Karachi, August 23, 2023 – The Federal Board of Revenue (FBR) has confirmed that profits and gains arising from any business activity will be considered a component of an individual’s income for tax purposes.
The FBR has issued an updated Income Tax Ordinance, 2001, applicable for the fiscal year 2023-24, which sheds light on the taxation of income derived from business activities.
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As per Section 18 of the Income Tax Ordinance, 2001, the following types of income shall be subject to taxation under the head “Income from Business” for a tax year, excluding income exempt from tax under this Ordinance:
(a) Profits and Gains from Business: This category encompasses profits and gains generated from any business conducted by an individual at any point during the tax year.
(b) Income Derived by Associations: Any income derived by trade, professional, or similar associations from the sale of goods or provision of services to their members falls under this category.
(c) Income from Hire or Lease: Income generated from the hire or lease of tangible movable property is also categorized as income from business.
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(d) Fair Market Value of Benefits or Perquisites: This category includes the fair market value of any benefit or perquisite, whether convertible into money or not, received by an individual as part of a past, present, or prospective business relationship. It’s worth noting that this clause specifies that “benefit” encompasses benefits derived from the waiver of profit on debt or the debt itself, in accordance with the State Bank of Pakistan’s Circular No. 29 of 2002 or any other scheme issued by the State Bank of Pakistan.
(e) Management Fees: Any management fee received by a management company, including a modaraba management company, is considered part of business income.
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It’s essential to highlight that income subject to taxation under sections 5A, 5AA, 6, 7, and 7A will not be chargeable to tax under this section.
Furthermore, the ordinance stipulates that any profit derived from debt by a person whose business revolves around earning such income shall be subject to taxation under the head “Income from Business” and not categorized as “Income from Other Sources.”
Additionally, when a lessor, including scheduled banks, investment banks, development finance institutions, modarabas, or leasing companies, leases out an asset, whether or not it owns the asset, any amount paid or payable by the lessee in connection with the lease will be treated as the lessor’s income and taxed under the head “Income from Business.”
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Moreover, any amount received by a banking company or a non-banking finance company, where such amount represents distribution by a mutual fund or a Private Equity and Venture Capital Fund from its income derived from profit on debt, will also be subject to taxation under the head “Income from Business” rather than “Income from Other Sources.”
These explanations aim to provide a comprehensive framework for the taxation of business-related income, ensuring compliance with Pakistan’s tax laws.
