B.Tax(I.T- Tax Year and Residential Status)

Question 1

As per Section 74, how many types of tax years are there, and what are they?

Answer 1

Tax year is of 3 types:
1. Normal tax year,
2. Special tax year, and
3. Transitional tax year.

Question 2

What is a Normal Tax Year as per Section 74?

Answer 2

A period of 12 months from 1 July to 30 June denoted by the calendar year in which the normal tax year ends. For the year ending 30.6.2023 the tax year shall be 2023.

Question 3

What is a Special Tax Year as per Section 74?

Answer 3

Any income year ending other than 30^th June is special tax year and denoted by the calendar year relevant to the normal tax year in which the closing date of the special tax year falls.
Example:
* Special year 1.1.2023 to 31.12.2023 ─ this year end falls in the normal tax year 1.7.2023 to 30.6.2024 and therefore tax year relevant to the normal tax year i.e., TAX YEAR 2024 is the tax year for this special year as well.
* Special tax year 1.10.2020 to 30.9.2021 = tax year 2022.

Shortcut to Denote Tax Year:
* Tax year ending January to June is denoted by same calendar year.
* Tax year ending July to December is denoted by next calendar year.

Question 4

What authority does the FBR have in relation to the Special Tax Year?

Answer 4

The FBR has authority to prescribe any special tax year in respect of any particular class of taxpayers such as 30th September in case of sugar mills and 31st December in case of banks and insurance companies.
If the tax year is not specified by the FBR and a taxpayer wants to have any special tax year, then he is required to make an application to the FBR specifying the reasons for the purpose.

Question 5

What is a Transitional Tax Year as per Section 74?

Answer 5

If a normal tax year or special tax year changes, then the period from the day next following the last full tax year to the date of commencement of new tax year shall be treated as transitional tax year.
Example:

Normal tax year 1.7.2020 to 30.6.2021 i.e. Tax year 2021
changes to special year 1.1.2022 to 31.12.2022 i.e. Tax year 2023.
In this case, the period from 1.7.2021 to 31.12.2021 is treated as a transitional tax year i.e., Transitional tax year 2022.

Question 6

How can a person using a normal tax year change to a special tax year?

Answer 6

A person using a normal tax year may apply to the Commissioner to allow him to use any special tax year.

Question 7

How can a person using a special tax year change to another special tax year or normal tax year?

Answer 7

A person using a special tax year may apply to the Commissioner to allow him to use any other special tax year or normal tax year.

Question 8

When will the Commissioner grant permission to change a tax year?

Answer 8

The Commissioner shall grant permission subject to conditions, if any, as the Commissioner may impose, only if the person has shown a compelling need for the change.

Question 9

What happens if the Commissioner wants to reject an application to change the tax year?

Answer 9

If the Commissioner wants to reject the application, he shall provide an opportunity of being heard to the person and shall record in the order the reasons for such rejection of permission. In this case, the person may file a review application to the FBR, and the decision of the FBR shall be final.

Question 10

What happens if the Commissioner wants to withdraw permission for a previously allowed tax year change?

Answer 10

If the Commissioner wants to withdraw his permission earlier allowed, he shall provide an opportunity of being heard to the person and shall record in the order the reasons for such withdrawal of permission. In this case, the person may file a review application to the FBR, and the decision of the FBR shall be final.

Question 11

Does residential status for tax purposes have a direct relationship with nationality or domicile?

Answer 11

Residential status for tax purposes has no direct relationship with nationality or domicile.

Question 12

On what basis is the residential status of an individual determined for tax purposes in Pakistan?

Answer 12

The residential status of an individual is generally based on the number of days he is physically present in Pakistan during a tax year.

Question 13

Can a foreigner be a resident person for Pakistan tax purposes?

Answer 13

Yes, a foreigner can also be a resident person for Pakistan tax purposes.

Question 14

Can a Pakistani national be a non-resident for tax purposes?

Answer 14

Yes, a Pakistani national may become a non-resident for tax purposes.

Question 15

Can a person be a resident in one tax year and a non-resident in another?

Answer 15

Yes, a person may be a resident person in one tax year and a non-resident in another.

Question 16

As per Sec 82, what are the criteria for an individual to be considered a resident person for Pakistan tax purposes?

Answer 16

An individual would be a resident person for Pakistan tax purpose if the individual:
* is present in Pakistan for a period for a period of, or periods amounting in aggregate to, 183 days or more in the tax year; or
* is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year;
* being a citizen of Pakistan, is not present in any other country for more than 182 days during the tax year or who is not a resident taxpayer of any other country.(Inserted by the Finance Act, 2022)

Omitted by the Finance Act, 2021:
[is present in Pakistan for a period of, or periods amounting in aggregate to, 120 days or more in the tax year and, in the 4 years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, 365 days or more; or]

Question 17

What does Rule 14 of the Income Tax Rules 2002 prescribe regarding the counting of days for residential status?

Answer 17

Rule 14 of the Income Tax Rules 2002 prescribes the procedure for counting of days as under:
Part of a day that an individual is present in Pakistan counts as a whole day, including:
* A day of arrival in Pakistan
* A day of departure from Pakistan
* A public holiday
* A day of leave
* A day that the individual’s activity in Pakistan is interrupted because of a strike, lock-out, or delay in receipt of supplies
* A holiday spent in Pakistan before, during, or after any activity in Pakistan

A day or part of a day where an individual is in Pakistan solely by reason of being in transit between two different places outside Pakistan does not count as a day present in Pakistan.

Question 18

When is a company considered a resident for tax purposes in Pakistan under Section 83?

Answer 18

• A company incorporated in Pakistan, provincial government, and local government are resident without any condition.
• Other company (i.e., a company incorporated outside Pakistan) is resident if control and management of the affairs is situated wholly in Pakistan at any time in the year.

Question 19

How is a “company” defined under Section 80(2)(b) of the Income Tax Ordinance?

Answer 19

“Company” means:
(i) A company as defined in the Companies Act 2017, including a small company;
(ii) A body corporate formed by or under any law in force in Pakistan;
(iii) A modaraba;
(iv) A body incorporated under the law of a country outside Pakistan relating to the incorporation of companies;
(v) A co-operative society, a finance society, or any other society;
(vi) A non-profit organisation;
(vii) A trust, an entity, or a body of persons established or constituted by or under any law for the time being in force;
(viii) A foreign association, whether incorporated or not, which the Board has, by general or special order, declared to be a company for the purposes of this Ordinance; or
(ix) A Provincial Government or a Local Government in Pakistan.

Question 20

When is an Association of Persons (AOP) considered a resident under Section 84?

Answer 20

AOP shall be considered as resident if control and management of the affairs is situated wholly or partly in Pakistan at any time in the year.

Question 21

What does an Association of Persons (AOP) include and exclude as per Section 80(2)(a)?

Answer 21

AOP includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company – section 80(2)(a)

Partnership Firm and Joint Venture are the common examples of AOP

Question 22

What is the scope of taxable income for resident and non-resident persons in Pakistan?

Answer 22

• A resident person is taxable for his worldover income subject to agreement for the avoidance of double taxation (Tax Treaty).
• A non-resident person is taxable only for his Pakistan-source income subject to tax treaty – {Sec 11(5)(6)}.

Question 23

What is the purpose of a tax treaty as per Section 107?

Answer 23

Tax treaty shall apply in case of any contradiction between local laws and tax treaty e.g., if a tax treaty provides exemption to a particular income such as dividend income, then the local laws regarding taxability of dividend would have no effect.

Question 24

In what cases shall a tax treaty be considered?

Answer 24

A tax treaty shall be considered for:
* Foreign source income of a resident person; and
* Pakistan source income of a non-resident person.

Question 25

Is foreign source income of a non-resident person taxable in Pakistan?

Answer 25

No, foreign source income of a non-resident person is not taxable in Pakistan irrespective of the tax treaty.

Tax treaty has nothing to do with Pakistan source income of a resident person.

Question 26

When is foreign source income of a short-term resident exempt under Section 50?

Answer 26

An individual shall be exempt in respect of his foreign-source income which is not brought/received in Pakistan if:

• He is a resident only by reason of his employment; and
• He is present in Pakistan for not exceeding three years.

This section does not apply to businesses established in Pakistan by an individual foreigner.

Question 27

When is foreign source income of a returning expatriate exempt under Section 51(1)?

Answer 27

If an individual citizen of Pakistan (returning expatriate) is resident in the current tax year but was non-resident in the 4 preceding tax years, his foreign-source income shall be exempt in the current tax year and in the following tax year.

Question 28

When is foreign source salary of a resident individual exempt under Section 102?

Answer 28

Foreign source salary of a resident individual is exempt in Pakistan if:

• He has paid foreign income tax on the foreign source salary; or
• His employer has deducted tax at source from salary and paid it to the revenue authority of that foreign country.

Question 29

When is salary earned outside Pakistan exempt under Section 51(2)?

Answer 29

Salary earned outside Pakistan shall be exempt if a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year.

Question 30

Summarize the exemption criteria for foreign source income of a resident person.

Answer 30

Foreign source income of a resident person is exempt under the following five criteria:
1. Tax Treaty: Exempt under agreements for the avoidance of double taxation.
1. Short-Term Resident: Exempt if the individual has not brought / received their income in Pakistan and is resident solely due to employment and stays in Pakistan for not exceeding 3 years.
1. Returning Expatriate: Exempt if the individual is a returning citizen of Pakistan who was non-resident for the last 4 tax years.
1. Tax Paid in Foreign Country: Exempt if tax is paid or deducted at source in the foreign country.
1. Citizen Leaving Pakistan: Exempt if a citizen leaves Pakistan during a tax year and remains abroad for the rest of that year.

Note: Criteria 4 and 5 are specific to foreign source salary income.