The Income Tax Ordinance of 2001, which became effective in 2002, marked a significant shift in Pakistan’s taxation framework. This ordinance superseded the 1979 Tax Ordinance for all income years commencing after June 30, 2002. Consequently, any income disputes up to the year 2001 remain governed by the provisions of the 1979 Ordinance.
A notable change introduced by the 2001 Ordinance is the replacement of the concepts of “income year” and “assessment year” with a singular “tax year,” which typically concludes on June 30. However, taxpayers may opt for a “special tax year” with prior approval from the Commissioner of Income Tax. Additionally, the 2001 Ordinance specifies that shares of a listed company, if not traded during the year, will not qualify the company as a public company. Furthermore, benefits under share option schemes provided by an employer are taxed as “salary.” In the realm of gift and estate taxes, Pakistan does not impose such taxes since the repeal of the Gift Tax Act in 1985.
Capital Gains Tax has seen significant amendments. Until 2005, capital gains were exempt from income tax. The Finance Ordinance of 2003 introduced the concept of “Advance Tax Ruling” by the Central Board of Revenue (CBR) for transactions involving non-residents. Additionally, the residence status of an individual is now determined solely based on their presence in the country during the current year. For a company to be considered a resident for tax purposes, the control and management of its affairs must be situated “almost wholly” within Pakistan.
The Finance Act of 1991 brought about extensive withholding tax provisions and introduced a turnover tax for companies and registered firms. This Act also enabled the CBR to prescribe a scheme for the payment of fixed tax by small establishments.
The Finance Supplementary (Amendment) Act of 1997 mandated the filing of income tax returns by individuals owning sizable immovable property, vehicles, telephone subscribers, or those undertaking foreign travel (excluding Hajj), regardless of their total income, subject to certain exceptions.
Income from various sources is categorized differently under the Ordinance. For instance, income from interest on government or local authority securities is subject to a standard withholding rate of 30%, with certain exemptions. Income from house property is levied based on the annual rental value. Business or professional income encompasses commercial, industrial, and professional earnings, with provisions for the deduction of business expenses and loss carryforwards.
Capital gains taxation applies to the disposal of capital assets, excluding certain items like personal effects and agricultural land. Notably, the exemption from capital gains tax on locally listed securities persists.
Finally, residual income, encompassing dividends, interest, royalties, and fees for technical services, is taxed under specific rates, with considerations for double taxation treaties in the case of non-residents.
These changes reflect a comprehensive approach towards modernizing and streamlining Pakistan’s tax system, aligning it more closely with international standards and addressing the complexities of a growing economy. For further information or clarification on specific aspects of the Income Tax Ordinance 2001, please feel free to contact us.
