Disposals Not Chargeable To Tax

<< Computation of Capital Gain

TAX RETURNS & ASSESSMENT OF INCOME UNIVERSAL SELF ASSESSMENT SCHEME >>

Taxation Management FIN 623

MODULE 9

LESSON 9.39

CAPITAL GAINS

Disposals Not Chargeable To Tax Under Sec.79 Non Recognition Rules

No gain or loss shall be taken to arise on the disposal of an asset:

Between spouses under an agreement to live apart;

By reason of the transmission of the asset to an executor or beneficiary on the death of person;

By reason of a gift of the asset;

By reason of the compulsory acquisition of the asset under any law where the consideration

received for the disposal is reinvested by the recipient in an asset of a like kind within one year of

the disposal;

By a company to its shareholders on liquidation of the company; or

By an association of persons to its member on dissolution of the association where the assets are

distributed to members in accordance with their interests in the capital of the association

Exemptions in respect to capital gains have been outlined in various clauses of Part 1 of Second Schedule.

Exemptions as Contained in Second Schedule

Clause (110) Any income chargeable under the head "capital gains", being income from the sale of

Mudarba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984,

listed on any stock exchange in Pakistan or shares of public company and the Pakistan telecommunication

corporation vouchers issued by the Government of Pakistan derived by a tax-payer.

Clause(111) any income chargeable under the head "capital gains" being income from the sale of shares of

a public company derived by any foreign institutional investor as is approved by the federal Government for

the purpose of this clause

Clause (112) omitted.

Clause (113) any income chargeable under the head "capital gains" being income from the sale of shares of

a public company set up in any special industrial zone referred to in clause [126] of this schedule, derived

by a person for a period of five years from the date of commencement of its commercial production:

provided that the exemption under this clause shall not be available to a person from the sale of shares of

such companies which are not eligible for exemption from tax under clause (126 ).

Clause (114) any income chargeable under the head "capital gains " derived by a person from an industrial

undertaking set up in an area declared by the Federal Government to be a "Zone" within the meaning of

the export processing zone Authority Ordinance 1980.

Clause(114A) any income chargeable under the head "capital gains", derived by a person from sale of ships

and all floating crafts including tugs, dredgers, survey vessels and other specialized craft up to tax year

ending on the thirtieth day of June ,2011]

Exercise on Capital Gain

Exercise-1:

On 1st July 2006, the Govt. prohibited the sale of plastic bags through an Ordinance and took over the

machines of M/s WW Ltd; amounting Rs. 1,000,000/-. As a compensation package the Govt. paid Rs.

2,500,000/- to the Company. The company purchased new machines of the related business on 1st April

2007 costing the company Rs. 4,000,000/-.

Calculate gain on disposal and also explain whether this gain is chargeable to tax.

Solution E 1:

Considerations received (A)

Rs. 2,500,000

Cost of Acquisition

(B)

Rs. 1,000,000

Capital Gain = (A B)

Rs.1,500,000

Although there is gain of Rs.1,500,000/ on disposal but it is not chargeable to tax since amount of

consideration received has been invested in the like business during one year of disposal.

Exercise2: On 01/01/2004 Mr. Y purchased 10,000 shares at a price of Rs 30 per share. He sold these

shares on 20/06/2006 at a price of Rs 50 per share. Calculate the gain taxable on this disposal.

Solution Ex. 2:

Taxation Management FIN 623

- Consideration received on disposal (A) (10,000 x 50) =

Rs. 500,000

- Cost of acquisition (B) (10,000 x 30) =

Rs. 300,000

- Capital Gain (A-B)

Rs. 200,000

Since shares held by the person for more than one year therefore under the provision of law 3/4th of the

gain would be taxable. Hence:

Taxable Capital Gain= 200,000 x ¾ = Rs 150,000

Exercise 3:

On 01/10/2006, Mr. A had acquired mining rights at a cost of Rs 2,000,000. On 01/02/2007, he disposed

of the rights to Mr. Y for consideration of Rs 5,000,000. Calculate Capital Gain.

Solution to Ex. 3:

Consideration received on disposal (A)

Rs. 5,000,000

Cost of acquisition (B)

Rs. 2,000,000

Capital Gain

Rs. 3,000,000

Exercise4:

On 01/01/2004, M/s XYZ Pvt. Ltd. purchased 5000 shares of a public limited company at a price of Rs

100 per share. On 10/05/2006, the company disposed of these shares at a price of Rs 150 per share.

Compute taxable gain on disposal of these shares.

Solution to E 4:

Consideration received on disposal (A)

Rs. 750,000

Cost of acquisition (B)

Rs. 500,000

Capital Gain

Rs. 250,000

Since Capital assets held by the person for more than one year therefore under the provisions of law 3/4th

of the gain would be taxable. Hence,

Taxable Capital Gain = 250,000 x ¾ = Rs 187,500

However, in this case, gain shall not be taxable since exemption under clause 110 of part 1 of 2nd schedule

has been granted on gain on account of disposal of shares of a public limited company.

Taxation Management FIN 623

MODULE 10

LESSON 10.39

INCOME FROM OTHER SOURCES (SECTION 39)

Incomes not covered by any given heads of income are covered under this head.

Some types covered under the head `Income from other Sources'

Income from Dividends

Income from Royalty

Profit on debt

Profit, yield, interest, premium etc. received as well as accrued.

However, Rental income (Leasing) received by a bank shall be `Income from Business' not "Income

from other sources'.

Any amount received by bank from Mutual Funds shall be taxed under the head `Income from Business'

not under `Income from other sources'.

Profit derived from National Saving Scheme is covered under the head `Income from other sources'.

Other Miscellaneous Incomes Covered Under the Head `Income From Other Sources'

Income from:

Annuities including annuities paid to a lender of trademark.

Pension

Income arising out of exploration rights (exploration of oil fields.

Income on account of interest- free loans (Over Bench mark rate).

Sum paid for vacating premises shall be treated as income of recipient.

Other Specific Items Covered Under the Head Income From Other Sources:

Sum received not through permissible banking channels on account of loans, Advances, Gifts, and

Deposits for issuance of Shares of companies offered for public subscription.

Sec. 39(3): if above sums received:

Otherwise than through crossed bank cheque

Otherwise than through banking channel or from a person not holding National Tax Number shall

be treated as income chargeable to tax under the head `Income from Other Sources' for the tax

year in which it was received.

Exception to above:

Sub Sec. (4): sub Section 3 of section 39 shall not apply to an advance payment for the sale of

goods or supply of services.

Advances received from customers in connection with sale of goods & services are not to be

included /added to income.

However, advances received against execution of contract or any other purposes shall be included

to income if amount not received through crossed bank cheques or through permissible banking

channels.

Unexplained Investments

Sec. 111 unexplained income or assets

Where

A person has made an investment,

Any amount credited to person's books of account

A person has incurred expenditure

A person has made an investment,

Any amount credited to person's books of account

A person has incurred expenditure.

Sec. III unexplained income or assets

But no reasonable explanation offered regarding sources of fund the amount as (a), (b) and (c) above shall

be included in person's income chargeable to tax.

Sub Sec. 1 of Sec. 111 does not apply to any amount of Foreign Exchange remitted from outside

Pakistan through normal banking channels that is en-cashed into Pak. Rupees by a scheduled Bank and

encashment certificate from such bank is produced to that effect.

Taxation Management FIN 623

Sub Sec. 1 of Sec 111 does not also apply to any unexplained amount relating to a period beyond pre-

ceding five tax years.

Immune (Exempted) Investments/Income

Private foreign Currency Accounts

Three years Foreign Currency Bearer Certificates

Rupees withdrawn or assets created out of:

Withdrawal from US Dollar Bearer Certificates,

Withdrawal from F.C. Accounts

Encashment of foreign exchange bearer certificates

Admissible Deductions:

Expenditure incurred to derive income chargeable to tax.

A person receiving any profit on debt chargeable to tax under the head Income from Other Sources'

shall be allowed a deduction for any Zakat paid by the person at the time the profit is paid to the

person, deducted at the time of making payment of profit.

Depreciation allowed as deduction.

Taxation Management FIN 623

MODULE 11

LESSON 11.39

56.

SET OFF OF LOSSES

(1) Subject to sections 58 and 59, where a person sustains a loss for any tax year under any head

of income specified in section 11, the person shall be entitled to have the amount of the loss

set off against the person's income, if any, chargeable to tax under any other head of income

for the year.

(2) Except as provided in this Part, where a person sustains a loss under a head of income for a

tax year that cannot be set off under sub-section (1), the person shall not be permitted to

carry the loss forward to the next tax year.

(3) Where, in a tax year, a person sustains a loss under the head "Income from Business" and a

loss under another head of income, the loss under the head "Income from Business shall be

set off last.

57. Carry forward of Business Losses

(1) Where a person sustains a loss for a tax year under the head "Income from Business"

(other than a loss to which section 58 applies) and the loss cannot be wholly set off under

section 56, so much of the loss that has not been set off shall be carried forward to the

following tax year and set off against the person's income chargeable under the head

"Income from Business" for that year.

(2) If a loss sustained by a person for a tax year under the head "Income from Business" is not

wholly set off under sub-section (1), then the amount of the loss not set off shall be carried

forward to the following tax year and applied as specified in subsection (1) in that year, and

so on, but no loss can be carried forward to more than six tax years immediately succeeding

the tax year for which the loss was first computed.

(2A) Where a loss, referred to in sub-section (2), relating to any assessment year commencing on

or after 1st day of July, 1995, and ending on the 30th day of June 2001, is sustained by a

banking company wholly owned by the Federal Government as on first day of June, 2002,

which is approved by the State Bank of Pakistan for the purpose of this sub-section, the

said loss shall be carried forward for a period of ten years.

(3) Where a person has a loss carried forward under this section for more than one tax year,

the loss of the earliest tax year shall be set off first.

(4) Where the loss referred to in sub-section (1) includes deductions allowed under sections 22,

23 and 24 that have not been set off against income, the amount not set off shall be added

to the deductions allowed under those sections in the following tax year, and so on until

completely set off.

(5) In determining whether a person's deductions under sections 22, 23 and 24 have been set

off against income, the deductions allowed under those sections shall be taken into account

last.

57A. Set off of business loss consequent to Amalgamation

(1) The accumulated loss under the head "Income from Business" (not being a loss to which

section 58 applies) of an amalgamating company or companies shall be set off or carried

forward against the business profits and gains of the amalgamated company and vice versa

up to a period of six tax years immediately succeeding the tax year in which the loss was first

computed in the case of amalgamated company amalgamating company or companies.

(2) The provisions of sub-section (4) and (5) of section 57 shall, mutatis mutandis, apply for the

purposes of allowing unabsorbed depreciation of amalgamating company or companies in

the assessment of amalgamated company and vice versa

(3) Where any of the conditions as laid down by the State Bank of Pakistan or the Securities and

Exchange Commission of Pakistan or any court, as the case may be, in the scheme of

amalgamation, are not fulfilled, the set off of loss or allowance for depreciation made in any

tax year of the amalgamated company or the amalgamating company or companies shall be

deemed to be the income of that amalgamated company or the amalgamating company or

Taxation Management FIN 623

companies, as the case may be, for the year in which such default is discovered by the

Commissioner or taxation officer, and all the provisions of this 0rdinance shall apply

accordingly.

59. Carry forward of Capital Losses

(1) Where a person sustains a loss for a tax year under the head "Capital Gains" (hereinafter

referred to as a "capital loss"), the loss shall not be set off against the person's income, if

any, chargeable under any other head of income for the year, but shall be carried forward to

the next tax year and set off against the capital gain, if any, chargeable under the head

"Capital Gains" for that year.

(2) If a capital loss sustained by a person for a tax year under the head "Capital Gains" is not

wholly set off under sub-section (1), then the amount of the loss not set off shall be carried

forward to the following tax year, and so on, but no loss shall be carried forward to more

than six tax years immediately succeeding the tax year for which the loss was first computed.

(3) Where a person has a loss carried forward under this section for more than one tax year, the

loss of the earliest tax year shall be set off first.

Deductible Allowances:

60. Zakat

(1) A person shall be entitled to a deductible allowance for the amount of any Zakat paid by the

person in a tax year under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).

(2) Sub-section (1) does not apply to any Zakat taken into account under subsection (2) of

section 40.

(3) Any allowance or part of an allowance under this section for a tax year that is not able to be

deducted under section 9 for the year shall not be refunded, carried forward to a subsequent

tax year, or carried back to a preceding tax year.

61. Charitable donations:

(1) A person shall be entitled to a tax credit in respect of any sum paid, or any property given by

the person in the tax year as a donation to

a) any board of education or any university in Pakistan established by, or under, a Federal

or a Provincial law;

b) any educational institution, hospital or relief fund established or run in Pakistan by

Federal Government or a Provincial Government or a local authority; or

c) any non-profit organization.

Sub-section (1) substituted by Finance Act, 2003 which previously read as follows:

A person shall be entitled to a tax credit for a tax year in respect of any amount paid, or

property given by the person in the tax year as a donation to a non-profit organization."

(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be

computed according to the following formula, namely:

(A/B) x C

Where:

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under

this Part;

B is the person's taxable income for the tax year; and

C is the lesser of:

(a) the total amount of the person's donations referred to in subsection (1) in the year, including

the fair market value of any property given; or

(b) where the person is:

(i)

an individual or association of persons, thirty per cent of the taxable income of

the person for the year; or

(ii)

a company, fifteen per cent of the taxable income of the person for the year.

(3) For the purposes of clause (a) of component C of the formula in subsection (2), the fair

market value of any property given shall be determined at the time it is given.

(4) A cash amount paid by a person as a donation shall be taken into account under clause (a) of

component C of sub-section (2) only if it was paid by a crossed cheque drawn on a bank.

Taxation Management FIN 623

(5) The Central Board of Revenue may make rules regulating the procedure of the grant of

approval under sub-clause (c) of clause (36) of section 2 and any other matter connected

with, or incidental to, the operation of this section.

62. Investment in shares

(1) A person other than a company shall be entitled to a tax credit for a tax year in respect of

the cost of acquiring in the year new shares offered to the public by a public company listed

on a stock exchange in Pakistan where the person other than a company is the original

allottee of the shares or the shares are acquired from the Privatization Commission of

Pakistan.

(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be

computed according to the following formula, namely:

(A/B) x C

Where:

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit

under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of:

(a) the total cost of acquiring the shares referred to in sub-section (1) in the year;

(b) ten per cent of the person's taxable income for the year; or

(3) Where:

a person has been allowed a tax credit under sub-section (1) in a tax year in

respect of the purchase of a share; and

b) the person has made a disposal of the share within twelve months of the date

of acquisition,

The amount of tax payable by the person for the tax year in which the shares were

disposed of shall be increased by the amount of the credit allowed.

63. Contribution to an Approved Pension Fund

(1) An eligible person as defined in sub-section (19A) of section 2 deriving income chargeable

to tax under the head "Salary" or the head "Income from Business" shall be entitled to a tax

credit for a tax year in respect of any contribution or premium paid in the year by the person

in approved pension fund under the Voluntary Pension System Rules, 2005.

(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be

computed according to the following formula, namely:

(A/B) x C

Where:

A is the amount of tax assessed to the person for the tax year, before allowance of any tax credit

under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of

(a) the total contribution or premium referred to in sub-section (1) paid by the person in the

year; or

(b) twenty per cent of the eligible person's taxable income for the relevant tax year; Provided

that an eligible person (words "a person" substituted by Finance Bill 2006) joining the

pension fund at the age of forty-one years or above, during the first ten years starting from

July 1, 2006 (words "of the notification of the Voluntary Pension System Rules, 2005"

substituted by Finance Bill 2006), shall be allowed additional contribution of 2% per annum

for each year of age exceeding forty years. Provided further that the total contribution

allowed to such person shall not exceed 50% of the total taxable income of the preceding

year; or

(3) The transfer by the members of approved employment pension or annuity scheme or approved

occupational saving scheme of their existing balance to their individual pension accounts

maintained with one or more pension fund managers shall not qualify for tax credit under this

section.

63. Retirement annuity scheme

Taxation Management FIN 623

(1) Subject to subsection (3), a resident individual deriving income chargeable to tax under

the head "Salary" or the head "Income from Business" shall be entitled to a tax credit for

a tax year in respect of any contribution or premium paid in the year by the person under

a contract of annuity scheme approved by , Securities and Exchange Commission of

Pakistan of an insurance company duly registered under the Insurance Ordinance, 2000

(XXXIX of 2000), having its main object the provision to the person of an annuity in old

age.

(2) The amount of a resident individual's tax credit allowed under sub-section (1) for a tax

year shall be computed according to the following formula, namely:

(A/B) x C

Where:

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit

under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of:

a) the total contribution or premium referred to in sub-section (1) paid by the

individual in the year;

b) ten (Substituted for "five" by Finance Act, 2003) per cent of the person's taxable

(Substituted for "total" by Finance Act, 2003) income for the tax year; or

c) two (Substituted for "one" by Finance Act, 2003) hundred thousand rupees.

(3) A person shall not be entitled to a tax credit under sub-section (1) in respect of a contract

of annuity which provides:

(a) for the payment during the life of the person of any amount besides an annuity;

(b) for the annuity payable to the person to commence before the person attains the age

of sixty years;

assignment; or

(d) for payment of the annuity outside Pakistan.

64.

Profit on debt:

(1) A person shall be entitled to a tax credit for a tax year in respect of any profit or share

in rent and share in appreciation for value of house paid by the person in the year on a

loan by a scheduled bank or non-banking finance institution regulated by the Security

and Exchange Commission of Pakistan or advanced by Government or the local

authority or a statutory body or a public company listed on a registered stock exchange

in Pakistan where the person utilizes the loan for the construction of a new house or

the acquisition of a house.

Sub-Section (1) substituted by Finance Act, 2003 which previously read as follows:

"(1) A person shall be entitled to a tax credit for a tax year in respect of any profit or

share in rent and share in appreciation of value of house paid by the person in the year on a

loan by a scheduled bank under a house finance scheme approved by the State Bank of

Pakistan or advanced by Government, the local authority or House Building Finance

Corporation where the person utilizes the loan for the construction of a new house or the

acquisition of a house."

(2) The amount of a person's tax credit allowed under sub-section (1) for a tax year shall be

computed according to the following formula, namely:

(A/B) x C

Where:

A is the amount of tax assessed to the person for the tax year before allowance of any tax credit

under this Part;

B is the person's taxable income for the tax year; and

C is the lesser of:

(a) the total profit referred to in sub-section (1) paid by the person in the year;

Taxation Management FIN 623

(b) forty (substituted "twenty five" by Finance Act, 2003) per cent of the person's

taxable (Substituted for "total" by Finance Act, 2003) income for the year; or

(3) A person is not entitled to tax credit under this section for any profit deductible under

section 17.

Common Rules

Income of joint owners Section 66

Where any property is own by two or more persons and there respective shares are definite and

ascertainable:

a) the persons shall not be assessed as an AOP in respect of the property; and

b) the share of each person in the income from property for a tax year shall be taken into

account in the computation of persons taxable income for that year.

This section shall not apply in computing income chargeable under the head "Income from Business"

Apportionment of deductions Section 67

Where the expenditure relates to:

The derivation of more than one head of income; or

The derivation of income comprising of taxable income and any income under final tax regime

The derivation of income chargeable to tax under a head of income and to some other purpose,

The expenditure shall be apportioned on any reasonable basis taking account of the relative nature and

size of the activities to which the amount relates.

Fair Market Value Section 68

Fair market value of any property or rent, asset, service, benefit or perquisites at a particular time shall

be the price which these mentioned above would ordinarily fetch on sale or supply in the open market at

that time.

Receipt of Income Section 69:

A person shall be treated as having received an amount, benefit, or perquisites if it is:

(a) actually received by the person

(b) applied on behalf of the person, at the instruction of the person or under any law; or

Recouped expenditure: Section 70

where a person has been allowed a deduction for any expenditure or loss incurred in a tax year in the

computation of persons income chargeable to tax under a head of income and, subsequently, the person has

received in cash or in kind, any amount in respect of such expenditure or loss, the amount so received shall

be included in the income chargeable under the head for the tax year in which it is received.

Currency Conversion: Section 71

Every amount taken into account under this ordinance shall be in Rupees

Where an amount is in a currency other than Rupees, the amount shall be converted to the Rupees at

the State Bank of Pakistan exchange rsate applicable on that date.

Cessation of Source of Income: Section 72

Where:

a) any income is derived by a person in a tax year from any business, activity, investment or other

source that has ceased either before the commencement of the year or during the year; and

b) if the income has been derived before the business, activity, investment or other source

ceased, it would have been chargeable to tax under this ordinance,

This ordinance shall apply to the income on the basis that the business, activity, investment or other

source had not ceased at the time the income was derived.

Rules to prevent double Derivation and double Deductions: Section 73

Sec 73

(1) Where:

(a) any amount is chargeable to tax under this ordinance on the basis that it is receivable, the

amount shall not be chargeable again on the basis that it is received; or

(b) any amount is chargeable to tax under this ordinance on the basis that it is received, the

amount shall not be chargeable again on the basis that it is receivable; or

Taxation Management FIN 623

(2) For the purposes of this Ordinance,

Where:

(a) any expenditure is deductible under this Ordinance on the basis that it is payable, the

expenditure shall not be deductible again on the basis that it is paid; or

(b) any expenditure is deductible under this Ordinance on the basis that it is paid, the

expenditure shall not be deductible again on the basis that it is payable.

Taxation Management FIN 623

MODULE 12

LESSON 12.39

TAXATION OF INDIVIDUALS

AND

TAXATION OF ASSOCIATION OF PERSONS

Exercise1-Sole Proprietorship

Mr. A is running business as sole proprietor. From the following information/data relevant to tax year

2007.

Opening Stock

Rs.800,000

Purchases

Rs.1,000,000

Sales

Rs.2,000,000

Carriage inwards

Rs.30,000

Closing stock

Rs.800,000

Electric bill of office paid

Rs 18,000

Telephone bill paid

Rs 20,000

Rent of office

Rs 120,000

Stationary for office

Rs 4000

Postages

Rs 3000

Salaries to staff

Rs 200,000

Advertisement expenses

Rs 10,000

Advance tax paid

Rs 60,000

Compute taxable income and tax thereon.

Solution to Ex. 1:

Tax Payer: Mr. A

Tax Year: 2007

Sole proprietorship

NTN: 000111

Trading and Profit & Loss Account

In Rs

Opening balance

800,000 Sale

2,000,000

Purchases

1,000,000 Closing Stock

800,000

Carriage inward

30,000

Gross profit

970,000

Total

2,800,000

Electricity

18,000

Telephone

20,000

Office rent

120,000

Stationary

4,000

Postages

3,000

Salaries

200,000

Advertising

10,000

Net profit

595,000

Total

970,000

Tax payable 595,000 x 12.50%=

Rs. 74,375

Advance tax paid

Rs 60,000

Tax payable

Rs 14,375

Tax paid with return

Rs 14,375

Tax payable / refundable

Nil

Exercise 2: Taxation of Association of Persons

From the following information/ data for tax year 2007 regarding M/S XYZ brothers, a partnership firm,

compute taxable income and tax liability of the firm as well as individual members.

This firm comprises of three partners Mr. X, Mr. Y and Mr. Z, each partner has equal share in profits.

Net profit of M/S XYZ brothers for tax year 2007 is worked out as Rs 900,000.

Mr. Z has also earned income amounting Rs 200,000 from other sources.

Taxation Management FIN 623

Solution Exercise 2:

Tax Payer: M/S. XYZ

Tax Year: 2007

Partnership Firm

NTN: 000111

Net profit (taxable income)

= Rs 900,000

Tax liability of firm

(900,000 x 17.50 %*)

= Rs 157,500

*Tax rate at serial # 12 for income range Rs 800,000 to 1,000,000 is applied.

Note:

Tax liability is the obligation of firm and not of the partners. However, if partner has income from any

other source, his share of income from partnership is added to taxable income only for rate purposes.

Share of profit of each member Mr. X, Mr. Y and Mr. Z Rs 300,000 each.

Computation of tax liability of Mr. Z

Income from other sources

Rs200,000

Share of profit of Mr. Z from firm M/s XYZ brothers

(Add for rate purposes only)

Rs 300,000

Taxable income

Rs 500,000

Tax payable (500,000 x 10%)

Rs 50,000

Subtract tax liability due to addition of Rs 300,000 for rate purposes

(50,000/ 500,000 x 300,000 = 30,000)

Rs 30,000

Tax payable by Mr. Z

Rs 20,000

(50,000-30,000=20,000)

If Rs 300,000 would have not been added for rate purposes, Mr. Z would have paid tax at the rate of 4 %

that is 200,000 x 4% = 8,000 instead of Rs 20,000.

Taxation Management FIN 623

MODULE 13

LESSON 13.39

TAXATION OF COMPANIES

Minimum Tax on Resident Companies Sec 113

Resident Company is subjected to minimum tax @ 0.50% of its turnover for a tax year, even in

cases where the company sustains loss.

Turnover under this section means:

the gross receipts, exclusive of sales tax and central excise duty or any trade discounts shown on

invoice or bills, derived from the sale of goods;

the gross fees for the rendering of services or giving benefits, including commissions;

the gross receipts from the executions of contracts; and

the company's share of the amounts stated above of any association of persons of which the

company is a member

Exercise-1

M/S XYZ (PVT) Ltd. filed return for tax year 2007, declaring taxable income of Rs. 1,300,000 and paid

entire liability of tax. On scrutiny of record by tax authorities, it came to their notice that following amounts

have been paid by Cash. In the light of this information/data compute tax liability of said company for tax

year-2007.

Salary

Rs. 30,000

Office Rent

Rs. 120,000

Professional Fee

Rs. 80,000

Postages

Rs. 8,000

Freight paid

Rs. 9,000

Electricity bill

Rs. 7,000

Telephone

Rs. 5,000

Penalty

Rs. 9,000

Solution of E-1

Add Back Inadmissible Deductions Under Section 21

Salary paid by cash

Rs. 30,000

Rent of office paid by cash

Rs. 120,000

Professional fee paid by cash

Rs. 80,000

Total Additions

Rs. 230,000

Declared income

Rs. 1,300,000

Tax already paid (1,300,000 x 35%)

Rs. 455,000

Additions made U/S 21

Rs. 230,000

Tax payable on additions

Rs.

80,500

Note:

Additions on account of rest of payments, although by cash not required to be added back as provided in

section 21(L)

Computation of Depreciation

Exercise 2

M/S A.K. Brothers is a partnership firm. In the books of accounts the following information/data has been

provided with respect to plant and machinery. Compute normal depreciation and initial allowance in the

light of the given information.

Book value of plant and machinery as on 01-07-2006

Rs. 1,800,000

Machinery disposed of during the year with book value.

Rs. 600,000

Additions of eligible depreciable asset during the year

Rs 1,000,000

Solution of E-2

Tax Payer: A.K. Brothers

Tax Year: 2007

Residential Status: Resident

NTN: 000111

Particulars

Book value

Depreciation

Opening W.D.V

1,800,000

----

Disposals

(600,000)

----

Taxation Management FIN 623

Balance W.D.V

1,200,000(X)

----

Additions during Year

1,000,000

Initial allowance

@ 50% on 1,000,000

500,000

Balance book value

(Y) 500,000

Total book value (X+Y)

1,700,000

Normal Depreciation@ 15%

255,000

Total Depreciation

755,000

On Speculation Business

Exercise 3

M/s ABC Ltd. A manufacturing company has furnished the following accounting information for tax year

2007. Compute taxable income and tax thereon:

- Gross Income from normal business

Rs.2,500,000

- Expenditures on normal business

Rs. 1,000,000

- Gross income from speculation business

Rs. 600,000

- Expenditures on speculation business

Rs.300,000

- Loss carried forward on normal business

Rs. 200,000

- Loss Carried forward on speculation business

Rs. 900,000

- Advance Tax Paid

Rs. 200,000

Solution of E-4

Tax Payer: ABC Ltd.

Tax Year: 2007

Residential Status: Resident

NTN: 000111

Computation of taxable income and tax thereon:

In Rs.

Particulars

Speculation Operations

Normal Business

Total

Gross Income

600,000

2,500,000

3,100,000

Expenditures

(300,000)

(1,000,000)

(1,300,000)

Net Income

300,000

1,500,000

1,800,000

C/F Loss

(900,000)

(200,000)

(1,100,000)

Taxable Income

(600,000)

1,300,000

---

Note-1

Taxable Income:

Normal business Rs.1,300,000

Tax payable= (1,300,000 x 35%) = Rs. 455,000

Note-1:

Loss of Rs. 600,000 from speculation business can not be set off against business income, it can be set off

against speculation business income, and hence this loss of Rs. 600,000 shall be carried forward to next year.

Taxation of Companies

Exercise-4

M/S XYZ is a limited company, running a chain of hospitals. The company filed tax return along with

relevant accounts/ documents for tax year 2006. This return has been selected for total audit. As a taxation

officer, work out taxable income and tax liability of the said company for tax year 2006.

Medicines purchased Rs. 1,000,000

Ambulances- running expenses.

Rs. 300,000

Depreciation on ambulances

Rs. 40,000

Depreciation on other assets

Rs. 60,000

Salaries paid through bank accounts of employees

Rs. 300,000

Unsupported payment for purchase of stationery

Rs. 12,000

Depreciation on account of car owned by director and in his personal use Rs. 40,000

Payment of legal fee by cash

Rs. 60,000

Received payments from corporations on the panel of the hospitals

Rs. 6,000,000

Other receipts

Rs. 2,000,000

Gain on sale of a vehicle

Rs. 200,000

Purchase of X-Ray machine for shown as expense in revenue account

Rs. 1,000,000

Withholding tax deductions

Rs. 525,000

Taxation Management FIN 623

Loss carried forward from tax year 2005

Rs. 1,200,000

Solution of E-4

Tax Payer: M/S XYZ Ltd.

Tax Year: 2006

Resident Company

NTN: 000111

Revenue Account as Submitted by Co.

RECEIPTS

EXPENDITURES

Particulars

Amount in Rs. Particulars

Amount in Rs.

Medicines

1,000,000

From Corporations

6,000,000

Ambulances

300,000

Other Receipts

2,000,000

Depreciation (Ambulances)

40,000

Gain on Sale of Vehicles

200,000

Depreciation Others

60,000

Salaries thru bank

300,000

Unsupported PAMT

12,000

Depreciation on personal car

40,000

Legal Fee by cash

60,000

X-Ray machine

1,000,000

Net Profit

5,388,000

8,200,000

Computation of Tax Payable:

Net Profit as computed by Co.

5,388,000

Less set off of c/f losses

(1,200,000)

Taxable Income

4,188,000

Tax Payable 4,188,000x35%

1,465,800

Less withholding Tax deductions

525,000

Balance Tax Payable

940,800

Tax Paid with Return

940,800

Tax Payable/Refundable

NIL

Additions by Taxation Officer on account of inadmissible expenses:

Unsupported payments

12,000

Depreciation claimed on personal car of Director

40,000

Payment of legal fee by cash

60,000

Purchase of X-Ray machine ( to be capitalized, balance sheet item as such 1,000,000

not to be shown in Revenue a/c)

Total additions

1,112,000

Tax payable on account of add backs (1,112,000 x 35%= 389,200)

389,200

The company shall have to pay tax amounting Rs 389,200.

Taxation Management FIN 623

MODULE 14

LESSON 14.39

Presumptive income

Taxation of permanent establishment (pe)

Presumptive Income:

Under normal tax regime, income tax is chargeable on taxable income but under some exceptional

circumstances, the income tax shall be charged on gross receipts. This is also called as presumptive tax

regime. Under following situations the tax will be charged on gross receipts basis.

Tax on dividends:

(a) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division III of Part I of

the First Schedule, on every person who receives a dividend from a company.

(b) The tax imposed under sub-section (1) on a person who receives a dividend shall be computed

by applying the relevant rate of tax to the gross amount of the dividend.

Tax on Certain Payments to Non-Residents:

(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IV of Part I of

the First Schedule, on every non-resident person who receives any Pakistan-source royalty or fee

for technical services.

(2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying

the relevant rate of tax to the gross amount of the royalty or fee for technical services.

(3) This section shall not apply to:

(a) any royalty where the property or right giving rise to the royalty is effectively connected

with a permanent establishment in Pakistan of the non-resident person;

(b) any fee for technical services where the services giving rise to the fee are rendered through

a permanent establishment in Pakistan of the non-resident person; or

(4) Any Pakistani-source royalty or fee for technical services received by a non-resident person to

whom this section does not apply by virtue of clause (a) or (b) of sub-section (3) shall be treated

as income from business attributable to the permanent establishment in Pakistan of the person.

Tax on Shipping and Air Transport Income of a Non-Resident Person

(1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division V of Part I of

the First Schedule, on every non-resident person carrying on the business of operating ships or

aircraft as the owner or chatterer thereof in respect of

(a) the gross amount received or receivable (whether in or out of Pakistan) for the carriage of

passengers, livestock, mail or goods embarked in Pakistan; and

(b) the gross amount received or receivable in Pakistan for the carriage of passengers, livestock,

mail or goods embarked outside Pakistan.

(2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying

the relevant rate of tax to the gross amount referred to in subsection (1).

(3) This section shall not apply to any amounts exempt from tax under this Ordinance.

Taxation of PE

105. Taxation of a Permanent Establishment in Pakistan of a Non-Resident Person.

(1) The following principles shall apply in determining the income of a permanent establishment in

Pakistan of a non-resident person chargeable to tax under the head "Income from Business",

namely:

(a) The profit of the permanent establishment shall be computed on the basis that it is a

distinct and separate person engaged in the same or similar activities under the same or

similar conditions and dealing wholly independently with the nonresident person of which

it is a permanent establishment;

(b) subject to this Ordinance, there shall be allowed as deductions any expenses incurred for

the purposes of the business activities of the permanent establishment including executive

and administrative expenses so incurred, whether in Pakistan or elsewhere;

to its head office or to another permanent establishment of the non-resident person (other

Taxation Management FIN 623

than towards reimbursement of actual expenses incurred by the non-resident person to

third parties) by way of:

(i)

royalties, fees or other similar payments for the use of any tangible or

intangible asset by the permanent establishment;

(ii)

compensation for any services including management services performed

for the permanent establishment; or

(iii)

profit on debt on moneys lent to the permanent establishment, except in

connection with a banking business; and

(d) no account shall be taken in the determination of the income of a permanent establishment

of amounts charged by the permanent establishment to the head office or to another

permanent establishment of the non-resident person (other than towards reimbursement of

actual expenses incurred by the permanent establishment to third parties) by way of:

(i)

royalties, fees or other similar payments for the use of any tangible or

intangible asset;

(ii)

compensation for any services including management services performed by

the permanent establishment; or

(iii)

profit on debt on moneys lent by the permanent establishment, except in

connection with a banking business.

(2) No deduction shall be allowed in computing the income of a permanent establishment in

Pakistan of a non-resident person chargeable to tax under the head "Income from Business" for

a tax year for head office expenditure in excess of the amount as bears to the turnover of the

permanent establishment in Pakistan the same proportion as the non-resident's total head office

expenditure bears to its worldwide turnover.

(3) In this section, "head office expenditure" means any executive or general administration

expenditure incurred by the non-resident person outside Pakistan for the purposes of the

business of the Pakistan permanent establishment of the person, including:

(a) any rent, local rates and taxes excluding any foreign income tax, current repairs, or

insurance against risks of damage or destruction outside Pakistan;

(b) any salary paid to an employee employed by the head office outside Pakistan;

(d) any other expenditures which may be prescribed

(4) No deduction shall be allowed in computing the income of a permanent establishment in

Pakistan of a non-resident person chargeable under the head "Income from Business" for:

(a) any profit paid or payable by the non-resident person on debt to finance the operations

of the permanent establishment; or

(b) any insurance premium paid or payable by the non-resident person in respect of such

debt.

Table of Contents: