Section 113 of Income Tax Ordinance, 2001 defined the application of minimum tax on taxpayers where they declare loss during a tax year or other reasons specified in the ordinance.
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Tax liability in certain security transactions
The newly clarified Section 112 specifically addresses tax liability arising from the disposal or certain security transactions.
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Foreign exchange rates on August 29, 2021
KARACHI: Following are the exchange rates of foreign currencies in Pak Rupee (PKR) on August 29, 2021:
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Action against concealed, unexplained income or assets
Section 111 of Income Tax Ordinance, 2001 explained action against income or assets that is concealed or unexplained by persons.
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following is the text of Section 111 of the Income Tax Ordinance, 2001:
111. Unexplained income or assets. — (1) Where —
(a) any amount is credited in a person’s books of account;
(b) a person has made any investment or is the owner of any money or valuable article;
(c) a person has incurred any expenditure; or
(d) any person has concealed income or furnished inaccurate particulars of income including —
(i) the suppression of any production, sales or any amount chargeable to tax; or
(ii) the suppression of any item of receipt liable to tax in whole or in part,
and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made suppression of any production, sales, any amount chargeable to tax and of any item of receipt liable to tax or the explanation offered by the person is not, in the Commissioner’s opinion, satisfactory-
(a) the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person’s income chargeable to tax under the head “Income from Other Sources” to the extent it is not adequately explained; and
(b) the suppressed amount of production, sales or any amount chargeable to tax or of any item of receipt liable to tax shall be included in the person’s income chargeable to tax under the head “Income from Business” to the extent it is not adequately explained”
Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law.
(2) The amount referred to in sub-section (1) shall be included in the person’s income chargeable to tax:
(i) in the tax year to which such amount relates if the amount representing investment, money, valuable article or expenditure is situated or incurred in Pakistan or concealed income is Pakistan-source; and
(ii) in the tax year immediately preceding the tax year in which the investment, money, valuable article or expenditure is discovered by the Commissioner and is situated or incurred outside Pakistan or concealed income is foreign-source.
Explanation.—For the removal of doubt, it is clarified that where the investment, money, valuable article or expenditure is acquired or incurred outside Pakistan in a prior tax year and is liable to be included in the income of tax year 2018 and onwards on the basis of discovery made by the Commissioner during tax year 2019 and onwards and the person explains the acquisition of such asset or expenditure from sources relating to tax year in which such asset was acquired or expenditure was incurred, such explanation shall not be rejected on the basis that the source does not relate to the tax year in which the amount chargeable to tax is to be included.
(3) Where the declared cost of any investment or valuable article or the declared amount of expenditure of a person is less than reasonable cost of the investment or the valuable article, or the reasonable amount of the expenditure, the Commissioner may, having regard to all the circumstances, include the difference in the person’s income chargeable to tax under the head “Income from Other Sources” in the tax year to which the investment, valuable article or the expenditure relates.
(4) Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.
(5) The Board may make rules under section for the purposes of this section.
Explanation.—For the removal of doubt, a separate notice under this section is not required to be issued if the explanation regarding nature and sources of amount credited or the investment of money, valuable article, or the funds from which expenditure was made has been confronted to the taxpayer through a notice under sub-section (9) of section 122 of this Ordinance.
(Disclaimer: The text of above section is only for information. Team PkRevenue.com makes all efforts to provide the correct version of the text. However, the team PkRevenue.com is not responsible for any error or omission.)
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Tax on salary income of earlier year
The Federal Board of Revenue (FBR) has unveiled Section 110 of the Income Tax Ordinance, 2001, providing a mechanism for the payment of tax on salary income of earlier years by private companies.
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Tax payable on income of controlled foreign company
The Federal Board of Revenue (FBR) has issued an updated version of the Income Tax Ordinance, 2001, which now includes amendments from the Finance Act, 2021. One of the notable updates is the detailed specification of Section 109A, which addresses the taxation of income from controlled foreign companies (CFCs) for resident taxpayers.
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Recharacterization of income for determining tax liability
Section 109 of Income Tax Ordinance, 2001 has stated that a commissioner may recharacterise a transaction for determining tax liability.
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following is the text of Section 109 of the Income Tax Ordinance, 2001:
109. Recharacterisation of income and deductions. — (1) For the purposes of determining liability to tax under this Ordinance, the Commissioner may –
(a) recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme;
(b) disregard a transaction that does not have substantial economic effect; or
(c) recharacterise a transaction where the form of the transaction does not reflect the substance.
1(d) from tax year 2018 and onwards, disregard an entity or a corporate structure that does not have an economic or commercial substance or was created as part of the tax avoidance scheme.
(2) In this section, “tax avoidance scheme” means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person’s liability to tax under this Ordinance.
(3) Reduction in a person’s liability to tax as referred to in sub-section (2) means a reduction, avoidance or deferral of tax or increase in a refund of tax and includes a reduction, avoidance or deferral of tax that would have been payable under this Ordinance, but are not payable due to a tax treaty for the avoidance of double taxation as referred to in section 107.
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Report from CA, CMA on arm’s length transaction
Section 108A of Income Tax Ordinance, 2001 has explained that when a transaction is not arm’s length a commission can obtain report from Chartered Accountant (CA) or Cost and Management Accountant (CMA).
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following is the text of Section 108 of the Income Tax Ordinance, 2001:
108A. Report from independent chartered accountant or cost and management accountant.- (1) Where the Commissioner is of the opinion that a transaction has not been declared at arm’s length, the Commissioner may obtain report from an independent chartered accountant or cost and management accountant to determine the fair market value of asset, product, expenditure or service at the time of transaction.
(2) The scope, terms and conditions of the report shall be as may be prescribed.
(3) Where the Commissioner is satisfied with the report of the independent chartered accountant or cost and management accountant, the fair market value of asset, product, expenditure or service determined in the report shall be treated as definite information for the purpose of sub-section (8) of section 122.
(4) Where the Commissioner is not stratified with the report of the independent chartered accountant or cost and management accountant, the Commissioner may record reasons for being not satisfied with the report and seek report from another independent chartered accountant or cost and management accountant, to determine the fair market value of asset, product, expenditure or service at the time of transaction.
(5) The Commissioner shall seek report under sub-section (1) or sub-section (3), as the case may be, with prior approval of the Board.
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Taxation of income on transactions between associates
Section 108 of Income Tax Ordinance, 2001 deals with income and deduction for tax in respect of any transaction between associates.
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following is the text of Section 108 of the Income Tax Ordinance, 2001:
108. Transactions between associates. — (1) The Commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm’s length transaction.
(2) In making any adjustment under sub-section (1), the Commissioner may determine the source of income and the nature of any payment or loss as revenue, capital or otherwise.
“(3) Every taxpayer who has entered into a transaction with its associate shall:
(a) maintain a master file and a local file containing documents and information as may be prescribed;
(b) keep, maintain and furnish to the Board prescribed country-by-country report, where applicable;
(c) keep and maintain any other information and document in respect of transaction with its associate as may be prescribed; and
(d) keep the files, documents, information and reports specified in clauses (a) to (c) for the period as may be prescribed.
(4) A taxpayer who has entered into a transaction with its associate shall furnish, within thirty days the documents and information to be kept and maintained under clause (a), (c) or (d) of sub-section (3) if required by the Commissioner in the course of any proceedings under this Ordinance.;
(5) The Commissioner may, by an order in writing, grant the taxpayer an extension of time for furnishing the documents and information under sub-section (4), if the taxpayer applies in writing to the Commissioner for an extension of time to furnish the said documents or information:
Provided that the Commissioner shall not grant an extension of more than forty-five days, when such information or documents were required to be furnished under sub-section (4), unless there are exceptional circumstances justifying a longer extension of time.”
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Agreements for avoidance of double taxation
Section 107 of Income Tax Ordinance, 2001 is related to agreements for the avoidance of double taxation and prevention of fiscal evasion.
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following is the text of Section 107 of the Income Tax Ordinance, 2001:
107. Agreements for the avoidance of double taxation and prevention of fiscal evasion. —(1) The Federal Government may enter into a tax treaty, a tax information exchange agreement, a multilateral convention, an inter-governmental agreement or similar agreement or mechanism for the avoidance of double taxation or assistance in the recovery of taxes or for the exchange of information for the prevention of fiscal evasion or avoidance of taxes including automatic and spontaneous exchange of information with respect to taxes on income imposed under this Ordinance or any other law for the time being in force and under the corresponding laws in force in that country and may, by notification in the official Gazette, make such provisions as may be necessary for implementing the said instruments.”; and
“(1A) Notwithstanding anything contained in any other law to the contrary, the Board shall have the powers to obtain and collect information when solicited by another country under a tax treaty, a tax information exchange agreement, a multilateral convention, an inter-governmental agreement, a similar arrangement or mechanism.
(1B) Notwithstanding the provisions of the Freedom of Information Ordinance, 2002 (XCVI of 2002), subject to clause (a) of sub-section (3) of section 216 of this Ordinance any information received or supplied, and any concomitant communication or correspondence made, under a tax treaty, a tax information exchange agreement, a multilateral convention, a similar arrangement or mechanism, shall be confidential.
(2) Subject to section 109, where any agreement is made in accordance with sub-section (1), the agreement and the provisions made by notification for implementing the agreement shall, notwithstanding anything contained in any law for the time being in force, have effect in so far as they provide for at least one of the following –
(a) relief from the tax payable under this Ordinance;
(b) the determination of the Pakistan-source income of non-resident persons;
(c) where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan;
(d) the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and
(e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under this Ordinance and under the corresponding laws in force in that other country.
(3) Notwithstanding anything in sub-sections (1) or (2), any agreement referred to in sub-section (1) may include provisions for the relief from tax for any period before the commencement of this Ordinance or before the making of the agreement.