basic concepts of tax on income

8/3/2019 Basic Concepts of Tax on Income

1/12

Basic Conceptsof Tax on

Income(Taxpayers Facilitation Guide)

Brochure IR-IT-01September 2011


2/12

Revenue DivisionFederal Board of RevenueGovernment of Pakistan

[email protected], 051-111-227-227www.fbr.gov.pk

Our VisionTo be a modern, progressive, effective,autonomous and credible organization

for optimizing revenue by providingquality service and promoting

compliance with tax and related laws

Our MissionEnhance the capability of the tax

system to collect due taxes throughapplication of modern techniques,

providing taxpayer assistance and bycreating a motivated, satisfied,

dedicated and professional workforce

Our ValuesIntegrity

ProfessionalismTeamwork

Courtesy

FairnessTransparencyResponsiveness

For assistance and information on tax mattersPlease contact our help line center through

Brochure IR-IT-01 Basic Concepts of Tax on Income
mailto:[email protected]://www.fbr.gov.pk/mailto:[email protected]://www.fbr.gov.pk/


3/12

Toll Free Telephone 0800-00-227Telephone 051-111-227-227 or 051-111-227-228

Fax 051-9205593E-mail [email protected]

or

Visit our tax facilitation center (located in all major cities) or any tax officeorVisit our website at www.fbr.gov.pk

mailto:[email protected]://www.fbr.gov.pk/mailto:[email protected]://www.fbr.gov.pk/


4/12

Revenue DivisionFederal Board of RevenueGovernment of Pakistan

Brochure IR-IT-01September 2011

Introduction

This brochure provides informationon the basic concepts of tax onincome.

We have used plain language toexplain most common tax situations.If you need more help after readingthis brochure, feel free to contact usfor further details and informationrelated to your case.

This brochure is to assist the taxpayers and reflects thelegal position at the time of printing. In case of anyconflict the legal provisions of the law shall prevail overthe contents of this brochure.

Comments and suggestions

We welcome your comments about this brochure and

your suggestions for future editions.

You can e-mail us at [email protected]

or

You can write to us at the following address:

Facilitation And Tax Education,

Federal Board of Revenue,

Constitution Avenue,

Islamabad

Contents Page

Introduction 1

Basic Concepts of Taxation 2

Taxable income 2

Total income 2

Heads of income 2

Resident 2

Non-Resident 3

Pakistan source income 3

Foreign source income 3

Person 3Company 3

Association of persons 4

Tax Year 4

Income subject to a separate charge 4

Income subject to Final Tax 4

Separate block of income 4

Tax 5

Income tax 5

Adjustable tax collected or deducted atsource

5

Agricultural income 5

Some Important Provisions of Law which aTaxpayer should know

6

Obligations as a withholding agent 6

Inadmissible deductions against incomechargeable to tax

6

Apportionment of expenditures 6

Obligations to furnish income tax declarations 6

Loan, advance, deposit or gift 6

Self-hiring 7

Recouped expenditure or loss 7

Double derivations and double deductions 7

4

mailto:[email protected]:[email protected]


5/12

Basic concepts of taxation

The Federal levy, tax, on income (Income Tax)is governed by the Income Tax Ordinance, 2001and Income Tax Rules, 2002. It is an annual

charge on the taxable income, income subjectto separate charge and income subject tofinal taxof aperson for a tax year.

Levy oftaxon taxable income is divided into twoparts:

Fixed Tax on separate block of income;and

Income Tax on taxable incomeexcluding separate block of income subject of

fixed tax.

In this brochure from now onwards taxableincome refers to is taxable income excludingseparate block of income subject of fixed tax

Taxable Income means total incomereduced by:

Donations qualifying for straightdeductions; and

Following deductible allowances:

- Zakat paid under the Zakat and

Ushr Ordinance, 1980; (Zakat paid on adebt, the profit of which is chargeable totax under the head Income from OtherSources is not deductible from totalincome. Such Zakat is an admissiblededuction against profit on debt);

- Workers Welfare Fund paidunder the Workers Welfare FundOrdinance, 1971 (applies to certainspecified industrial establishments); and

- Workers Participation Fundpaid under the Companies Profit(Workers Participation) Act, 1968(applies to companies only).

Total Income is the aggregate of incomechargeable to tax under each of head ofincome:

Head of Income Under the Income TaxOrdinance, 2001, all income are broadly dividedinto following five head of income:

Salary;

Income from property;

Income from business;

Capital gains; and

Income from other sources [likedividend, royalty, profit on debt, rent fromsub-lease of land or building, income fromlease of any building together with plant ormachinery, prize on bonds, winnings from araffle, lottery or crossword puzzle, or a loan,advance, deposit or gift(subject to certainconditions)].

Different set of rules apply for determination ofincome chargeable to tax under each head ofincome. These are briefly explained latter in thisbrochure.

Generally, income under a head of income is thetotal of the amounts derived as reduced by theadmissible deductions against such income, ifany. Expenditures attributable to exempt

income, income subject to separate charge,income subject to final tax and separateblock of income are deductible against incomechargeable to tax as total income/taxableincome.

Chargeable income under each head of incomeis further dependent on the residential status ofa taxpayer. In case of resident, it is bothPakistan source income and foreign sourceincome, while in case of non-resident it isrestricted to Pakistan source income only.

Resident

An association of persons is residentfor a tax year if the control andmanagement of its affairs is situated whollyor partly in Pakistan at any time in the year;

A company is resident for a tax year if

5



6/12

- it is incorporated or formed by or

under any law in force in Pakistan;

- the control and management ofits affairs is situated wholly in Pakistan

at any time in the year; or

- it is a Provincial Government or

a local Government in Pakistan.

An individual is resident for a tax yearifhe/she

- is present in Pakistan for a

period of, or periods amounting inaggregate to, 183 days or more in thetax year; or

- is an employee or official of theFederal Government or a ProvincialGovernment posted abroad in the taxyear.

In order to compute the number of days an individual ispresent in Pakistan in a tax year, the following rules apply: -

A part of a day that an individual is present in Pakistan(including the day of arrival in, and the day of departurefrom, Pakistan) counts as a whole day of such

presence; However, a day or part of a day where anindividual is in Pakistan solely by reason of being intransit between two different places outside Pakistandoes not count as a day present in Pakistan.

The following days in which an individual is wholly orpartly present in Pakistan count as a whole day of suchpresence:-

- a public holiday;

- a day of leave, including sick leave;

- a day that the individuals activity in Pakistan isinterrupted because of a strike, lock-out or delayin receipt of supplies; or

- a holiday spent by the individual in Pakistanbefore, during or after any activity in Pakistan.

Non-ResidentAn association of persons,

a company and an individual are non-residentfor a tax year if they are not a residentfor thatyear.

Pakistan source income is defined in section101 of the Income Tax Ordinance, 2001, whichcaters for incomes under different heads andsituations. Some of the common Pakistansource incomes are as under: -

Salary received from any employmentexercised in Pakistan wherever paid;

Salary paid by, or on behalf of, the FederalGovernment, a Provincial Government, or a

local Government in Pakistan, wherever theemployment is exercised;

Dividend paid by resident company;

Profit on debt paid by a resident person;

Property or rental income from the lease ofimmovable property in Pakistan;

Pension or annuity paid by a resident orpermanent establishment of a non-resident;

Foreign source income is any income, whichis not a Pakistan source income.

Person means:

An individual;

A company or association of personsincorporated, formed, organized orestablished in Pakistan or elsewhere;

The Federal Government, a foreigngovernment, a political subdivision of a

foreign government, or public internationalorganization

Company means

A company as defined in the CompaniesOrdinance, 1984 (XLVII of 1984);

A body corporate formed by or under anylaw in force in Pakistan;

A modaraba;

A body incorporated by or under the law of acountry outside Pakistan relating toincorporation of companies;

A trust, a co-operative society or a financesociety or any other society established orconstituted by or under any law for the timebeing in force;

6



7/12

A foreign association, whether incorporatedor not, which the Board has, by general orspecial order, declared to be a company forthe purposes of this Ordinance;

A Provincial Government;

A Local Government in Pakistan;

Association of persons includes a firm (therelation between persons who have agreed toshare the profits of a business carried on by allor any of them acting for all), a Hindu undividedfamily, any artificial juridical person and anybody of persons formed under a foreign law, butdoes not include a company.

Tax Year is a period of twelve months endingon 30th day of June i.e. the financial year and is

denoted by the calendar year in which the saiddate falls. For example, tax year for the period oftwelve months from July 01, 2010 to June 30,2011 shall be denoted by calendar year 2011and the period of twelve months from July 01,2011 to June 30, 2012 shall be denoted bycalendar year 2012.

Tax year includes special tax year, which meansany period of twelve months (subject to certainconditions and restrictions) and is denoted bythe calendar year relevant to the normal tax yearin which closing date of the special tax year falls.

For example, tax year for the period of twelvemonths from January 01, 2010 to December 31,2010 shall be denoted by calendar year 2011and the period of twelve months from October01, 2010 to September 30, 2011 shall bedenoted by calendar year 2012.

Income subject to a separate charge, whichdo not form part of total income or taxableincome and are subject to tax on the basis ofgross income, e.g.:-

Dividend;

Royalty of non-resident;

Fee for technical services of non-resident;

Shipping income of non-resident; and

Air transport income of non-resident.

For further details, please refer to our brochureIncome subject to separate charge, final taxand fixed tax regimes of Income Tax.

Income subject to Final Tax, which are subjectto collection or deduction of tax at source andsuch tax collected or deducted at source istreated as final tax liability in respect of suchincome e.g.:

Income arising from business on account of:- Import of goods;

- Execution of contracts by non-residents

- Insurance and re-insurancepremiums received by non-residents

- Any other amounts received bya non-resident (profit on debt)

- Supply of goods (other than bymanufacturers);

- Execution of contracts;

- Services of stitching, dying,printing, embroidery, washing, sizingand weaving

- Media services by non-residents

- Export realization (goods)

- Commission / discount on

petroleum products

- Brokerage and commission;

- Plying of goods transport

vehicles; and

- Natural Gas Consumption (CNG

Stations).

Income arising from other sources onaccount of:

- Profit on debt; and

- Prizes and winnings.

7



8/12


Separate block of income are those, which arechargeable to tax under the respective head ofincome (salary, property, business, capital gainsand other sources) but for the purposes ofcalculation of tax such income are excluded fromthe taxable income and tax thereon is calculatedand charged at varying rates depending on thenature of each such income e.g.:-.

Income arising from salary in respect of:

- Retirement or termination

benefits of an employee;

- Arrears of salary of an

employee; and

- Flying and submarine allowance

of certain employees.

Property income;

Business income:

- Of certain retailers;

- From services rendered outside

Pakistan;

- From construction contracts

executed out-side Pakistan;

- Of certain manufacturers of

cooking oil or vegetable ghee or both;and

- Of resident from shipping

business.

Capital gains from:

- Sale of securities; and

- Sale of shares or assets by a

private limited company to PrivateEquity and Venture Capital Fund.


Tax is the amount computed by applying theapplicable rate of tax, on taxable income, incomesubject to a separate charge, income subject tofinal tax and separate block of income subject tofixed tax.

Taxpayable on taxable income is called IncomeTax.

Income tax payable on taxable incomeis:

Gross income tax (Calculated on taxableincome by applying applicable rate of incometax);

Reductions in tax liability (refer to ourbrochure Tax Reductions, Rebates andCredits); minus

Foreign tax credit (refer to our brochure TaxReductions, Rebates and Credits); minus

Tax credits on donations, investments etc.(refer to our brochure Tax Reductions,Rebates and Credits); minus

Tax credit on exempt share from associationof persons (refer to our brochure Tax

Reductions, Rebates and Credits).

To arrive at the net income tax payable orrefundable, income tax payable determined asabove is reduced by:

Advance tax already paid; and

Adjustable tax collected or deducted atsource.

Adjustable tax collected or deducted atsource is the amount of tax collected or

deducted at source, other than the tax collected ordeducted at source which is treated as final tax.For further details refer to our brochuresCollection and Deduction of Tax at Sourceand Income subject to separate charge, finaltax and fixed tax regimes of Income Tax

Agricultural Income is chargeable to tax(Agricultural Income Tax) separately by the

8



9/12

respective Provincial Governments and hence isspecifically declared exempt from levy of taxunder the Income Tax Ordinance, 2001.Accordingly such income does not form part oftotal income / taxable income.

Agricultural income is defined broadly toinclude direct and indirect income from landsituated in Pakistan used for agriculturepurposes. Rental income for the use ofcultivated land and rent of a building on or in thevicinity of cultivated land occupied by thecultivator or by the receiver of rental incomefrom cultivated land are some of the examples ofindirect agriculture income.

Some Important Provisions ofLaw which a Taxpayer shouldknow

Obligations as a withholding agent refer toour brochure Collection and Deduction of Taxat Source

Inadmissible deductions against incomechargeable to tax:

Payment of salary, rent, brokerage orcommission, profit on debt, payment to non-resident, payment for services or fee fromwhich a taxpayer was obliged to deduct taxat source but has not been deducted and/ornot deposited in the Government Treasury.

Fine or penalty for the violation of any law,rule or regulation;

Personal expenditures like residentialexpenses, education, etc.;

Salary exceeding Rs. 15,000 per monthother than by a crossed cheque or directtransfer of funds to the employees bankaccount;

Expenditure of a capital nature (normaluseful life of more than one year) exceptdepreciation and amortization on certainspecified tangible and intangible assets;

Expenditure exceeding Rs. 10,000 incurred

and paid otherwise than by a crossedcheque drawn on a bank or by crossed bankdraft or crossed pay order or any othercrossed banking instrument showingtransfer of amount from the business bankaccount of the taxpayer.

However, this does not apply to thefollowing:

- Where expenditures under asingle account head in aggregate doesnot exceed Rs.50,000;

- Expenditures on account of

Utility bills;

Freight charges;

Travel fare;

Postage;

Payment of taxes,duties, fee, fines or any otherstatutory obligation; and

Purchase of agriculturalproduce directly from the growers ofsuch produce.

Crossed banking instrument includesonline transfer of payment from the businessaccount of the payer to the businessaccount of payee as well as paymentsthrough credit card, subject to the conditionthat such transactions are verifiable from thebank statements of the respective payer andthe payee.

Apportionment of expenditures Whereexpenditure relates to

The derivation of income from more thanone head of income;

Derivation of income comprising of taxableincome and/or income subject to separate

9



10/12

charge and/or income subject to final taxand/or separate block of income; or

The derivation of income chargeable to taxunder a head of income and to some otherpurpose,

the expenditure is has to apportioned on anyreasonable basis taking account of the relativenature and size of the activities to which theamount relates. Rule 13 of the Income TaxRules, 2002 specifies how to apportion suchcommon expenditures.

Obligations to furnish income tax declarations refer to our brochure Obligation to file IncomeTax Declarations

Loan, advance, deposit or gift received fromanother person otherwise than:

By a crossed cheque drawn on a bank; or

Through a banking transaction from aperson holding a National Tax NumberCertificate;

is treated as income chargeable to tax under thehead income from other sources.

The purpose is to document the transactions ofloan, advance, deposit or gift reflected in thebooks of account, wealth statement or

reconciliation of wealth. The followingtransactions, however, are excluded:

Loan, advance or deposit received from abanking company or an institution notifiedunder the Companies Ordinance, 1984 bythe Federal Government in the officialgazette as a financial institution; or

Advance payment for the sale of goods orsupply of services.

Self-hiring When an employee gives on rent

any building (house/flat/apartment etc.) ownedby him or any of his/her family members to theemployer and the employer provides the sameagainst the employees entitlement for a rent-free accommodation or housing, it results into:

Provision of a perquisite (rent freeaccommodation or housing) by the employer

to the employee chargeable as income fromsalary; and

Receipt of rent of land or building by theemployee or any of his/her family members,as the case may be, chargeable as income

from property in the hands of the owner.

Recouped expenditure or loss is the incomeof the tax yearin which it is received in cash orin kind and chargeable under the head ofincome where deduction for such expenditure orloss was allowed in computing the chargeableincome of an earlier year.

Double derivations and double deductions-Any amount chargeable to tax on the basis ofbeing receivable shall not be again chargeableon the basis that it is received or vice versa.Similarly any expenditure deductible on the

basis of being payable shall not be againdeductible on the basis that it is paid or viceversa.

10



11/12

11



12/12

Facilitation and Taxpayer Education Material available on ourwebsite www.fbr.gov.pk

Income Tax:

Income Tax Ordinance, 2001;

Income Tax Rules, 2002;

Income Tax Notifications (SROs issued by the Federal Government); Income Tax Circulars (Clarifications issued by the Federal Board of Revenue);

Income Tax Forms (Registration form, return forms, withholding tax statements, tax deposit form);

Computer Software (Withholding tax statements);

Avoidance of Double Tax Treaties with other countries;

Publications and brochures

Sales Tax

Sales Tax Act, 1990;

Sales Tax Rules, 2006;

Sales Tax Special Procedure Rules, 2007;

Sales Tax Special Procedure (Withholding) Rules, 2007

Sales Tax Notifications (SROs issued by the Federal Government);

Sales Tax General Orders;

Sales Tax Circulars/Rulings (Clarifications issued by the Federal Board of Revenue);

Sales Tax Forms (Registration form, return forms, tax deposit form);

Computer Software (Refund claim);

Publications and brochures

Federal Excise Duty

Federal Excise Act, 2005;

Federal Excise Rules, 2005;

Federal Excise Notifications (SROs issued by the Federal Government);

Federal Excise General Orders;

Federal Excise Circulars/Rulings (Clarifications issued by the Federal Board of Revenue);

Federal Excise Forms (Return forms); Publications and brochures

On line information services:

Registration (Income Tax, Sales Tax and Federal Excise Duty);

Registration Application Status (Income Tax and Sales Tax);

Registered Taxpayers Verification (Income Tax and Sales Tax);

Active taxpayers list;

F A T EFacilitation and Tax Education

is the key to Voluntary Complianceand

Voluntary Compliance is the key toBetter Revenues

12

http://www.fbr.gov.pk/http://www.fbr.gov.pk/

basic concepts of tax on income

Documents