Chapter 04 Basic Concepts of Taxation Part II

Basic Concepts of Taxation (Part II)

Sec. 80 (2)(d) Trust:
“trust” means an obligation(responsibility) attached to the ownership of property (e.g cash) and
arising out of the confidence reposed(relaxed) in and accepted by the owner (sometimes temporary
owner or expert), or declared and accepted by the owner for the benefit of another (who provided
cash/capital), or of another and the owner, and includes a unit trust; and (e.g A and B having Rs. 5
million each. they give their cash to C (an expert) for some investment purpose. Now A and B are the
persons who having confidence and are funds provider and C is the owner/expert. Now the benefit
from investment will be for A and B or for C also. Now the C is trust)
Sec 2(14) & 80 (2)(e):
“Unit trust” means any trust under which beneficial interests are divided into units such that the
entitlements of the beneficiaries (funds providers) to income or capital are determined by the number
of units held. (the amount invested is divided in to some units. e.g in the above example if one unit is
for Rs 100,000 then both A and B has 50 units)
Sec 2(36) “Non-profit organization” means any person other than an individual which is
(i) established for religious, educational, charitable, welfare or development purposes, or for the
promotion of an amateur sport [sports in which the participants engage largely without
remuneration (shokia khilari)];
(ii)formed and registered under any law as a non- profit organization;
(iii) approved by the Commissioner for specified period, on an application made by such person
in the prescribed form and manner, accompanied by the prescribed documents and, on
requisition, such other documents as may be required by the Commissioner;
and none of the assets of such person are available for private benefit to any other person.
Sec 2(11A) “Charitable Purpose” includes;
 relief of the poor, education, medical relief and
 the advancement of any other object of general public utility
Sec 2(30AE), IT enabled services,
include but not limited to inbound or outbound call centres, medical transcription, remote monitoring,
graphics design, accounting services, Human Resource (HR) services, telemedicine centers, data entry
operations, cloud computing services, data storage services, locally produced television programs and
insurance claims processing
Sec 2(41) “Permanent Establishment” in relation to a person, means a 5 [fixed] place of business
through which the business of the person is wholly or partly carried on, and includes –
(a) a place of management, branch, office, factory or workshop, [premises for soliciting orders,
warehouse, permanent sales exhibition or sales outlet,] other than a liaison office except where the
office engages in the negotiation of contracts (other than contracts of purchase);
(b) a mine, oil or gas well, quarry or any other place of extraction of natural resources;
[(ba) an agricultural, pastoral or forestry property;]

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(c) a building site, a construction, assembly or installation project or supervisory activities [connected]
with such site or project [but only where such site, project and its 5 [connected] supervisory activities
continue for a period or periods aggregating more than ninety days within any twelve-months period];
(d) the furnishing of services, including consultancy services, by any person through employees or
other personnel engaged by the person for such purpose;
(e) a person acting in Pakistan on behalf of the person (hereinafter referred to as the “agent other than
an agent of independent status acting in the ordinary course of business as such, if the agent:
(i) has and habitually exercises an authority to conclude contracts on behalf of the other person or
habitually concludes contracts or habitually plays the principal role leading to the conclusion of
contracts that are routinely concluded without material modification by the person and these contracts
are─
(a) in the name of the person; or
(b) for the transfer of the ownership of or for the granting of the right to use property owned by
that enterprise or that the enterprise has the right to use; or
(c) for the provision of services by that person; or
(ii) has no such authority, but habitually maintains a stock-in-trade or other merchandise from which
the agent regularly delivers goods or merchandise on behalf of the other person; or
(f) any substantial equipment installed, or other asset or property capable of activity giving rise to
income;
(g) a fixed place of business that is used or maintained by a person if the person or an associate of a
person carries on business at that place or at another place in Pakistan and─ (i) that place or other
place constitutes a permanent establishment of the person or an associate of the person under this
sub-clause; or (ii) business carried on by the person or an associate of the person at the same place or
at more than one place constitute complementary functions that are part of a cohesive business
operation.
Sec 2(44A) “Principal Officer” used with reference to a company or association of persons includes;
(a) a director, a manager, secretary, agent, accountant or any similar officer; and
(b) any person connected with the management or administration of the company or association of
persons upon whom the Commissioner has served a notice of treating him as the principal officer
thereof
Sec 2(59A) "Small Company" means a company registered on or after the first day of July, 2005,
under the Companies Ordinance, 1984 which, -
(i) has paid up capital plus undistributed reserves (retained earnings etc) not exceeding fifty
million rupees;
(ii) has employees not exceeding two hundred and fifty any time during the year;
(iii) has annual turnover (sales) not exceeding two hundred and fifty million rupees; and
(iv) is not formed by the splitting (to divide in to pieces) up or the reconstitution (to bring into
original form before splitting) of a company already in existence and
(v) is nto a Small and Medium Enterprise (SME);
6.5 Minimum tax on the income of certain persons [Sec 113]
This section shall apply to:
 A resident company

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 An individual or AOP (having turnover of Rs.100 million or above in the tax year 2017 or
in any subsequent tax year) and
A resident company, an individual and AOP shall pay tax at 1.25% of turnover even if it has:
a) loss for the year;
b) the setting off of a loss of an earlier year;
c) exemption from tax;
d) the application of credits or rebates; or
e) the claiming of allowances or deductions (including depreciation and amortization
deductions)
no tax is payable or paid by the person for a tax year or the tax payable or paid by the person
for a tax year is less than 1.25% of the amount representing the person„s turnover from all
sources for that year. Where the minimum tax paid is more than the actual tax payable the
excess amount will be carried forward for adjustment against actual tax liability of the next
three tax years succeeding tax year in which tax is paid.
Explanation:
For the purpose of this sub-section, the expression tax payable or paid does not include:
a) Tax already paid or payable in respect of deemed income which is assessed as final
discharge of the tax liability under section 169 or under any other provision of this
Ordinance; and
b) Tax payable or paid under Super tax for rehabilitation of temporary displaced persons
(section 4B)
Where this section applies:
a) The aggregate of the person„s turnover as defined in subsection (3) for the tax year shall be
treated as the income of the person for the year chargeable to tax;
b) The person shall pay as income tax for the tax year (instead of the actual tax payable under
this Ordinance), minimum tax ranging from 0.2% to 1.25% for different categories of
Persons;
c) where tax paid under sub-section (1) exceeds the actual tax payable under Part I, clause (1)
of Division I, or Division II of the First Schedule, the excess amount of tax paid shall be
carried forward for adjustment against tax liability under the aforesaid Part of the
subsequent tax year
d) Provided that the amount under this clause shall be carried forward and adjusted against
tax liability for five tax years immediately succeeding the tax year for which the amount
was paid.
Turnover Means:
a) the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty or any
trade discounts shown on invoices, or bills, derived from the sale of goods, and also
excluding any amount taken as deemed income and is assessed as final discharge of the
tax liability for which tax is already paid or payable;
b) the gross fees for the rendering of services for giving benefits including commissions;
except covered by final discharge of tax liability for which tax is separately paid or
payable;

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c) the gross receipts from the execution of contracts; except covered by final (FTR)
discharge of tax liability for which tax is separately paid or payable; and
d) the company„s share of the amounts stated above of any association of persons of which
the company is a member.
Women Enterprise and its Taxation
Woman enterprise means a start-up established on or after first day of July 2021 as sole
proprietorship concern owned by a woman or an AOP all of whose members are women or a
company whose 100% shareholding is held or owned by women.
Taxation
Tax payable by women enterprise on profits and gains derived from business chargeable to tax under
the head income from business shall be reduced by 25%, However, this benefit will not be available to
business that is formed by the transfer or reconstitution or splitting up of an existing business.

1. COMMON RULES:
Apportionment of Deductions (Sec 67 & Rule 13)
Where expenditure, deduction and allowance relate to:
a) the derivation of more than one heads of income (e.g property income and business
income); or
b) Derivation of taxable income (e.g salary income, business income capital gain and other
income) and any class of income subject to FTR (e.g dividend and prize bond winnings).
c) the derivation of income chargeable to tax under any head of income and to some other
purpose (e.g business income and for residence purpose).
The expenditure, deduction and allowance shall be apportioned on any suitable basis keeping in
mind the relative nature and size of activities
Practice Exercise:
Mr. Hassan Khan is engaged in business of trading activities in Pakistan. On January 3 2020 he
went to UAE and there he opened his new branch he stayed there till the end June 30, 2020. His
business details are as under:
Pakistan’s UAE Business
Business (converted into Pak
Rs.)
Sales 3,000,000 7,000,000
Rent 100,000 700,000
Salaries 250,000 1000,000
Advertisement Expenditure incurred on TV channel seen on both the countries is Rs. 500,000
Required:
Residential Status of Mr. Hassan Khan
Calculate his total income

Solution:
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Part a: Resident (as he stayed 83 days or more in Pakistan in the tax year Sec 82(Ab))

Part b: Pakistan’s Source of Income:

Sales 3,000,000
Less: Rent (100,000)
Less: Salaries (250,000)
Less: Advertisement (500,000x3,000,000/10 (150,000)
million)
Net profit 2500000
UAE’s Source of Income:
Sales 7,000,000
Less: Rent (700,000)
Less: Salaries (1,000,000)
Less: Advertisement (500,000x7,000,000/10 (350,000)
million)
4950,000
Total Income 7450,000

Rules 13 for Apportionment of Expenditures

Common expenditure, deductions and allowances means any expenditure, deductions and
allowances that is not clearly allocatable to any particular class or classes of incomes. Rules
regarding apportionment of such expenses, deductions and allowances are given as follows:
Any expenditure, deduction or allowance that is incurred for particular class of income (chargeable
income, FTR income or exempt income) shall be allocated/apportioned to that class only.
Any common expenditure shall be apportioned amongst each class of income according to the
following formula:
Amount of expense x (Gross receipts for the class of income/ Gross receipts for all class of
income)
Note: Gross receipts means net off receipts or turnover of sales tax of FED paid.
While allocating common expenditure, deductions and allowances (particularly selling expenses)
the nature and source of each class of income must be taken into account.
The basis determined for allocation of expenditure, deductions and allowances should be certified
by a Chartered Accountant or a Cost and Management Accountant. This certificate shall be
accepted by CIR unless there are significant variations (10% + beyond the limits) from allocation
under the rules.
In this rule the class of income means Pakistan and Foreign source of income as follows:
 Income from Salary (may be ignore as well)
 Income from property
 Income from business - Non speculation
 Income from business - speculation
 Income from Capital gains
 Income from other source

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 Income chargeable to tax as separate block

 Income exempts from tax e.g. agriculture income
 Income chargeable to tax under final tax regime.
While allocating common expense the nature and source of each class must be considered. The
basis determined for allocation of expenditure, deductions and allowances should be certified by a
Chartered Accountant or a Cost and Management Accountant. This certificate shall be accepted by
CIR unless there is significant variations (10% + beyond the limits) from allocation under the
rules.
Fair Market Value (Sec 68)
1) The fair market value (FMV) of any property, or rent, asset, service, benefit or perquisite
at a particular time shall be the price which the property, or rent, asset, service, benefit or
perquisite would ordinarily fetch on sale or supply in the open market at that time.
2) The fair market value of any property, or rent, asset, service, benefit or perquisite shall be
determined without having regard to any restriction (e.g A is the owner of plot and Govt
said that in the future a road can be constructed while passing from the plot of A due this
restriction the value of plot will be low and for tax purpose the value without this
restriction will be considered) on transfer or to the fact that it is not otherwise convertible
to cash.
3) Where the price referred above is not ordinarily ascertainable, the Board may, from time to
time, by notification in the official gazette determine the fair market value of the
immoveable property of the area and areas as may be specified in the notification.
4) Where the fair market value of any immoveable property of an area or areas has not been
determined by the board in the notification referred as above, the fair market of such
immoveable property shall be deemed to be the value fixed by the district officer (revenue)
or provincial or any other authority authorize in this behalf for the purposes of stamp duty.
Recouped (Recovered) expenditure (Sec 70)
Any amount received subsequently in respect of deduction previously allowed as deduction will be
added in the income in the year of receipt. (e.g outstanding expenses to bank waived off by bank or e.g
bad debts written off recovered upto the amount of recouped not the actual amount e.g finance charges
O/S were Rs. 50,000 but waived off only Rs. 30,000 then Rs. 30,000 will be added to income)
Currency Conversion (Sec 71)
Every amount taken into account under the Income Tax Ordinance, 2001 shall be in Rupees.
Where any amount is in a currency other than rupees, conversion shall be at the State Bank of
Pakistan rate prevailing at the date of at which the amount is taken into account.
Exercise: Mr. XYZ received a sum of US Dollars 500 from his client on 14 April 200X and he paid a
sum of Euro 250 for expenses incurred in respect of the said assignment on 15 April 2020. The
exchange rate prescribed by the State bank of Pakistan on the dates of transactions are as under:
Date Currency Dollar/ Euro Pak Rs. Conversion

14 April, 2020 Dollar 1 Rs. 90/Dollar

15 April, 2020 Euro 1 Rs. 125/Euro

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Solution:
MR. XYZ
COMPUTATION OF TAXABLE INCOME
TAX YEAR 2020
Description Amount in Rs.
Receipt $ 500 x Rs.90/Dollar 45,000

Expenses Euro 250 x Rs.125/Euro (31,250)

Income 13,750

Cessation of source of income (Sec 72)

If a taxable source of income ceased to exist either before the commencement of the year or during the
tax year, then any subsequent benefit derived from this business shall be taxable in normal way
assuming that the source has not been ceased at the time of deriving of income. e.g insurance claim of
ceased business received subsequently after the cessation.
Notice of discontinued business (Sec-117)
Any person discontinuing a business shall give the Commissioner a notice in writing to that effect within fifteen
days of the discontinuance and furnish a return of income from start of year till date of discontinuance.
Where notice of discontinuance is not filed by a person, and the Commissioner has reasons to believe
that such person has discontinued or is likely to discontinue his business, he may require such person,
through a notice, to file a return of income for a specified period within the time specified in the notice.
Exercise: Explain the tax treatment in respect of the following:
On 21 March 2023, there was a fire in the shop of Mr. Imran and the entire stock of honey valued at Rs.100,000
(at cost) was destroyed. Imran‟s insurance company refused to entertain the claim for Rs. 100,000 for the loss of
the stock-in-trade. Imran ceased doing business as and from 30 June 2023. In the return of income furnished for
the tax year 2023, Imran claimed the Rs. 100,000 as a deductible business loss in computing his income under the
head „Income from business‟. The loss was allowed as a deductible charge in that tax year. During the tax year
2025, the insurance company, on receiving a legal notice from Imran, made a payment of Rs.75,000 against the
claim for the loss of stock-in-trade which Imran accepted in full settlement.
Answer:
Law specifically provides that if there is any income that has been derived by a person in a tax year from a
business, activity, investment or other source that has either ceased before the commencement of that
year or during the year and if that income would have been taxable had there been no cessation, then the
provision of the tax statute would apply as if there was no cessation (Ref: Sec 72)
In other words, section 72 deems the business activity, investment or other source to have been carried on by the
person in the tax year in which the income was derived despite the cessation of the business activity, investment
or other source. The above amount shall be offered for tax in the return under the head “Income from business”.

Rules to prevent double derivation and double deductions (Sec 73)

 If any amount is chargeable to tax on receipt basis the amount shall not be chargeable again on
the basis that it is receivable and vice versa.

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 Similarly, if any expenditure is deductible on payable basis the same shall not be deducted
when it is paid and vice versa.