Chapter 4; Basic Concepts of Income Tax (1)

Question 1

Under the provisions of the Income Tax Ordinance 2001;
Define Normal tax year.

Answer 1

The tax year shall be a period of 12 months ending on 30th June (referred to as ‘normal tax year’) and shall be denoted by the calendar year in which the 30th June falls.

Question 2

Under the provisions of the Income Tax Ordinance 2001;
Define Special tax year.

Answer 2

Where a person is allowed, to use a 12 months’ period different from normal tax year, such period shall be that person’s tax year(referred to as ‘special tax year’) and shall be denoted by the calendar year relevant to normal tax year in which the closing date of the special tax year falls.

Question 3

Under the provisions of the Income Tax Ordinance 2001;
Explain change in tax year in case of a class of persons.

Answer 3

The board;
~ In the case of a class of persons having a special tax year may permit, through official Gazette, to use a normal tax year; and
~ In the case of a class of persons having a normal tax year may permit, through official Gazette, to use a special tax year.

Question 4

Explain the requirements of the Income Tax Ordinance 2001 regarding change in tax year from normal to special.

Answer 4

A person may apply, in writing, to the Commissioner to allow him to use a 12 months’ period other than normal tax year, as special tax year and the Commissioner may allow him.
The commissioner shall grant the permission to change the tax year only if the person has shown a compelling need. The Commissioner may impose conditions while giving permission.

Question 5

Explain the requirements of the Income Tax Ordinance 2001 regarding change in tax year from special to normal.

Answer 5

A person using a special tax year, may apply in writing, to the Commissioner to allow him to use normal tax year and the Commissioner may allow him.
The commissioner shall grant the permission to change the tax year only if the person has shown a compelling need. The Commissioner may impose conditions while giving permission.

Question 6

Under the provisions of the Income Tax Ordinance 2001;
Define Transitional tax year.

Answer 6

Where the tax year of person changes, the period between the end of the last tax year prior to change and the date on which the changed tax year commences shall be treated as a separate tax year, to be known as the ‘transitional tax year’

Question 7

Under the provisions of the Income Tax Ordinance 2001; Discuss the remedy available to the person if he is dissatisfied by Commissioner’s decision regarding change in tax year.

Answer 7

A person dissatisfied with any order of Commissioner may file a review application to the board. The decision by the board shall be final.

Question 8

Under the provisions of the Income Tax Ordinance 2001; From when an order of change in tax year shall take effect from?

Answer 8

An order of change in tax year shall take effect from 1st day of the special tax year or the normal tax year.

Question 9

Under the provisions of the Income Tax Ordinance 2001; Can a Commissioner subsequently cancels the permission granted to a person regarding change in his tax year.

Answer 9

The Commissioner may by order after providing an opportunity of being heard, withdraw the permission granted regarding change in tax year.

Question 10

Under the provisions of the Income Tax Ordinance 2001; Explain how does a Commissioner rejects the application by a person regarding change in tax year.

Answer 10

An order by commissioner of change in tax year shall be passed after providing to the applicant an opportunity of being heard. If the application is rejected, the commissioner shall mention in order the reasons for rejection.

Question 11

Under the provisions of the Income Tax Ordinance 2001;
Define Resident and non-resident persons.

Answer 11

RESIDENT PERSON:-
A person shall be a resident person for a tax year if the person is;
(a) a resident individual, a resident
company or resident association of
persons for the year; or
(b) the Federal Government.
NON-RESIDENT PERSON:-
A person shall be a non-resident person for a tax year if the person is not a resident person for that year.

Question 12

State the provisions of the income tax ordinance 2001 regarding the residential status of an individual.

Answer 12

An individual shall be a resident individual for a tax year if the individual;
(a) is present in Pakistan for a period of, or periods amounting in aggregate to, 183 days or more in the tax year; or
(b) is an employee or official of the Federal Government or Provincial Government posted abroad in the tax year.
(c) is a citizen of Pakistan and
~ 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.

Question 13

State the provisions of the income tax ordinance 2001 regarding the residential status of companies.

Answer 13

A company shall be a resident company for a tax year if:
(a) it is incorporated or formed by or under any law in force in Pakistan;
(b) the control and management of the affairs of the company is situated WHOLLY in Pakistan at any time in the year;
(c) it is a Provincial Government or Local Government in Pakistan.

Question 14

State the provisions of the income tax ordinance 2001 regarding the residential status of an association of persons.

Answer 14

An association of persons shall be a resident association of persons for a tax year if the control and management of the association of persons is located WHOLLY or PARTLY in Pakistan at any time in the year.

Question 15

State the provisions of the income tax ordinance 2001 regarding counting the days of an individual present in Pakistan in the tax year.

Answer 15

(a) A part of a day that an individual is present in Pakistan including the day of arrival in, and the day of departure from Pakistan counts as whole day of such presence;
(b) The following days in which an individual is wholly or partly present in Pakistan counts as a whole day of such presence, namely:-
~ a public holiday;
~ a day of leave, including sick leave;
~ a day when an individual’s activity is interrupted because of a strike, lock-out or delay in receipt of supplies; or
~ a holiday spent by the individual in Pakistan before, during or after any activity in Pakistan.
(c) a day or part of day in which 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 16

Under the provisions of the Income Tax Ordinance 2001;
Define Person.

Answer 16

The following shall be treated as persons under Income Tax Ordinance 2001, namely;
(a) An individual;
(b) A company or an association of persons incorporated, formed or established in Pakistan or elsewhere;
(c) The Federal Government, a foreign government, a political sub division of a foreign government, or public international organization.

Question 17

Is Federal Government of Pakistan a Company ?

Answer 17

No, only provincial and local government are included in the definition of Company.

Question 18

Under the provisions of the Income Tax Ordinance 2001;
Define Company.

Answer 18

According to Income Tax Ordinance, 2001,
Company means the following:
(a) A company as defined in the Companies Act, 2017.
(b) A body corporate formed by or under any law in force in Pakistan.
(c) A modaraba.
(d) A body incorporated under the law of a country outside Pakistan relating to incorporation of companies.
(e) A co-operative society, a finance society or any other society.
(f) A non-profit organization.
(g) A trust, an entity or a body of persons established by or any under any law for the time being in force.
(h) A foreign association, whether incorporated or not, which the Board has declared to be a company for the purposes of Income Tax Ordinance 2001.
(i) A provincial government.
(j) A local government in Pakistan; or
(k) A small company.

Question 19

Under the provisions of the Income Tax Ordinance 2001;
Define Trust.

Answer 19

Trust means an obligation attached to the ownership of property and arising out of the confidence given to and accepted by the owner for the benefit of another, or of another and the owner, and includes a unit trust.

Question 21

Under the provisions of the Income Tax Ordinance 2001;
Define Unit trust.

Answer 21

Unit trust means any trust under which beneficial interests are divided into units so that the rights of the beneficiaries to income/capital are determined by the number of units held.

Question 21

What is the rate of tax on the taxable income of a company?

Answer 21

For the tax year 2023, the rate is 29%.

Question 22

Under the provisions of the Income Tax Ordinance 2001;
Define Association of persons.

Answer 22

“Association of persons” includes the following:
(a) A firm
(b) A Hindu undivided family
(c) Any Artificial juridical person (e.g. students society)
(d) Any body of persons formed under a foreign law. However a company is not included in association of persons.`

Question 23

Under the provisions of the Income Tax Ordinance 2001;
Define Firm and Member.

Answer 23

Firm means the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Member in relation to an association of persons, includes a partner in a firm.

Question 24

Under the provisions of the Income Tax Ordinance 2001;
How to calculate tax on taxable income ?

Answer 24

(1) Income tax shall be:
~ imposed for each tax year.
~ charged at the rates specified in 1st
schedule
~ charged on every person who has
taxable income for the year.
(2) The income tax for a year shall be computed by applying the rate of tax to the taxpayer’s taxable income for the tax year and then subtracting tax credits from the above figure.