BASIC CONCEPTS OF INOCME TAX

By Arslan Iqbal

Outlines

• 4 Key Fundamental Concepts

• 1. Types of Person

• 2. Types of Tax Year

• 3. Types of Taxable Income

• 4. Tax Rates

4 Key Fundamentals of Charge of Tax

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1. Person کس بندے پر لگے گا
2. Taxable Income کس رقم پر لگے گا
3. Tax Year کب لگے گا
4. Tax Rates کتنا لگے گا

1. PERSON

There are 7 types of Persons in IT Ordinance, 2001

1. Individual
2. Association of Persons (AOP)
3. Company
4. Federal Government
5. Foreign Governments
6. Political Subdivisions of Foreign Governments
7. Public International Organizations

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1. Individual

• Tax applied on Natural Person (human being)
• Tax on Deceased Person:�FBR has first claim on deceased asset even before any one liability or inheritance. This liability is paid by legal representative of deceased person.
• Income of Minor Child�It is also taxable in parents hand who has highest taxable income.
• Unsound Mind:�They are unable to make a contract. But tax is also charged on them.

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2. Association of Person (AOP)

• It is different from traditional partnership.
• “Association of persons” includes a firm, a Hindu undivided family, any artificial juridical person and anybody of persons formed under a foreign law, but does not include a company.
• AOP is liable to tax separately from its members.

• It may be� • Individual + Individual • Individual + Govt.

• Individual + Company • Company + Govt.� � �

2. Association of Person (AOP)

• Mr. A and Mr. B started a business in equal ration with name “VIP Style”. Their joint business earned 800,000.
• Mr. A also earn Rs. 1,000,000 yearly salary from his job.
• Mr. B also earn Rs. 700,000 from his other business.
• Q) How many persons has to file an income tax return?

3. Company

Company include following entities:

• All define in Companies Act 2017
• a Small company
• a body corporate formed by or under any law in force in Pakistan.
• a Modaraba
• a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies.

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3. Company

Company include following entities:

• a Provincial Govt.
• a Local Govt.
• Non-Profit Organizations
• Co-operative societies
• a Trust

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3. Company

Small Companies

• Paid up Capital > 50 million
• Employees > 250
• Annual turn over not > 250 million

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4. Federal Government

• To levied the tax

5. Foreign Governments

6. Political Sub-Divisions of Foreign Govt.

• It include embassies

7. Public International Organizations

• IMF, World Bank, WHO, UN, SAARC etc

1. PERSON

There are 7 types of Persons in IT Ordinance, 2001

1. Individual
2. Association of Persons (AOP)
3. Company
4. Federal Government
5. Foreign Governments
6. Political Subdivisions of Foreign Governments
7. Public International Organizations

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These 3 are taxpayers

These 4 are policy makers

Status of Individual

Status of Person: � 1. Resident Person 2. Non-Resident Person �

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Types of Income:

• Pakistan Source Income (PSI)
• Foreign Source Income (FSI)

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Resident Individual

Individual become resident when it qualify any one rule from three rules.�Rule 1: Presence in Pakistan of 183 days or more in aggregate in a Tax Year.� Days include: Day of departure & arrival count in Pakistan, Public holidays, days of leave ( include strikes, lock down sick, shutdown).� Days Exclude: In transit day not include.

Rule 2: Employee/ official of Federal/ Provincial Government working abroad in a tax year are always resident.�Rule 3: Pakistan national not present in any country for 183 days or more or who is not resident tax payer of any other country, is considered as resident of Pakistan.

Status of Individual

Status of Person: � 1. Resident Person 2. Non-Resident Person �

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Types of Income:

• Pakistan Source Income (PSI)
• Foreign Source Income (FSI)

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Tax on Resident & Non-Resident Individual

�Resident: PSI + FSI both Charged for Tax

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Non-Resident: Only PSI Charged for Tax

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Problem of DOUBLE TAXATION?????

Example of Rahat Fateh Ali Khan Song “Mere Pass Tum ho” �Example of Jason Roy (England) PSL Player

Resident Company

Resident company has three rules:�Rule 1: All companies incorporated/ formed in Pakistan under Pakistan law. (Birth Certificate of Pakistan).� this rule is for all local companies.

Rule 2: this rule for foreign companies whose control & management of affairs of company is situated wholly in Pakistan at any time.�Rule 3: Provincial & local government also consider as company.

Resident AOP

AOP become resident when its control & management of the affairs of AOP is situated wholly or partially in Pakistan at any time in the year.

2. Tax Year

There are 3 types of Tax Years in IT Ordinance, 2001

1. Normal Tax Year (NTY)�2. Special Tax Year (STY)�3. Transitional Tax Year (TTY)�

1. Normal Tax Year (NTY)

Period of 12 months ending on 30^th June and denoted by calendar year in which said end date falls.�

Example:

1. Normal Tax Year (NTY)

Period of 12 months ending on 30^th June and denoted by calendar year in which said end date falls.�

Example:

2. Special Tax Year (STY)

Period of 12 months different from NTY that a person is allowed by CIR (Commissioner Inland Revenue). Denoted by calendar year relevant to NTY in which the closing date of the STY falls.

Example:

3. Transitional Tax Year (TTY)

Period that comes between end of last TY prior to change and date on which the changed Y commence. It is always less than 12 months.�

Example:

3. Tax Rates

See the ICMA Tax Cards

4. Taxable Income

Term Income includes all types of person`s income.

There are 5 types of Taxable Incomes in IT Ordinance, 2001

Heads of Income (Section 11)

1. Income from Salary (Section 12)

2. Income from Property (Section 15)

3. Income from Business (Section 18) �4. Capital Gains (Section 37)

5. Income from Other Sources (Section 39)

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Employment Income

Rental Income of immovable property

Business Profits

Gain due to sale of capital assets

All incomes not cover in above heads

4 Key Fundamental Concepts

Person

Tax Year

Some Tax Rates

Taxable Income

1. For Salaried �
2. Non-Salaried��
3. Companies��

1. Normal Tax Year�
2. Special Tax Year�
3. Transitional Tax Year�

1. Individual
2. AOP
3. Company
4. Federal Govt
5. Foreign Govt
6. Political Sub-Divisions of Foreign Govt
7. Public International Organizations

1. IFS�
2. IFB�
3. IFP�
4. CG�
5. IFOS�

(Ending on June 30)

(Ending other than June 30)

(Small Company 20%�Large 29%�Banks 39%)

(Business and AOP individual)

(Salary)

(Less than 12 month)

Revision

Rules of Resident Ind.

1. Stay >183 days in Pakistan
2. Federal/ Pro Employee posted abroad
3. Pak National not stay > 183 in any country.

>75% lncome from Salary)

(Business)

(Rental Income)

(Sale of Capital Assets)

(except above fours)

Rule of Resident AOP

Control & Management of AOP wholly or partially located in Pakistan

Rules of Resident Company

1. Formed in Pakistan (Birth)
2. Foreign Co whose Control & Management wholly in Pakistan
3. Provincial Govt & Local Govt outside their territory.

Question & Answers