Chapter 4; Basic Concepts of Income Tax (2)

Question 1

Under the provisions of the Income Tax Ordinance 2001;
1) Who is a salaried person?
2) Define Taxable Income.

Answer 1

1) An individual whose income from salary exceeds 75% of taxable income in a tax year will be considered as a salaried person.

2) The taxable income of a person for a tax year shall be total income for the year reduced (but not below zero) by the total of any ‘deductible allowances’ of the person for the year.

Question 2

Under the provisions of the Income Tax Ordinance 2001;
What is total income?
Also list Heads of Income.

Answer 2

TOTAL INCOME:
The total income is sum of -
~ Person’s income under all heads of
income for the year; and
~ Person’s income exempt from tax
under any provision of Income tax
ordinance.
Following are the heads:-
a) Income from Salary
b) Income from Property
c) Income from Business
d) Income from Capital Gains
e) Income from Other Sources

Question 3

Under the provisions of the Income Tax Ordinance 2001;
How income is chargeable under a head of income ?

Answer 3

The income under a head of income for a tax year shall be the total chargeable amounts derived by the person under the head as reduced by the total deductions.

Where total deduction allowed to a person for a tax year under a head of income exceeds the total amounts chargeable to tax, the person shall be treated as sustaining a loss for that head.

Question 3

In accordance with the Income Tax Ordinance, 2001;
Does total income differ in case of resident and non-resident.

Answer 3

IN CASE OF RESIDENT PERSON:
The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income.
IN CASE OF NON-RESIDENT PERSON:
The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income.

Question 4

Under the provisions of the Income Tax Ordinance 2001;
Discuss Zakat .

Answer 4

A person shall be entitled to a deductible allowance for Zakat paid by the person in a tax year under the Zakat and Ushr Ordinance, 1980.
An allowance for a tax year that is not fully deducted shall not shall not be;
~ Refunded
~ Carried forward to a subsequent tax year; ~ Or carried back to a preceding tax year.

Question 5

Under the provisions of the Income Tax Ordinance 2001;
Is Zakat paid to a relative, deductible?

Answer 5

No, as it is not considered Zakat as per Zakat and Ushr Ordinance, 1980.

Question 6

Under the provisions of the Income Tax Ordinance 2001;
Discuss Workers’ welfare Fund.

Answer 6

A person shall be entitled to a deductible allowance for the amount of any Workers’ Welfare Fund paid by the person in the tax year under Workers’ Welfare Fund Ordinance or under any law relating to Workers’ Welfare Fund enacted by provinces.
No deductible allowance will be allowed for the amount of Workers’ Welfare Fund paid to provinces by a trans-provincial establishment.

Question 7

Under the provisions of the Income Tax Ordinance 2001;
Discuss Workers’ Participation Fund.

Answer 7

A person shall be entitled to a deductible allowance for the amount of any Workers’ Participation Fund paid by the person in the tax year under Companies Profit Act or under any law relating to the Workers’ profit participation Fund enacted by Provinces.
No deductible allowance will be allowed for the amount of Workers’ Participation Fund paid to provinces by a trans-provincial establishment.

Question 8

List down the names of deductible allowances in accordance with the Income Tax Ordinance, 2001.

Answer 8

1) Zakat
2) Workers’ Welfare Fund
3) Workers’ Participation Fund
4) Deductible allowance for education expenses

Question 9

Under the provisions of the Income Tax Ordinance 2001;
Discuss the tax liability of deceased individual.

Answer 9

1) The legal representative of a deceased individual shall be liable for:
(a) any tax that the individual would have
become liable if he had not died; and
(b) any tax payable in respect of the
income of the deceased’s estate.

2) The tax liability of a legal representative shall be limited to the extent of deceased’s estate.

2a) The tax liability shall be the first charge on the deceased’s state.

3) For the purpose of this ordinance;
(a) any proceeding taken against the
deceased before his death shall be
assumed as having taken against legal
representative. The proceeding will be
continued against the legal representative
from the stage at which they are at the
time of the death.
(b) any proceeding which could have been
taken against the deceased may be taken
against the legal representative of the
deceased.

4) In this section, ‘legal representative’ means a person:
(a) who in law represents the estate of a
deceased person.
(b) who intermeddles with the estate of a
deceased person.
(c) on whom the estate devolves on the
death of representative, if the
representative is being sued in a case.

Question 10

Under the provisions of the Income Tax Ordinance 2001;
Discuss tax liability of an author.

Answer 10

Where the time taken by an author of a literary or artistic work to complete the work exceeds 24 months, the author may elect any lump sum amount received in a tax year as royalties for the work as having been received in that tax year and the preceding two years in equal proportions.

Question 11

Under the provisions of the Income Tax Ordinance 2001;
Discuss tax liability of a minor child.

Answer 11

Income from business of minor child is taxable in hands of parent who has highest taxable income.
This provision will not apply if business is acquired through inheritance.
“Minor child” is an individual under age of 18 at end of tax year.

Question 12

Discuss the common rules with regard to the apportionment of deductions /expenditures under Income Tax Ordinance, 2001.

Answer 12

Where expenditure, deduction, and allowances relates to :
(a) the derivation of more than one head
of income; or
(b) the derivation of income comprising of
taxable income and income falling under
final tax regime; or
(c) the derivation of income chargeable to
tax under a head of income and for some
other purpose,
the expenditure, deduction, and allowances shall be apportioned on any reasonable basis considering the relative nature and size of the activities.

Question 13

Under the provisions of the Income Tax Ordinance 2001;
Explain rules for apportionment of expenditure.

Answer 13

(1) Any expenditure that is incurred for a particular class or classes of income shall be allocated to that class. (specific expense)
(2) Any common expenditure, deduction and allowance which relates to business including presumptive (final tax regime) and exempt income, shall be allocated to each class of income according to the formula;

(gross receipt for a class of income/gross receipt for all classes of income) * Amount of expense .

The basis 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 commissioner unless there is significant variations (10% +/-) from allocation

Question 14

Under the provisions of the Income Tax Ordinance 2001;
1) What is meant by
(a) ‘gross receipts’
(b) ‘common expenditure,’ OR ‘common
deductions’ OR ‘common allowances.
in apportionment of expenditure’s formula.

2) What is gross receipt in case a person is earning net commission or brokerage?

Answer 14

“Gross receipt” are receipts without deduction of expenditures.

“Common expenditure, deductions and allowances” means any expenditure that is not clearly allocable to any particular class of income.

When a person is earning net commission or brokerage than his gross profit will be taken as turnover (sale/gross receipt).

Question 15

Under the provisions of the Income Tax Ordinance 2001;
What is meant by ‘class of income’ in apportionment of expenditure formula.

Answer 15

In this rule, ‘class of income’ means Pakistan and foreign source as follows:
(a) Income from salary
(b) Income from business (non-speculation)
(c) Income from business (speculation)
(d) Income from capital gain
(e) Income from other sources
(f) Income from property
(g) Income exempt from tax
(h) Income as separate block
(i) Income falling under final tax regime
While allocating expenses the nature and scope of each class must be considered.

*heads of income are different from classes of income.

Question 16

Discuss the common rules with regard to the Fair Market Value under Income Tax Ordinance, 2001.

Answer 16

1) The fair market value of any property or rent , asset, service, benefit or perquisite at a particular time shall be the price which will ordinarily be fetched on sale or supply in the open market at that time.
2) The fair market value shall be determined ignoring any restriction on transfer or the fact that it is not convertible to cash.
3) Where the price is not ordinarily ascertainable, the Board may, by notification in the official gazette determine the fair market value of the immoveable property.
4) Where the fair market value of any immoveable property of an area has not been determined by the Board as above, the fair market value of such immoveable property shall be deemed to be the value fixed by the district officer (revenue) or provincial or any other authority for the purposes of stamp duty.

Question 17

Discuss the common rules with regard to the recouped expenditure under Income Tax Ordinance, 2001.

Answer 17

In case of subsequent recoupment of any expenditure or loss, in cash or kind, the recouped amount shall be included in the income chargeable under relevant head for the tax year in which it is received.

Question 18

Discuss the common rules with regard to the Currency conversion under Income Tax Ordinance, 2001.

Answer 18

1) Every amount taken into account under this Ordinance shall be in Rupees.
2) Where an amount is in a currency other than rupees, conversion shall be at the State bank of Pakistan rate prevailing at the date at which the amount is taken into account.

Question 19

Discuss the common rules with regard to the Cessation of source of income under Income Tax Ordinance, 2001.

Answer 19

If a taxable source of income ceases to exist either before the commencement of the year or during the tax year, then any subsequent benefit derived from it shall be taxable in normal way assuming that the source has not ceased at the time income was derived.

Question 20

Discuss the common rules with regard to the rules to prevent double derivation and double deductions under Income Tax Ordinance, 2001.

Answer 20

1) If any income is taxable on receivable basis, it shall not be taxed again on receipt basis and if it is taxable on the basis of when it is received then it shall not be taxable on receivable basis.
2) If any expenditure is deductible on payable basis, it shall not be deducted again when it is paid and if any expenditure is deductible on basis of when it is paid it shall not be deductible on payable basis.

Question 21

Discuss the common rules with regard to the Tax on dividend under Income Tax Ordinance, 2001.

Answer 21

1) A tax shall be imposed, at prescribed rate, on every person who receives a dividend from a company.
2) This tax shall be computed by applying the rate of tax to the gross amount of the dividend.
3) This section shall not apply to a dividend that is exempt from tax.
Every company paying a dividend shall deduct tax on gross amount of dividend.

Question 22

In accordance with the income tax ordinance, 2001;
List down the general provisions/rules which may apply to income subject to final tax regime.

Answer 22

Following rules apply to income subject to final tax regime:
a) This income shall not be chargeable under any head of income;
b) no deduction shall be allowable for any expense incurred;
c) the income shall not be reduced by any deductible allowance or the set off of any loss.
d) the tax deducted shall not be reduced by any tax credit.
e) the liability of a person under this section shall be discharged if tax has already been deducted. (e.g. by the company)

*The tax deducted on dividend is commonly known as non-adjustable tax.

Question 23

What are different tax regimes ?

Answer 23

1) NORMAL TAX REGIME:
Under this regime income is taxed on net basis [i.e. (Gross amounts - deduction) is chargeable to tax].

2) FINAL TAX REGIME:
Under this regime tax will be deducted at the time of transaction by applying rate on gross receipt normally. e.g.
a) Dividend income
b) Profit on debt (in certain cases)
3) MINIMUM TAX REGIME:
e.g. Minimum tax on turnover
4) SEPARATE BLOCK:
e.g.
(a) Gain on securities
(b) Gain on disposable of immoveable
property.