FBR categorizes heads of income for tax collection

FBR categorizes heads of income for tax collection

The Federal Board of Revenue (FBR) in Pakistan has outlined five distinct heads of income for the purpose of tax collection from both individuals and corporate entities.

According to the Income Tax Ordinance, 2001, these categories provide a structured framework for taxation, ensuring a comprehensive approach to the diverse sources of income.

The five heads of income identified by the FBR are as follows:

1. Salary:

• This head encompasses income earned through employment. It includes salaries, bonuses, allowances, and any other financial benefits received by an individual as an employee.

2. Income from Property:

• Under this category, income generated from property holdings is considered. This may include rental income from real estate, royalties, and other forms of property-related earnings.

3. Income from Business:

• Any income generated through business activities falls under this head. It covers profits, gains, and returns from commercial ventures, trade, or professional services.

4. Capital Gains:

• Capital gains include profits made from the sale of capital assets, such as real estate, stocks, or other investments. The taxation on capital gains is determined based on the duration of asset ownership.

5. Income from Other Sources:

• This head encompasses various miscellaneous income streams that do not fall directly into the other four categories. It may include interest income, dividends, gifts, and other sources not covered elsewhere.

The distinction among these heads allows for a nuanced approach to tax assessment, ensuring that different types of income are appropriately taxed based on their nature and origin.

Residency Status:

The FBR also clarified the criteria for determining the residency status of individuals, associations of persons (AOP), and companies:

• Resident Individuals:

• An individual is considered a resident for a tax year if they are present in Pakistan for a total of 183 days or more during the year.

• Alternatively, if the individual is present in Pakistan for 120 days or more in the tax year and has spent a cumulative 365 days or more in Pakistan over the preceding four years, they are considered a resident.

• Employees or officials of the federal or provincial government posted abroad during the tax year are also considered residents.

• Resident AOP:

• An AOP is deemed a resident for a tax year if its control and management are located wholly or partly in Pakistan during that year.

• Resident Companies:

• Companies are considered residents if they are incorporated or formed under Pakistani law, if their control and management are situated wholly in Pakistan, or if they are a provincial or local government in Pakistan.

• Non-Resident Entities and Individuals:

• Entities and individuals are classified as non-resident if they do not meet the criteria for residency outlined above.

This categorization is crucial for determining the applicable tax rates, exemptions, and obligations for individuals and entities under the tax laws of Pakistan. By structuring income into these distinct heads and defining residency status, the FBR aims to foster clarity, fairness, and efficiency in the taxation system.