A basic to guide to your tax liabilities under the Income Tax Ordinance 2001 and related laws

By Pir Abdul Wahid

If you need more information  and/or legal advice on your tax liabilities and refunds please email me at pirwahid@joshandmak.com

The Income Tax Ordinance 2001 came into force in 2002. Hence the provisions of the 1979 Tax Ordinance remain effective for any income year ending on or before June 30, 2002 and this is something which is best kept in mind regarding tax or income disputes upto the year 2001 which are governed with the provisions of 1979 Ordinance. Under the 2001 Ordinance there is no concept of “income year” and “assessment year” and replaced with a single concept of “tax year” ending normally on June 30, though a “special tax year” assessment may be chosen by assesse with prior permission of Commissioner Income Tax. Also if shares of a listed company are not traded during the year, it will not be regarded as a public company. Any benefits under share option schemes provided by employer are taxed as “salary”. In Pakistan, there is no Estate Tax or Gift Tax. Under the Gift Tax Act (Repeal) Order 1985, Gift Tax Act 1963 has been repealed, and as of July 1, 1985 no gift tax is leviable.

Capital Gains Tax: Capital Gains have been exempted from charge of income tax until 2005. Through amendment made by Finance Ordinance 2003, a concept of “Advance Tax Ruling” from Central Board of Revenue has been introduced in case of non-resident for transaction proposed or entered into by taxpayer. Further residence status of individual is determined on basis of his stay in country in current year only. A Company shall not be considered to be resident for tax purposes unless control and management of its affairs is situated “almost wholly” within Pakistan.

By virtue of the Finance Act, 1991, extensive withholding tax provision  have also been enacted and there is also a turnover tax payable by companies and registered firms. CBR has, through this Act, also enabled to prescribe scheme for payment of fixed tax by person maintaining small establishment to carry on business or profession.

Through the Finance Supplementary (Amendment) Act, 1997 , any person who owns immovable property with land area of 250 sq. yards or more, or owns motor vehicle, or subscribes to telephone, or has undertaken foreign travel except for Haj during income year must file income tax return irrespective of amount of total income unless they are covered by exceptions.

Interest on Securities.

Income from interest receivable by person from any security of federal or provincial government or any debenture or other security issued by or on behalf of local authority or company is classified under this head. Standard withholding rate of 30% is applicable to such income except in case of interest on debentures issued by local authority or company for which recipient gets credit at time of his own assessment. Interest on Government Securities is exempt from tax provided that this is condition of issue of such securities.

Income from House Property: Anytax under this head is leviable in respect of annual rental value of property.

Income from Business or Profession: This head applies to all income derived from commercial and industrial activities as well as from exercise ofprofession or vocation such as law, medicine, engineering, accountancy, etc. Income under this head is computedaccording to normal principles of accountancy after allowing deduction of business expenses. Losses are allowed tobe set off against current income from all sources and where these are not completely absorbed in this manner canbe carried forward for six years to be set off against further profits from same business profession or vocation. A six-year time limit does not apply to unabsorbed depreciation allowance, which can be carried forward indefinitely untilit is completely set off against future profit.

Capital gains derived from disposed of capital assets other than, inter alia, any stock-in-trade (not being stocks and shares), personal effects and land from which income derived by assesse is agricultural income, is charged under this head. Note: The exemption from capital gains tax on locally listed securities remains here.

Residual Income

Under this head all residual income from any source other than those listed above is included. This includes dividends, interest, royalties and fees for technical services. Dividend income received by an assesse (not being a company themselves) from a company is taxed at 10% as separate slice of income; likewise income from prize bonds (at 10%); interest/profit from banks, finance society or company profit on specified security issued by any of foregoing (at 10%) deductible at source. Tax on income of nonresidents from fees for technical services and on invoice for royalty fees is charged at 15%, unless lower rate is prescribed under the double taxation  treaty.

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