Taxation Lecture#3

Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1

Lecture # 3

3.13.1

TERRITORIAL LIMITS & DEFINITIONS


Chapter IPreliminary Section 1

Short title The title of this book is “Income Tax

Ordinance 2001”

Scope and extent It extends to whole of Pakistan

Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved

SCOPE OF INCOME TAX LAW ANDSCOPE OF INCOME TAX LAW ANDTERRITORIAL LIMITSTERRITORIAL LIMITS

AZADAZAD

KASHMIRKASHMIR TRIBALTRIBAL AREASAREAS

NORTHERNNORTHERN AREASAREAS

Pakistan includes all areas except the following:




Article 246 of the Constitution 1973Article 246 of the Constitution 1973

Tribal Areas means the areas in Pakistan which, Tribal Areas means the areas in Pakistan which, immediately before the commencing day, were immediately before the commencing day, were Tribal Areas, and includes:Tribal Areas, and includes:

1 The Tribal Areas of Balochistan and North-The Tribal Areas of Balochistan and North-West Frontier Province, andWest Frontier Province, and

2 2.The former States of Amb, Chitral, Dir2.The former States of Amb, Chitral, Dir


Provincially Administered Tribal Areas Provincially Administered Tribal Areas means:means:

The districts of Chitral, Dir and Swat (which The districts of Chitral, Dir and Swat (which includes Kalam), Malakand protected area, the includes Kalam), Malakand protected area, the Tribal Area adjoining Hazara district and the Tribal Area adjoining Hazara district and the former State of Amb; andformer State of Amb; and

Zob district, Loralai district (excluding Bhuke Zob district, Loralai district (excluding Bhuke Tehsil), Dalbandin Tehsil of Chagai district and Tehsil), Dalbandin Tehsil of Chagai district and Marri and Bugti Tribal territories of Sibi Marri and Bugti Tribal territories of Sibi district.district.

2.22.2


Federally Administered Tribal Areas Federally Administered Tribal Areas include:include:

1.1. Tribal Areas adjoining Peshawar districtTribal Areas adjoining Peshawar district

2.2. Tribal Areas adjoining Kohat districtTribal Areas adjoining Kohat district

3.3. Tribal Areas adjoining Bannu districtTribal Areas adjoining Bannu district

4.4. Tribal Areas adjoining Dera Ismail Khan districtTribal Areas adjoining Dera Ismail Khan district

5.5. Bajaur in Malakand AgencyBajaur in Malakand Agency

6.6. Mohamand AgencyMohamand Agency

7.7. Khyber AgencyKhyber Agency

8.8. Kurram AgencyKurram Agency

9.9. North Waziristan AgencyNorth Waziristan Agency

10.10. South Waziristan AgencySouth Waziristan Agency


Executive Authority

2.12.1

Subject to the Constitution, the executive Subject to the Constitution, the executive authority of the Federation shall extend to the authority of the Federation shall extend to the Federally Administered Tribal Areas, and the Federally Administered Tribal Areas, and the executive authority of a Province shall extend executive authority of a Province shall extend to the Provincially Administered Tribal Areas to the Provincially Administered Tribal Areas therein.therein.


Act of Parliament or Provincial Act of Parliament or Provincial AssemblyAssembly

33.13.1

No Act of Parliament shall apply to any Federally No Act of Parliament shall apply to any Federally Administered Tribal Areas, or to any part thereof, Administered Tribal Areas, or to any part thereof, unless the President so directs, and no Act of unless the President so directs, and no Act of Parliament or a Provincial Assembly shall apply Parliament or a Provincial Assembly shall apply to Provincially Administered Tribal Areas, or to to Provincially Administered Tribal Areas, or to any part thereof, unless the Governor of the any part thereof, unless the Governor of the Province in which the Tribal Area is situated, with Province in which the Tribal Area is situated, with the approval of the President, so directs. the approval of the President, so directs.


IMPORTANT CONCEPTSIMPORTANT CONCEPTS

3.43.4

RELATING TO TAXRELATING TO TAX RELATING TO TAXRELATING TO TAX


ROLE OF LEGAL FICTIONROLE OF LEGAL FICTION

1.1. ARTIFICIALLY DECLARES A THING WHICH IS ARTIFICIALLY DECLARES A THING WHICH IS ACTUALLY NOT.ACTUALLY NOT.

2.2. ASSIGNS MEANING TO A WORD WHICH IT ASSIGNS MEANING TO A WORD WHICH IT ORDINARILY DOES NOT HAVE.ORDINARILY DOES NOT HAVE.

3.3. DECLARES AN EVENT TO HAVE TAKEN PLACE DECLARES AN EVENT TO HAVE TAKEN PLACE WHEREAS, IT HAS NOT ACTUALLY TAKEN PLACE WHEREAS, IT HAS NOT ACTUALLY TAKEN PLACE AND VICE VERSA.AND VICE VERSA.

4.4. DECLARES A SITATION TO EXIST WHICH DECLARES A SITATION TO EXIST WHICH ACTUALLY DOES NOT EXIST AND VICE VERSA.ACTUALLY DOES NOT EXIST AND VICE VERSA.

5.5. THE WORD “DEEMED” IS USED.THE WORD “DEEMED” IS USED.

2.22.2


TYPES OF FICTIONTYPES OF FICTION

FICTION OF A PERSONFICTION OF A PERSONFICTION OF A PERSONFICTION OF A PERSON

FICTION OF INCOMEFICTION OF INCOME FICTION OF INCOMEFICTION OF INCOME

FICTION OF TIMEFICTION OF TIME FICTION OF TIMEFICTION OF TIME

FICTION OF PLACEFICTION OF PLACE FICTION OF PLACEFICTION OF PLACE

3.13.1


FICTION OF PERSONFICTION OF PERSON

EXAMPLEEXAMPLE INCOME OF A MINOR INCOME OF A MINOR

CHILD Section 91 CHILD Section 91

INCOME OF MINOR INCOME OF MINOR CHILD TREATED AS CHILD TREATED AS INCOME OF ONE OF INCOME OF ONE OF THE PARENTSTHE PARENTS


FICTION OF INCOMEFICTION OF INCOME

EXAMPLE-IEXAMPLE-I

ADVANCE /PUGREE RECEIVEDADVANCE /PUGREE RECEIVED

SECTION 39 (2) SECTION 39 (2)

EXAMPLE –IIEXAMPLE –II

PRIVATE LOANSRECEIVED OTHER PRIVATE LOANSRECEIVED OTHER THAN A CROSS CHEQUETHAN A CROSS CHEQUE

SECTION 39(3)SECTION 39(3)

10th part is charged to 10th part is charged to tax, although it is tax, although it is capital receipt.capital receipt.

Treated as income of Treated as income of the recipientthe recipient


FICTION OF TIMEFICTION OF TIME

EXAMPLEEXAMPLE UnexplainedUnexplained

Property / InvestmentProperty / Investment Section 111Section 111

Property constructed Property constructed in the previous year in the previous year but detected today will but detected today will be treated as the be treated as the income of the current income of the current year.year.


FICTION OF PLACEFICTION OF PLACE

Income paid outside Pakistan will be treated as paid in Pakistan

Section 101(1)(b)

Salary paid by Government of Pakistan in other country to the staff of it’s embassy will be treated as Pakistan source income and the staff has to file return in Pakistan


DEFINITIONSDEFINITIONS

Arranged alphabeticallyArranged alphabetically

74 definitions plus insertions74 definitions plus insertions

SECTION 2SECTION 2

SUB-SECTIONS 74SUB-SECTIONS 74 SECTION 2SECTION 2

SUB-SECTIONS 74SUB-SECTIONS 74

11


DEFINITIONS AND CONCEPTSDEFINITIONS AND CONCEPTS

ASSESSMENTASSESSMENT 2(5)2(5) Assessment is the determination of taxable Assessment is the determination of taxable

income ,tax liability and payment of tax.income ,tax liability and payment of tax.

It It IncludesIncludes reassessment and amended reassessment and amended assessment. assessment.

Checking of return of income.Checking of return of income. Making changes accordinglyMaking changes accordingly Paying more tax or refund of the tax.Paying more tax or refund of the tax.

What type of definition it is ?What type of definition it is ?


EXPLANATION

HEADS OF INCOME Section 11HEADS OF INCOME Section 11

Salary Sec 12 to 14Salary Sec 12 to 14 Income from property Sec 15 to 17Income from property Sec 15 to 17 Income from business Sec 18 to 36Income from business Sec 18 to 36 Capital gain Sec 37 & 38Capital gain Sec 37 & 38 Income from other sources Sec 39 & 40Income from other sources Sec 39 & 40


BUSINESSBUSINESS 2(9) 2(9)

It includes any;It includes any; Trade;Trade; Commerce;Commerce; Manufacture;Manufacture; Profession;Profession; Vocation;Vocation; Or any adventure in the nature of trade, Or any adventure in the nature of trade,

commerce, or manufacture.commerce, or manufacture. However, it does not include an However, it does not include an

employment.employment.


CAPITAL ASSETCAPITAL ASSET 2(10) & read with 37(5)2(10) & read with 37(5)

It means property of any kind (personal or It means property of any kind (personal or business) held excluding:business) held excluding:

Stock in trade Stock in trade (other than stocks and shares), (other than stocks and shares), consumable stores, or raw material.consumable stores, or raw material.

Any depreciable asset ( provided in the 3Any depreciable asset ( provided in the 3rdrd Schedule of the Income Tax Ordinance 2001).Schedule of the Income Tax Ordinance 2001).

Any intangible asset on which amortization is Any intangible asset on which amortization is charged.charged.


CAPITAL ASSET CAPITAL ASSET --- cont--- cont

Any immovable property.Any immovable property.

Movable property for personal use but Movable property for personal use but include the following:include the following:

A painting, drawing, work of art, A painting, drawing, work of art, jewelry, a rare manuscript (Qalmi jewelry, a rare manuscript (Qalmi nuskha), a coin or medallion, an nuskha), a coin or medallion, an antique.antique.


F.B.R

BOARDBOARD 2(11)2(11)

i.i. Board Board meansmeans Federal Board of Revenue Federal Board of Revenue (FBR) established under Federal Board (FBR) established under Federal Board of Revenue Act 2007.of Revenue Act 2007.

ii.ii. Highest tax collecting authority in Highest tax collecting authority in Pakistan.Pakistan.

iii.iii. Regulates all federal taxes including Regulates all federal taxes including direct and indirect taxes.direct and indirect taxes.

iv.iv. Appointed by Federal Government.Appointed by Federal Government.


CHARITABLE PURPOSESCHARITABLE PURPOSES 2(11A) 2(11A)

3.23.2

EducationEducationEducationEducation

Medical reliefMedical relief Medical reliefMedical relief

Any other object of public utilityAny other object of public utilityAny other object of public utilityAny other object of public utility

Relief of the poorRelief of the poor Relief of the poorRelief of the poor


INCOME INCOME SECTION 2 (29)SECTION 2 (29)

Income includes; Any amount chargeable to tax; a) Salarya) Salary b) Income from propertyb) Income from property c) Income from business c) Income from business d) Capital gain d) Capital gain e) Income from other sourcese) Income from other sources

Any amount chargeable to tax; Import of goods Sec 148 Dividends Sec 150 Royalty or fee for technical services Sec 152Royalty or fee for technical services Sec 152 Payment for supply of goods and services Sec 153Payment for supply of goods and services Sec 153 Winning of prizes & lottery Sec 156Winning of prizes & lottery Sec 156


INCOMEINCOME --- --- contcont SECTION 2 (29)SECTION 2 (29)

Any loss of income (adjustment of loss Any loss of income (adjustment of loss against income)against income)

But does not include amount representing But does not include amount representing face value of bonus shares in the hands of face value of bonus shares in the hands of shareholdersshareholders


Presumptive Tax Regime (PTR) and Presumptive Tax Regime (PTR) and Normal Tax Regime (NTR)Normal Tax Regime (NTR)

2.42.4

Tax on gross receipts is called PTR e.g the Tax on gross receipts is called PTR e.g the realization of foreign exchange proceeds of realization of foreign exchange proceeds of exports is taxed @ 1%.It is also called Final Tax exports is taxed @ 1%.It is also called Final Tax Regime (FTR)Regime (FTR)

Tax on the Net Income of the business @35% for Tax on the Net Income of the business @35% for companies, given under the1st Schedule is called companies, given under the1st Schedule is called Normal Tax Regime (NTR). Normal Tax Regime (NTR).


CONCEPT OF INCOME-CONCEPT OF INCOME- Broad PrinciplesBroad Principles

Temporary & PermanentTemporary & Permanent

income – No distinctionincome – No distinctionLumps sum & Installment – taxableLumps sum & Installment – taxablePersonal giftsPersonal gifts

• Birthday, marriage gift- not taxableBirthday, marriage gift- not taxable

Tax free incomeTax free income• Treated as facility which is ultimately Treated as facility which is ultimately

taxedtaxed

Income cannot be taxed twiceIncome cannot be taxed twice


CONCEPT OF INCOME- CONCEPT OF INCOME- Broad PrinciplesBroad Principles

33.23.2

No trading with himselfNo trading with himself• Head office cannot make profit from a Head office cannot make profit from a

transaction with its branchtransaction with its branch Revenue receipts – taxableRevenue receipts – taxable Capital receipt – taxable if stated specificallyCapital receipt – taxable if stated specifically Certain income excluded - if exemption is Certain income excluded - if exemption is

providedprovided Burden of proof Burden of proof

• Amount is taxed against the wish of taxpayer, Amount is taxed against the wish of taxpayer, burden of proof lies upon tax department.burden of proof lies upon tax department.


Principal Officer:Principal Officer: section 2(44A)section 2(44A)

With reference to company or associationWith reference to company or association

of persons, it includes:of persons, it includes:

a.a.A director, a manager, agent, A director, a manager, agent, accountant or any similar officer, andaccountant or any similar officer, and

b.b.Any person with management upon Any person with management upon whom commissioner has served a whom commissioner has served a noticenotice

c.c.It is to ensure by the tax It is to ensure by the tax

department that notice has beendepartment that notice has been

served on the taxpayer.served on the taxpayer.


Taxable IncomeTaxable Income Section 2 (64)Section 2 (64)

The taxable income of a person for the tax The taxable income of a person for the tax year shall be the total income for the year as year shall be the total income for the year as reduced by any deductible allowances. reduced by any deductible allowances. However, the taxable income should not be However, the taxable income should not be below zero.below zero.


Taxable IncomeTaxable Income --- cont --- cont Section 2 (64)Section 2 (64)

Total Income xxxTotal Income xxx Less: deductible Allowance Less: deductible Allowance Zakat paid under Zakat and Usher Zakat paid under Zakat and Usher

Ordinance (xxx)Ordinance (xxx) Donations (specified) (xxx)Donations (specified) (xxx)

Taxable Income xxxTaxable Income xxx


Tax Year Tax Year 2 (68) read with section 742 (68) read with section 74

Tax year means a period of 12 months ending on Tax year means a period of 12 months ending on June 30June 30thth, which is called , which is called Normal Tax YearNormal Tax Year under under the ordinance and is denoted by the calendar year the ordinance and is denoted by the calendar year in which the closing date falls. in which the closing date falls.

Special year Special year period of 12 months other than period of 12 months other than normal tax year is called special tax year. It normal tax year is called special tax year. It denoted by the calendar year relevant to the denoted by the calendar year relevant to the Normal year in which closing date of Special year Normal year in which closing date of Special year falls.falls.


Convenient to Convenient to taxpayertaxpayer

Accounting period Accounting period

Operating cycle of the business Operating cycle of the business

Cash flows of the businessCash flows of the business

CONCEPT OF TAX YEARCONCEPT OF TAX YEAR


Special tax year calculation

Accounting period. Normal year relating to Accounting period. Closing date. Calendar year in which closing date of Normal year

falls. Formula :

Closing date falls before 30th June

Same

Closing date falls after 30th June Add one year


Special Tax Year

Classes of taxpayers

Accounting period Tax year

Mr. Umer Javed, a rice exporter

Ist Jan 10 to 31st Dec 10 2011 (Special Tax Year)

Ist Jan 11 to 31st Dec 11 2012

Ist Jan 12 to 31st Dec 12 2013


Special Tax Year



Mr. Zaheer – ud – Babar, a manufacturer of shawls

Ist April 09 to 31st March 10 2010 (Special Tax Year)

Ist April 10 to 31st March 11 2011

Ist April 11 to 31st March 12

2012


Special Tax Year



M/S XYZ, a company manufacturer of sugar

Ist Oct 09 to 30th Sep 10 2011

Ist Oct 10 to 30tt Sep 11 2012

Ist Oct 11 to 30th Sep 12 2013


Transitional tax period

Whenever, a taxpayer changes his/her tax year from Normal to Special, Special to Normal or from Special to Special tax year, there exists a gap which can be ranging from one day to less than a year. This gap is called Separate Tax Year or Transitional Tax Period. A taxpayer has to file separate return for such period.


PERIOD OF INCOMEPERIOD OF INCOME TYPE OF TYPE OF TAX YEARTAX YEAR

DENOTED BYDENOTED BY

FROMFROM TOTO

01-07-201001-07-2010 30-06-201130-06-2011 NORMALNORMAL 20112011

01-10-201101-10-2011 30-09-201230-09-2012 SPECIALSPECIAL 20132013

01-07-201101-07-2011 30-09-201130-09-2011 SEPARATESEPARATE TRANSITIONAL TAX TRANSITIONAL TAX YEARYEAR

CHANGE OF TAX YEAR - ICHANGE OF TAX YEAR - I

APPLICATION DATE =APPLICATION DATE = 15-07-201015-07-2010REQUEST FOR CHANGE OF NORMAL TAX YEAR TO REQUEST FOR CHANGE OF NORMAL TAX YEAR TO

SPECIAL TAX YEAR (WITH EFFECT FROM 01-10-2010)SPECIAL TAX YEAR (WITH EFFECT FROM 01-10-2010)


PERIOD OF INCOMEPERIOD OF INCOME TYPE OF TAX TYPE OF TAX YEARYEAR

DENOTED BYDENOTED BY

FROMFROM TOTO

01-01-201001-01-2010 31-12-201031-12-2010 SPECIALSPECIAL 20112011

01-07-201101-07-2011 30-06-201230-06-2012 NORMALNORMAL 20122012

01-01-201101-01-2011 30-06-201130-06-2011 SEPARATESEPARATE TRANSITIONAL TRANSITIONAL TAX YEARTAX YEAR

CHANGE OF TAX YEAR - IICHANGE OF TAX YEAR - II

APPLICATION DATE =APPLICATION DATE = 15-01-201015-01-2010REQUEST FOR CHANGE OF SPECIAL TAX YEAR TO REQUEST FOR CHANGE OF SPECIAL TAX YEAR TO

NORMAL TAX YEARNORMAL TAX YEAR


PERSON 2 (42) & read with 80(1)

1111

Individuals Individuals

A Company

A Company

Association of Persons (AOP)Association of Persons (AOP)

The Federal Government or

Public International Organization

The Federal Government or

Public International Organization


Why to determine the status as a person ?

Legal status (first item in the tax returns to fill in).

Different tax rates. Identification of ‘person’ for Tax Department

is necessary to collect the tax. Tax year for different persons is different.

44


COMPANY 2 (12) read with section 80 (2) (b)

i) A company registered under Companies Ordinance 1984

ii) Body Corporate formed Under Law

iii) A Modaraba

iv) Body Corporate Formed Under Foreign Law

v) Trust, Co-operative Society or Any Other Society Under the Law

vi) Foreign Association Declared to be a Company

vii) Provincial Government

viii) Local Authority in Pakistan

45


EXPLANTION

The Companies Ordinance, 1984 has defined a company as “ a company which has been registered under the Companies Ordinance, 1984 or any other law regulating companies prior to the promulgation of the Companies Ordinance”.

According to the Modaraba Companies and Modaraba (Floatation and Control) Ordinance , 1980, ‘modaraba’ means a business in which a person participates with his money and another with his efforts or skill or both and shall include ‘unit trusts’ and ‘mutual funds’.

46


ASSOCIATION OF PERSONS (AOP) (Sections 2 (6) read with section 80 (2) (a)

1111

FIRMS FIRMS

HINDU UNDIVIDED FAMILY

HINDU UNDIVIDED FAMILY

BODY FORMED UNDER A FOREIGN LAWBODY FORMED UNDER A FOREIGN LAW

ARTIFICIAL JUDICIAL PERSON ARTIFICIAL JUDICIAL PERSON


Determine the personal status?

University of the Punjab Habib Bank Limited A joint family of Mr. Hari Ram and his two

sons and one daughter. Federal Government Kashmiri Traders, an unregistered firm of A

and B. Mr. Hammad working as General Manager in

Millat Textile Company. Punjab University Housing Society

48


ANSWERS

Company Company – a banking company Hindu Undivided Family Company Association of a persons (AOP) Individual Company

49


PUBLIC COMPANY Section 2(47)

a) 50% or more shares owned by Government

b) Foreign Company owned by a foreign Government

c) Company Registered on Stock Exchange; or

d) “Unit Trust”, if units are widely available or any other trust.

PRIVATE COMPANY Section 2(45)

BANKING COMPANY Section 2(7)

Banking Companies Ordinance 1962

50


DIVIDEND SECTION 2(19)

A:DISTRIBUTION OF PROFITS OR ACCUMULATED PROFITS IN ANY SHAPE AT ANY TIME TO SHAREHOLDERS.

B:LOAN BY A

PRIVATE COMPANY

51


AGRICULTURAL INCOME – DEFINITIONSection 41

Agricultural Income is exempt from tax. There are three conditions given in the

definition which are cumulative, not alternative.

DEFINITION Derived from land, Land is situated in Pakistan, and The land is used for agricultural purposes.

52


AGRICULTURAL INCOME (Section 41)

a. Rent or revenue from land in Pakistan used for agricultural purposes

b. Income from land in Pakistan through

i) Agriculture

ii) Process necessary to make the produce fit for market

iii) Sale of produce

iv) Building used for agricultural purpose


INCOME WHICH IS PARTIALLY AGRICULTURAL

The market value of the Agricultural raw material used in own business is treated as an expense of the business.on the other hand it is Agricultural Income.

54


Examples of Non- Agricultural Income

Income from spontaneous forests. Profit of merchant from purchase and resale

of agricultural produce. Income from fisheries. Income from poultry farming. income from a manufacturing process

undertaken in connection with the agricultural produce.


EXAMPLES OF AGRICULTURAL INCOME

Income arising from the forest grown and maintained by a person.

Amount received from cattle owners for allowing the cattle to graze.

Profit on the sale of standing crops. Income from growing flowers.


Illustration:

Mr Junaid is running a Flour Mill and using wheat having market value Rs. 2,25,000 (Cost Rs.80,000) produced from his own land.

Sales during the year is Rs. 6,00,000 Cost of goods sold (excluding own produced

wheat) Rs. 1,75,000 Selling and Admin expenses Rs. 1,20,000 Calculate Net Income from business and

Agricultural Income.


SOLUTION

Sales Rs. 6,00,000 Cost of goods sold 2,75,000 Gross profit 3,25,000 Selling and Admin expenses 1,20,000 Net Income 2,05,000

Is it correct ?


SOLUTION

Sales Rs. 6,00,000 Cost of goods sold (adjusted) 4,00,000 Gross profit 2,00,000 Selling and Admin expenses 1,20,000 Net Income 80,000

This is the correct position.


SOLUTION

Agricultural IncomeMarket value of the Ag. Raw material 1,25,000

Less Cost 80,000

Agricultural Income (exempt) 45,000


RESIDENT AND NON RESIDENT PERSONS (Sections 81 to 84)

RESIDENTS

NON RESIDENTS

RULES AND APPLICATIONS


RESIDENT- INDIVIDUAL Sec 2(50) & 83

It is determine for one tax year. Next year the person’s residential status may change.

Period or periods, amounting in all – 183 days or more in a tax year

Or He is an employee of a Federal or a Provincial

government posted abroad in the tax year


Residential status

63

DeterminationDetermination=

Posted abroad

by

Government

Posted abroad

by

Government

183 days or

more

183 days or

more


RULES GOVERNING RESIDENT INDIVIDUAL

Given under Income Tax Rules 2002 Part oh the day shall be counted as whole day ,

for example day of arrival or day of departure. Following days shall be counted as whole day. A public holiday


EXERCISE – 1

DETERMINATION OF RESIDENTIAL STATUSFOR THE YEAR 2010:

Mr. Kamran visited Pakistan on 1st August 2009 in connection with his business. After 7 days he left for Paris. Mr. Kamran again came back to Pakistan on 16 February 2010 and stayed in Pakistan till 20th June 2010.


SolutionAccounting period 1st July 2009 to 30th June 2010

Month Days

August 2009 7 days

February 2010 13 days

March 2010 31 days

April 2010 30 days

May 2010 31 days

June 2010 20 days

TOTAL 132 days


RESIDENT OR NON-RESIDENT ?

Give logical reason ,quote the provisions of the law.


EXERCISE - 2

Mr. Saleem is an employee of Federal Government posted at London, stayed in Pakistan from 1st September 2008 to 20th November 2008. For the rest of period pertaining to tax year 2009 and 2010, he stayed in London. Determine his residential Status for the tax year 2010.


EXERCISE - 2

Mr. Saleem is an employee of Federal Government posted at London, stayed in Pakistan from 1st September 2008 to 20th November 2008. For the rest of period pertaining to tax year 2009 and 2010, he stayed in London. Determine his residential Status for the tax year 2010.


EXERCISE - 3

Mr. Hamid came to Pakistan on April 1st 2009 for the first time and left the country on 30th September 2009. Determine his residential status for the tax year 2010.


SolutionFirst determine the Accounting Period which is 1st July 2009 to 30th June 2010

Months Days

July 31 days

August 31 days

September 30 days

TOTAL 92 days


EXERCISE - 4

Mr. Jamil came to Pakistan on 1st March 2009 to attend a marriage ceremony of his cousin. He had to return back to Colombo by 22nd March . However, due to his illness, he had to extend his stay till 30th June 2009. Determine his residential status for the tax year 2009.


Solution

First of all determine the Accounting Period which is 1st July 2009 to 30th June 2010

Months Days

March 31 days

April 30 days

May 31 days

June 30 days

TOTAL 122 days


EXERCISE - 5

Mr. Bob Woolmer, former English test player and a famous coach, came to Pakistan to give training to Pakistan Test cricket team in Lahore . He came to Pakistan on March 14th 2004 and then left for South Africa to join his family on May 31st 2005, Determine his residential status for the tax tear 2005.


RESIDENT – COMPANY

Incorporated or formed under any law in Pakistan

or Control and management whole in Pakistan at

any time in a tax year. or It is a Provincial Government or Local Authority

in Pakistan


THEORY OF MANGEMENT AND CONTROL

It refers to the management of the vital affairs and the policy making areas of the business. It is the “Head and Brain“ of the business. For example the decisions like the appropriations of the profit, the payment of dividend, the capital budgeting decisions, the working capital, the debt- Equity ratio etc.

It includes Board of Directors (BOD) and top ranking managers.


EXAMPLE

A subsidiary company has it’s BOD in Pakistan, whereas, the parent company is situated outside Pakistan. The major decisions are taken in Pakistan by the BOD of the subsidiary company. The subsidiary company will be the Resident company of Pakistan.


ASSOCIATION OF PERSON (AOP)

Control and management of the affair of the Association is situated wholly or partly in Pakistan at any time in the year, then an AOP is treated as resident. e


Reasons for distinction between Resident and Non-Resident

Incidence of taxation• Resident – both Pakistan and Foreign sources of

income are taxable• Non-Resident – only Pakistan source income is

taxable

Different tax rates for resident and non-resident entities.


ASSOCIATION OF PERSONS (AOP)

Control and management of the affairs of the Association is situated wholly or partly in Pakistan at any time in the year, then an AOP is treated as resident.


SCOPE OF TOTAL INCOME OF A RESIDENT AND NON-RESIDENR PERSON

Section 11(5) & 11(6)

The income of the resident person will include both Pakistan and foreign source incomes.

The non- resident person will be charged to tax, only the Pakistan source income. Section 11(6)


GEOGRAPHICAL SOURCE OF INCOME -PAKISTAN SOURCE INCOME

Section 101 Salary shall be Pakistan source income to

the extent to which the salary; If received from any employment received in

Pakistan, wherever paid,(can be credited to his bank account in Paris) or

Is paid by, or on behalf of, the Federal Government, a Provincial Government, or a Local Authority in Pakistan, wherever the employment is exercised (may be serving in UAE).


PAKISTAN SOURCE BUSINESS INCOME -- cont

2) Business income of a resident person shall be the Pakistan source income to the extent to which the income is derived from any business carried on in Pakistan.

3) Business income of a non-resident person shall be the Pakistan source income to the extent to which it is directly or indirectly attributable to (connected to) ;

A permanent establishment of the non-resident person in Pakistan;

Sales in Pakistan of goods or merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan.


PAKISTAN SOURCE BUSINESS INCOME ---cont

Other business activities (e.g. consultancy) carried on in Pakistan of the same or similar kind as those sold by the person through a permanent establishment in Pakistan, or

Any business connection in Pakistan.


PAKISTAN SOURCE -BUSINESS INCOME ---cont

Where, the business of a non-resident person comprises the rendering of independent services, including professional services and the services of entertainers and sports persons(coaches), derived any remuneration, paid by resident person (Pakistan Sports Board) or a permanent establishment in Pakistan of a non-resident person.

5) Any gain from the disposal of any asset or property used in deriving any business income referred to in sub-section (2),(3) and (4) shall be Pakistan source income.


PAKISTAN SOURCE BUSINESS INCOMEcont-- 6) a dividend shall be Pakistan income if it is

paid by a resident company. Profit on debt shall be Pakistan source income

if it is;

a) paid by a resident persons except where the profit is payable in respect of any debt used for the purpose of a business carried on by the resident outside Pakistan through a permanent establishment, or

b) borne (paid) by a permanent establishment in Pakistan of a non-resident person.


IMPORTANT POINTS REGARDING INCOME

Receipts of income is taxable while Remittance is just transfer of amount, therefore not taxable.

Cash or kind Receipts and Accrual Actual Receipts or Constructive receipts

(Deemed Income e.g. unexplained income ,treated as actual income).


TWO IMPORTANT CODITIONS FOR PAKISTAN SOURCE INCOME

Any income, paid by a resident person or Borne (paid) by permanent establishment in

Pakistan of a non-resident person.


EXERCISE – 1

RESIDENTIAL STATUS AND TAXATION. Determine Gross total income of MR. Ahmed in the light of the

following particulars for the Tax Year 2010. Mr. Ahmed employed in Pakistan, received Rs. 4,00,000 as

salary. His income from other sources is given under: Dividend received in Tokyo on 20th August 2010 from a Pakistani

resident company. , amounting to Rs. 10,000. Received dividend from an American company worth Rs. 70,000

in Pakistani currency. Share of profit received in Tokyo on 10th May 2010 from

business situated in Kuwait but controlled through a Permanent Establishment in Pakistan, Rs.60,000.

Remittances from Tokyo on March 10th 2010 out of past profit earned and received there amounting Rs.6,00,000.

Profit on debt received and earned in Pakistan on 1st August 2010 Rs.50,000. Calculate his gross total income , if he is a) a resident and b) a non- resident


COMPUTATION OF GROSS TOTAL INCOME OF TAX YEAR 2010

Particulars Resident Non- resident

Salary (Pak source income) Rs. 4,00,000 Rs. 4,00,000

Dividend from Pakistani resident company 10,000 10,000

Dividend from non- resident company 70,000 NIL

Share of profit from PE in Pakistan (Pak source income)

60,000 60,000

Remittance from past profits ( Not an income)

NIL NIL

Profit on Debt (not relating to Tax Year 2006)

NIL NIL

Gross Total Income 5,40,000 4,70,000


TAXPAYER 2 (66)

Income chargeable to tax Representation of such person Person responsible to deduct tax & deposit

with Govt. treasury. Required to file return of income Note: Filing the Return of Income and

paying tax are two different aspects, a return may be a ‘Nil Return’.


WHO IS TO FILE THE RETURN OF INCOME ? (Section 114)

a) Company

b) Any other person whose income exceeds minimum taxable limit.

c) Paid Income Tax in any of the previous four years

d) Claims a loss


e) It includes the followings:

Owner of immovable property (land area of 250 square yards or more)

Owns a motor vehicle

Foreign Travel by a Resident person (except Haj, Umra, Ziarat)

Member of a Club.

Subscriber to a telephone, including mobile phone

f) Notice by the Commissioner


EXCEPTIONS TO (e) (Section 115)

a) Hundred percent salary income

b) i) Widow

ii) Orphan below the age of 25 years

iii) Disabled person

iv) Non resident person owning immovable property


Total income 2 (69) read with section 11

HEADS OF INCOME (Section 11)

a) Salary

b) Income from Property

c) Income from Business

d) Capital Gains and

e) Income from other Sources


ASSOCIATES Section 85

Two persons will be associates where the relationship between the two is such that one may reasonably be expected to act in accordance with the instruction of the other, e.g.

1) an individual and his close relative 2) members of AOP 3) Company and shareholder Dealing between associates is called “Non-

arm’s length transaction”. Arm’s length means proper distance.


Visit this website:

www.fbr.gov.pk

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Taxation Lecture#3

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