What is the fifth schedule? (Section 100 Income Tax Ordinance)

Based on the provided Fifth Schedule document, here are some commonly asked legal questions and answers:

1. Q: What does Part I of the Fifth Schedule pertain to? A: Part I pertains to the rules for the computation of profits and gains from the exploration and production of petroleum.
2. Q: What activities are considered a separate business undertaking under the Fifth Schedule? A: Activities related to the exploration or production of petroleum in Pakistan, including pipeline operations and the manufacture and sale of liquefied petroleum gas or compressed natural gas, are considered a separate business undertaking.
3. Q: How should profits and gains from the exploration and production of petroleum be computed? A: Profits and gains should be computed separately from other business income, profits, or gains, and in the manner applicable to income from business.
4. Q: What happens to expenditures incurred on searching for a petroleum deposit if the search is abandoned? A: Such expenditures are treated as lost at the time of the surrender of the area or the completion of a dry-hole.
5. Q: How can the said loss be set off according to the Fifth Schedule? A: The loss can be set off against the income of the same year or carried forward and set off against future years’ income, but not carried forward for more than six or ten years, depending on the specific conditions.
6. Q: What is the treatment of expenditures incurred before commercial production that are not represented by physical assets? A: These expenditures are allowed as a deduction, with limits on the deductible amount per year depending on whether the area is inshore or offshore.
7. Q: Are royalties paid to the Federal Government deductible? A: Yes, royalties paid on or after 1st July 2001, which are not capital expenditures or personal expenses, are deductible.
8. Q: What is the depletion allowance provided under the Fifth Schedule? A: A depletion allowance of 15% of the gross receipts representing the well-head value of the production is allowed, not exceeding 50% of the profits or gains before this deduction.
9. Q: What is the limitation on payments to the Federal Government and taxes for onshore petroleum undertakings? A: The aggregate of the taxes and other payments, excluding royalties, should not exceed 50% of the profits or gains derived, and not less than 40% for offshore undertakings from the tax year commencing on or after 1st July 2002.
10. Q: Can the excess payments to the Federal Government be carried forward? A: Yes, any excess payments can be carried forward and treated as payments for the succeeding year, under certain conditions.
11. Q: Who is authorized to make rules related to the operations of the Fifth Schedule? A: The Central Board of Revenue is authorized to make rules for matters connected with or incidental to the operation of this Part.
12. Q: What does “agreement” mean in the context of the Fifth Schedule? A: An agreement refers to an agreement entered into between the Federal Government and a taxpayer for the exploration and production of petroleum in Pakistan.
13. Q: How is “commercial production” defined? A: Commercial production is defined as production determined by the Federal Government.
14. Q: What constitutes “payments to the Federal Government”? A: Payments to the Federal Government include amounts payable in respect of royalties and any tax or levy specifically applicable to oil production or extractive industries.
15. Q: What is excluded from the definition of “petroleum”? A: Refined petroleum products are excluded from the definition of petroleum.
16. Q: What is meant by “surrender”? A: Surrender means the termination of rights with respect to an area, including expiration of rights according to the terms of an agreement.
17. Q: What is a “surrendered area”? A: A surrendered area is an area with respect to which a person’s rights have terminated by surrender, assignment, or termination of the business.
18. Q: Does the term “taxes on income” include payments to the Federal Government? A: No, “taxes on income” do not include payments to the Federal Government.
19. Q: What is the “well-head value”? A: Well-head value is defined in the agreement between the Federal Government and the taxpayer, or in the absence of such definition, by the Pakistan Petroleum (Production) Rules or (Exploration and Production) Rules.
20. Q: What does Part II of the Fifth Schedule address? A: Part II addresses the rules for the computation of profits and gains from the exploration and extraction of mineral deposits other than petroleum.
21. Q: How are businesses involved in the exploration or extraction of mineral deposits treated? A: These businesses are treated as separate undertakings for the purpose of the Ordinance, and their profits and gains are computed separately from other business income.
22. Q: How is expenditure on prospecting and exploration treated up to the date of commercial production? A: Such expenditure is treated as a loss to the extent it cannot be set off against other income of the undertaking.
23. Q: How long can the loss from prospecting and exploration be carried forward? A: The loss can be carried forward for up to ten years from the commencement of commercial production.
24. Q: What is the depreciation allowance for machinery and plant used for extracting ore? A: The original cost of machinery and plant used for extracting ore is allowed as a deduction from profits and gains in the tax year they are first used.
25. Q: What is the depletion allowance for mineral extraction undertakings? A: A depletion allowance equal to 20% of the taxable income of the undertaking, before the deduction of such allowance, is made.
26. Q: Is there any condition for making a depletion allowance deduction? A: Yes, the amount equal to the depletion allowance must be set apart as a reserve for the development and expansion of the undertaking.
27. Q: What happens if the depletion allowance reserve is used contrary to its purpose? A: The amount originally allowed is treated as wrongly allowed, and the Commissioner may recompute the taxable income of the taxpayer for the relevant tax years.
28. Q: Are profits from refining or concentrating mineral deposits exempt from tax? A: Yes, profits from refining or concentrating mineral deposits are exempt from tax up to 10% of the capital employed in such business.
29. Q: Does the tax exemption for refining or concentrating mineral deposits apply to all businesses? A: No, it does not apply to businesses formed by the splitting up or reconstruction of existing businesses, or by the transfer of used assets from a pre-existing business.
30. Q: How long does the tax exemption for refining or concentrating mineral deposits apply? A: The exemption applies for the tax year following the year in which commercial production commences and for the next four years.
31. Q: Who can make rules related to the operations of Part II? A: The Commissioner is authorized to make rules for matters connected with or incidental to the operations of this Part.
32. Q: How is “commercial production” defined in Part II? A: Commercial production in Part II is defined as production determined by the Commissioner.
33. Q: Does the definition of “petroleum” in Part II differ from Part I? A: No, “petroleum” in Part II has the same meaning as defined in Part I, clause 4 of rule 6.
34. Q: What constitutes the income from the business of petroleum exploration and production? A: Income includes profits and gains from pipeline operations, and manufacture and sale of liquefied petroleum gas or compressed natural gas.
35. Q: Can expenditure on the acquisition of depreciable assets be deducted? A: No, expenditure on the acquisition of depreciable assets to which section 22 applies cannot be deducted.
36. Q: What is the treatment for expenditure on intangible assets? A: Expenditure on intangible assets to which section 24 applies cannot be deducted.
37. Q: How is the consideration received for the disposal of assets used in petroleum exploration and production determined? A: The consideration is equal to the cost of the asset reduced by any depreciation deductions allowed under the Ordinance.
38. Q: Are there any special provisions for depreciation for offshore petroleum exploration and production? A: Yes, the six-year limitation on carrying forward depreciation does not apply to offshore petroleum exploration and production machinery, plant, or equipment.
39. Q: What happens if deductions exceed gross receipts from the sale of petroleum? A: The excess is set off against other income and carried forward, but not for more than six years.
40. Q: Is there a requirement for commercial production before deductions for prior expenditures? A: Yes, commercial production must commence before deductions for prior expenditures not deemed lost can be allowed.
41. Q: Can losses be carried forward indefinitely? A: No, losses can only be carried forward for up to six or ten years depending on the specific conditions outlined in the rules.
42. Q: What does “surrender” entail in the context of petroleum exploration? A: Surrender entails the termination of rights with respect to an area, including the expiration of rights according to the terms of an agreement.
43. Q: What is the “well-head value” used for? A: The well-head value is used for determining the gross receipts from the production of petroleum.
44. Q: Are payments to the Federal Government treated as tax? A: No, payments to the Federal Government are not included in “taxes on income.”
45. Q: Can a taxpayer receive an abatement of tax if payments to the Federal Government are less than the agreed amount? A: Yes, an abatement of tax is allowed to make the aggregate payments equal to the amount provided for in the agreement.
46. Q: What is the maximum percentage for depletion allowance in the case of profits or gains? A: The depletion allowance must not exceed 50% of the profits or gains before the deduction of such allowance.
47. Q: What is the role of the Central Board of Revenue under the Fifth Schedule? A: The Central Board of Revenue is responsible for making rules for any matters connected with or incidental to the operation of Part I of the Fifth Schedule.
48. Q: How are capital expenditures treated under the Fifth Schedule? A: Capital expenditures are not deductible as current expenditures under the rules.
49. Q: What expenditures are deductible after the commencement of commercial production? A: Expenditures laid out or expended wholly and exclusively for the purpose of the business of production and exploration of petroleum, excluding capital expenditures and personal expenses, are deductible.
50. Q: What happens if the agreement does not provide a definition for well-head value? A: The meaning assigned to it in the Pakistan Petroleum (Production) Rules or the Pakistan Petroleum (Exploration and Production) Rules is used.
51. Q: Are there provisions for businesses engaged in both exploration and refining of mineral deposits? A: Yes, there are tax exemptions for profits from refining or concentrating mineral deposits, subject to certain conditions.
52. Q: Is the expenditure on the acquisition of physical assets incurred before commercial production deductible? A: Yes, it is deductible as if the assets were acquired at the time of the commencement of commercial production at their original cost, reduced by any previously allowed depreciation deduction.
53. Q: Can the aggregate of taxes on income and other payments exceed the limits provided in the agreement? A: No, it should not exceed the limits provided for in the agreement.
54. Q: Are there any special rules for the computation of profits for offshore petroleum exploration and production? A: Yes, specific rules are applicable for offshore petroleum exploration and production, including different limitations on deductions and carrying forward of losses.
55. Q: How is the loss from a dry-hole treated under the Fifth Schedule? A: The loss from a dry-hole is treated as lost at the time of the completion of the dry-hole and can be set off against income as per the rules provided.
56. Q: What is the process for setting off the said loss against future income? A: The loss can be set off against the income of the same year or carried forward and set off in future years, subject to the specified limitations.
57. Q: Are payments made to Federal Government authorities included in the definition of “payments to the Federal Government”? A: Yes, payments to any Federal Governmental authority in Pakistan are included.
58. Q: Is the six-year limitation on carrying forward excess deductions applicable to all petroleum exploration and production businesses? A: No, the limitation does not apply to offshore petroleum exploration and production machinery, plant, or equipment.
59. Q: Can physical assets acquired before the commencement of commercial production be depreciated? A: Yes, depreciation deductions are allowed for physical assets acquired before the commencement of commercial production as if they were acquired at the time of commencement.
60. Q: How is the taxable income recomputed if a depletion allowance is used contrary to its intended purpose? A: The Commissioner may recompute the taxable income for the relevant tax years, applying section 122, with the five-year period reckoned from the end of the tax year in which the amount was misused.
61. Q: Can the income from pipeline operations be included in the profits of an exploration and production business? A: Yes, income from pipeline operations is included in the profits of the exploration and production business.
62. Q: What is the aggregate limit on taxes and other payments for offshore petroleum exploration and production undertakings? A: The limit is 40% of the profits or gains derived by the undertaking before deduction of the payment to the Federal Government.
63. Q: Are profits from businesses formed by the reconstruction of existing businesses eligible for tax exemption? A: No, such profits are not eligible for the tax exemption provided under the rules.
64. Q: What is the purpose of setting apart the depletion allowance as a reserve? A: The reserve is to be utilised for the development and expansion of the undertaking.
65. Q: How are losses from prospecting and exploration treated if they cannot be set off against the income of the tax year in which commercial production commenced? A: The portion not set off is carried forward to the following year and so on, for up to ten years.
66. Q: What are “other payments” referred to in the limitation on payment to the Federal Government? A: Other payments include any tax or levy imposed in Pakistan peculiarly applicable to oil production or extractive industries.
67. Q: Are there any deductions for personal expenses of the taxpayer? A: No, personal expenses of the taxpayer are not deductible.
68. Q: Can expenditures on searching for petroleum be treated as lost if the search is given up before commercial production? A: Yes, such expenditures are treated as lost if the search is abandoned before commercial production.
69. Q: Is there a difference in the allowable deduction percentage for inshore and offshore areas? A: Yes, the allowable deduction is up to 10% for inshore areas and up to 25% for offshore areas.
70. Q: How is the consideration for the disposal of assets determined for the purposes of section 22? A: It is equal to the cost of the asset reduced by any depreciation deductions allowed under the Ordinance, excluding the initial allowance under section 23.
71. Q: What is included in the “income from business” head for computation of profits? A: The “income from business” head includes all profits and gains chargeable under this category.
72. Q: Can profits from the manufacture and sale of compressed natural gas be treated as part of the petroleum exploration and production business? A: Yes, these profits are included as part of the petroleum exploration and production business.
73. Q: Is there any provision for an additional tax if the aggregate payments to the Federal Government are less than the amount provided for in the agreement? A: Yes, an additional tax may be payable to equalise the aggregate payments with the amount provided in the agreement.
74. Q: Are refined petroleum products included in the definition of petroleum? A: No, refined petroleum products are excluded from the definition of petroleum.
75. Q: What should be done if the payments to the Federal Government exceed the amount provided for in the agreement? A: The excess payments may be carried forward and treated as payments for the succeeding year, as per the rules.
76. Q: Is there any limit on carrying forward the excess deductions allowed under Part IV of Chapter III? A: Yes, the excess deductions can be carried forward for a maximum of six years.
77. Q: How is the taxable income computed for businesses engaged in both extraction and refining of mineral deposits? A: The taxable income is computed according to Part IV of Chapter III, with specific rules applicable to such businesses.
78. Q: Can an offshore petroleum exploration and production undertaking carry forward losses for more than six years? A: No, losses can be carried forward for a maximum of six years, except for depreciation deductions on offshore equipment.
79. Q: Are expenditures incurred after the commencement of commercial production deductible? A: Yes, provided they are not capital expenditures or personal expenses and are laid out wholly and exclusively for the business purpose.
80. Q: What is the significance of the term “surrendered area”? A: A surrendered area refers to an area where rights have terminated by surrender, assignment, or termination of the business.
81. Q: How are profits and gains from the exploration and extraction of mineral deposits treated under the Fifth Schedule? A: They are computed separately as a separate business undertaking and subject to specific rules under Part II.
82. Q: What happens to expenditures on exploration if the commercial production does not commence? A: These expenditures are treated as losses and can be carried forward for up to ten years after the commencement of commercial production.
83. Q: Is there a provision for setting off losses against other income? A: Yes, losses can be set off against other income, except for dividends, and carried forward subject to the specified limitations.
84. Q: What is the treatment of physical assets acquired before commercial production for depreciation purposes? A: These assets are treated as if acquired at the commencement of commercial production at their original cost, with deductions for previously allowed depreciation.
85. Q: Are there any conditions for the tax exemption of profits from refining mineral deposits? A: Yes, the profits must not exceed 10% of the capital employed, and the business must not be formed by the reconstruction of existing businesses or transfer of used assets.
86. Q: What is the allowable deduction percentage for offshore petroleum exploration and production? A: The allowable deduction percentage for offshore areas is up to 25%.
87. Q: Can losses from prospecting and exploration be carried forward indefinitely? A: No, they can be carried forward for up to ten years from the commencement of commercial production.
88. Q: Are profits from concentrating mineral deposits eligible for tax exemption? A: Yes, profits from concentrating mineral deposits are eligible for tax exemption up to 10% of the capital employed in such business.
89. Q: How is the consideration for the disposal of assets used in petroleum exploration treated for tax purposes? A: It is treated as a disposal of the asset for a consideration equal to the cost of the asset, reduced by any depreciation deductions allowed under the Ordinance.
90. Q: What is the aggregate limit on taxes and other payments for onshore petroleum exploration and production undertakings? A: The limit is 50% of the profits or gains derived before deduction of the payment to the Federal Government.
91. Q: Are there any special rules for businesses engaged in the exploration of mineral deposits other than petroleum? A: Yes, Part II of the Fifth Schedule outlines specific rules for the computation of profits and gains from the exploration and extraction of mineral deposits other than petroleum.
92. Q: Can expenditures on the acquisition of intangible assets be deducted under the Fifth Schedule? A: No, expenditures on the acquisition of intangible assets to which section 24 applies cannot be deducted.
93. Q: Are there provisions for additional taxes if the aggregate payments to the Federal Government exceed the agreed amount? A: Yes, an additional tax or abatement is applied to equalise the aggregate payments with the agreed amount.
94. Q: How are profits from the business of refining mineral deposits treated? A: Profits from refining mineral deposits are exempt from tax up to 10% of the capital employed, under specific conditions.
95. Q: What happens if the payments to the Federal Government are greater than the amount provided for in the agreement? A: The excess payments can be carried forward and treated as payments for the succeeding year, as specified in the rules.
96. Q: Is the depletion allowance applicable to all mineral extraction undertakings? A: Yes, a depletion allowance of 20% of the taxable income is applicable, subject to the conditions specified in the rules.
97. Q: How are expenditures on physical assets treated after the commencement of commercial production? A: They are deductible as if the assets were acquired at the time of commencement, reduced by previously allowed depreciation deductions.
98. Q: Can the income from the sale of liquefied petroleum gas be included in the profits of a petroleum exploration business? A: Yes, income from the sale of liquefied petroleum gas is included as part of the profits of the petroleum exploration business.
99. Q: What is the purpose of the Fifth Schedule? A: The purpose of the Fifth Schedule is to provide detailed rules for the computation of profits and gains from the exploration and production of petroleum and other mineral deposits in Pakistan.
100. Q: Are there any limitations on the deductions for expenditures incurred after the commencement of commercial production? A: Yes, deductions are allowed provided they are not capital expenditures or personal expenses and are laid out wholly and exclusively for the business purpose.