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Category: Definitions

  • ITO explains principal officer of company

    ITO explains principal officer of company

    Income Tax Ordinance (ITO), 2001 has explained principal officer of a company for the purpose or apply law and rules for the purpose of income tax payment.

    The Income Tax Ordinance, 2001 updated up to June 30, 2001 issued by the Federal Board of Revenue (FBR) defined ‘principal officer’ with reference to a company or association of persons includes –

    (a) a director, a manager, secretary, agent, accountant or any similar officer; and

    (b) any person connected with the management or administration of the company or association of persons upon whom the Commissioner has served a notice of treating him as the principal officer thereof.

  • Liaison office defined by Income Tax Ordinance

    Liaison office defined by Income Tax Ordinance

    Income Tax Ordinance, 2001 has defined the meaning of liaison office of a company for the purpose of imposition and calculation of income tax.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) defined ‘liaison office’ as a place of business acting for the principal, head office or any entity of which it is a part, and

    (a) its activities do not result in deriving income in Pakistan; and

    (b) maintains itself out of any amount remitted from outside Pakistan received through normal banking channels.

    Explanation,— It is clarified that—

    (i) a place of business shall not be treated as liaison office if it engages in –

    (a) commercial activities;

    (b) trading or industrial activities; or

    (c) the negotiation and conclusion of contracts;

    (ii) the activities shall be treated to be commercial activities, if these include—

    (a) providing after sales services for goods or services; or

    (b) marketing or promoting pharmaceutical and medical products or services;

    (iii) subject to clause (i), a place of business shall be treated as a liaison office, if it undertakes activities of—

    (a) an exploratory or preparatory nature, to investigate the possibilities of trading with, or in, Pakistan;

    (b) exploring the possibility of joint collaboration and export promotion;

    (c) promoting products where such products are yet to be supplied to, or sold in, Pakistan;

    (d) promoting technical and financial collaborations between its principal and taxpayers in Pakistan; or

    (e) provision of technical advice and assistance.

  • Concept of person defined for levy of income tax

    Concept of person defined for levy of income tax

    Income Tax Ordinance, 2001 has defined the concept of person for the collection and deduction of tax on income.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), the “person” means a person as defined in section 80 of the Ordinance.

    Section 80 defines person as:

    (1) The following shall be treated as persons for the purposes of this Ordinance, namely: —

    (a) An individual;

    (b) a company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere;

    (c) the Federal Government, a foreign government, a political sub-Division of a foreign government, or public international organisation.

    (2) For the purposes of this Ordinance —

    (a) “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;

    (b) “company” means —

    (i) a company as defined in the Companies Ordinance, 1984 (XLVII of 1984);

    (ii) a body corporate formed by or under any law in force in Pakistan;

    (iii) a modaraba;

    (iv) a body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies;

    (v) a co-operative society, a finance society or any other society;

    (va) a non-profit organization;

    (vb) a trust, an entity or a body of persons established or constituted by or under any law for the time being in force;

    (vi) 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;

    (vii) a Provincial Government;  

    (viii) a Local Government in Pakistan; or

    (ix) a Small Company as defined in section 2;

    (c) “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;

    (d) “trust” means an obligation annexed to the ownership of property and arising out of the confidence reposed in and accepted by the owner, or declared and accepted by the owner for the benefit of another, or of another and the owner, and includes a unit trust; and

    (e) “unit trust” means any trust under which beneficial interests are divided into units such that the entitlements of the beneficiaries to income or capital are determined by the number of units held.

  • What is permanent establishment under income tax law?

    What is permanent establishment under income tax law?

    Income Tax Ordinance, 2001 has defined the meaning of permanent establishment of a foreign entity operating in Pakistan.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue 9FBR), defined as “permanent establishment” in relation to a person, means a fixed place of business through which the business of the person is wholly or partly carried on, and includes –

    (a) a place of management, branch, office, factory or workshop, premises for soliciting orders, warehouse, permanent sales exhibition or sales outlet, other than a liaison office except where the office engages in the negotiation of contracts (other than contracts of purchase);

    (b) a mine, oil or gas well, quarry or any other place of extraction of natural resources;

    (ba) an agricultural, pastoral or forestry property;

    (c) a building site, a construction, assembly or installation project or supervisory activities connected with such site or project but only where such site, project and its connected supervisory activities continue for a period or periods aggregating more than ninety days within any twelve-months period;

    (d) the furnishing of services, including consultancy services, by any person through employees or other personnel engaged by the person for such purpose;

    (e) a person acting in Pakistan on behalf of the person (hereinafter referred to as the “agent”), other than an agent of independent status acting in the ordinary course of business as such, if the agent –

    “(i) has and habitually exercises an authority to conclude contracts on behalf of the other person or habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the person and these contracts are─

    (a) in the name of the person; or

    (b) for the transfer of the ownership of or for the granting of the right to use property owned by that enterprise or that the enterprise has the right to use; or

    (c) for the provision of services by that person; or”

    (ii) has no such authority, but habitually maintains a stock-in-trade or other merchandise from which the agent regularly delivers goods or merchandise on behalf of the other person; or

    Explanation.—For removal of doubt, it is clarified that an agent of independent status acting in the ordinary course of business does not include a person acting exclusively or almost exclusively on behalf of the person to which it is an associate; or ”;

    (f) any substantial equipment installed, or other asset or property capable of activity giving rise to income;

    (g) a fixed place of business that is used or maintained by a person if the person or an associate of a person carries on business at that place or at another place in Pakistan and─

    (i) that place or other place constitutes a permanent establishment of the person or an associate of the person under this sub-clause; or

    (ii) business carried on by the person or an associate of the person at the same place or at more than one place

    constitute complementary functions that are part of a cohesive business operation.

    Explanation.—For the removal of doubt, it is clarified that─

    (A) the term ”cohesive business operation” includes an overall arrangement for the supply of goods, installation, construction, assembly, commission, guarantees or supervisory activities and all or principal activities are undertaken or performed either by the person or the associates of the person; and

    (B) supply of goods include the goods imported in the name of the associate or any other person, whether or not the title to the goods passes outside Pakistan.

  • Income tax ordinance defines non-profit organization

    Income tax ordinance defines non-profit organization

    Income Tax Ordinance, 2001 has defined the meaning of Non-Profit Organization for the purpose of tax treatment on the activity of NPOs.

    The Income Tax Ordinance, 2001 up dated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), explained as:

    “Non-profit organization” means any person other than an individual, which is —

    (a) established for religious, educational, charitable, welfare purposes for general public, or for the promotion of an amateur sport;

    (b) formed and registered by or under any law as a non-profit organization;

    (c) approved by the Commissioner for specified period, on an application made by such person in the prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents as may be required by the Commissioner;  and none of the assets of such person confers, or may confer, a private benefit to any other person.

  • What is Income Year?

    What is Income Year?

    Income Tax Ordinance, 2001 has explained that the meaning of income year is same as defined in repealed Income Tax Ordinance, 1979.

    The repealed Income Tax Ordinance, 1979 defined the income year as:

    Income year”, in relation to any assessment year (hereafter in this clause, referred to as `the said assessment year’), means-

    (a)  the financial year next preceding the said assessment year, or

     (c)  such period as the Central Board of Revenue (now Federal Board of Revenue) may, in the case of any person or class of persons or any source of income, specify by notification in the official Gazette, and includes any period which, under any provision of this Ordinance, is deemed to be an income year, or in respect of which a return of total income is required to be furnished, or any income is liable to be

    Explanation.-

    (a)  Where, in any case,-

    (iii) both sub-clause (a) and sub-clause (c) apply, the income year as specified under clause (c) shall be deemed to be the income year of the assessee in respect of his income from all sources; and

    (iv)  the sources of income of an assessee include two or more sources in respect of which income years have been specified under clause (c), the income year of the said income years ending last shall be deemed to be the income year of the assessee in respect of his income from all sources except the sources to which clause (c) applies; and

    (b)  as used in sub-clause (c), “period” means any period of twelve months, or any period of more or less than twelve months, and includes any such period as may commence from, or end on, any date, including a date falling before the commencement, or after the end, as the case may be, of the financial year next preceding the said assessment year.

  • How to determine tax year?

    How to determine tax year?

    Tax year, as defined by Income Tax Ordinance, 2001, means the tax year as defined in sub-section (1) of section 74 and, in relation to a person, includes a special year or a transitional year that the person is permitted to use under section 74.

    According to the Income Tax Ordinance, 2001, updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), explained the Section 74 as:

    Tax year.— (1) For the purpose of this Ordinance and subject to this section, the tax year shall be a period of twelve months ending on the 30th day of June (hereinafter referred to as ‘normal tax year’) and shall, subject to sub-section (3), be denoted by the calendar year in which the said date falls.

    (2) Where a person’s income year, under the repealed Ordinance, is different from the normal tax year, or where a person is allowed, by an order under sub-section (3), to use a twelve months’ period different from normal tax year, such income year or such period shall be that person’s tax year (hereinafter referred to as ‘special tax year’) and shall, subject to sub-section (3), be denoted by the calendar year relevant to normal tax year in which the closing date of the special tax year falls.

    (2A) The Board,—

    (i) in the case of a class of persons having a special tax year different from a normal tax year may permit, by a notification in the official Gazette, to use a normal tax year; and

    (ii) in the case of a class of persons having a normal tax year may permit, by a notification in the official Gazette, to use a special tax year.]

    (3) A person may apply, in writing, to the Commissioner to allow him to use a twelve months’ period, other than normal tax year, as special tax year and the Commissioner may, subject to sub-section (5), by an order, allow him to use such special tax year.

    (4) A person using a special tax year, under sub-section (2), may apply in writing, to the Commissioner to allow him to use normal tax year and the Commissioner may, subject to sub-section (5), by an order, allow him to use normal tax year.

    (5) The Commissioner shall grant permission under sub-section (3) or (4) only if the person has shown a compelling need to use special tax year or normal tax year, as the case may be, and the permission shall be subject to such conditions, if any, as the Commissioner may impose.

    (6) An order under sub-section (3) or (4) shall be made after providing to the applicant an opportunity of being heard and where his application is rejected the Commissioner shall record in the order the reasons for rejection.

    (7) The Commissioner may, after providing to the person concerned an opportunity of being heard, by an order, withdraw the permission granted under sub-section (3) or (4).

    (8) An order under sub-section (3) or (4) shall take effect from such date, being the first day of the special tax year or the normal tax year, as the case may be, as may be specified in the order.

    (9) Where the tax year of a person changes as a result of an order under sub-section (3) or sub-section (4), 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”.

    (10) In this Ordinance, a reference to a particular financial year shall, unless the context otherwise requires, include a special tax year or a transitional tax year commencing during the financial year.

    (11) A person dissatisfied with an order under sub-section (3), (4) or (7) may file a review application to the Board, and the decision by the Board on such application shall be final.

  • Income Tax Ordinance defines Greenfield industry

    Income Tax Ordinance defines Greenfield industry

    Income Tax Ordinance, 2001 had defined Greenfield industrial undertaking for the purpose of granting exemption and concession.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) explained Greenfield industrial undertaking as –

    (a) a new industrial undertaking which is –

    (i) setup on land which has not previously been utilized for any commercial, industrial or manufacturing activity and is free from constraints imposed by any prior work;

    (ii) built without demolishing, revamping, renovating, upgrading, remodeling or modifying any existing structure, facility or plant;

    (iii) not formed by the splitting up or reconstitution of an undertaking already in existence or by transfer of machinery, plant or building from an undertaking established in Pakistan prior to commencement of the new business and is not part of an expansion project;

    (iv) using any process or technology that has not earlier been used in Pakistan and is so approved by the Engineering Development Board; and

    (b) is approved by the Commissioner on an application made in the prescribed form and manner, accompanied by the prescribed documents and, such other documents as may be required by the Commissioner:

    Provided that this definition shall be applicable from the 1st July, 2019 and onwards.

  • ITO explains approved funds

    ITO explains approved funds

    Income Tax Ordinance (ITO), 2001 has defined various approved funds for the chargeability of income tax.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) explained the following:

    “Approved gratuity fund” means a gratuity fund approved by the Commissioner in accordance with Part III of the Sixth Schedule;

     “Approved Annuity Plan” means an Annuity Plan approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Life Insurance Company registered with the SECP under Insurance Ordinance, 2000 (XXXIX of 2000);

    “Approved Income Payment Plan” means an Income Payment Plan approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;

    “Approved Pension Fund” means Pension Fund approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005, and managed by a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;

    “Approved Employment Pension or Annuity Scheme” means any employment related retirement scheme approved under this Ordinance, which makes periodical payment to a beneficiary i.e. pension or annuity such as approved superannuation fund, public sector pension scheme and Employees Old-Age Benefit Scheme;

    “Approved Occupational Savings Scheme” means any approved gratuity fund or recognized provident fund;

    “Approved superannuation fund” means a superannuation fund, or any part of a superannuation fund, approved by the Commissioner in accordance with Part II of the Sixth Schedule.

  • Foreign source of income defined by ITO 2001

    Foreign source of income defined by ITO 2001

    Income Tax Ordinance, 2001 has defined the meaning of ‘foreign source of income’ derived by Pakistani individual by working or giving services abroad.

    Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) stated that an amount shall be foreign-source income to the extent to which it is not Pakistan-source income.  

    The Ordinance further explained as:

    Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary.

    A resident individual shall be treated as having paid foreign income tax in respect of foreign-source salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue authority of the foreign country in which the employment was exercised.

    It explains:

    Where a resident taxpayer derives foreign source income chargeable to tax under this Ordinance in respect of which the taxpayer has paid foreign income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of –

    (a) the foreign income tax paid; or

    (b) the Pakistan tax payable in respect of the income.

    (2) For the purposes of clause (b) of sub-section (1), the Pakistan tax payable in respect of foreign source income derived by a taxpayer in a tax year shall be computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign-source income for the year.

    (3) Where, in a tax year, a taxpayer has foreign income under more than one head of income, this section shall apply separately to each head of income.

    (4) For the purposes of sub-section (3), income derived by a taxpayer from carrying on a speculation business shall be treated as a separate head of income.

    (5) The tax credit allowed under this section shall be applied in accordance with sub-section (3) of section 4.

    (6) Any tax credit or part of a tax credit allowed under this section for a tax year that is not credited under sub-section (3) of section 4 shall not be refunded, carried back to the preceding tax year, or carried forward to the following tax year.

    (7) A credit shall be allowed under this section only if the foreign income tax is paid within two years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.

    (8) In this section,—

    “average rate of Pakistan income tax” in relation to a taxpayer for a tax year, means the percentage that the Pakistani income tax (before allowance of the tax credit under this section) is of the taxable income of the taxpayer for the year;

    “foreign income tax” includes a foreign withholding tax; and

    “net foreign-source income” in relation to a taxpayer for a tax year, means the total foreign-source income of the taxpayer charged to tax in the year, as reduced by any deductions allowed to the taxpayer under this Ordinance for the year that –

    (a) relate exclusively to the derivation of the foreign-source income; and

    (b) are reasonably related to the derivation of foreign-source income in accordance with sub-section (1) of section 67 and any rules made for the purposes of that section.