Karachi, September 18, 2024 – The Federal Board of Revenue (FBR) has provided a detailed explanation of the duration of the tax year in Pakistan as per the Income Tax Ordinance, 2001, updated until June 30, 2024.
This explanation aims to clarify how the tax year is defined and structured for income tax purposes, providing essential guidance for taxpayers across the country.
Under Section 74 of the Income Tax Ordinance, 2001, the tax year in Pakistan is a period of 12 months that ends on June 30. This period is referred to as the “normal tax year” and is denoted by the calendar year in which the last day of the tax year, i.e., June 30, falls. For instance, the tax year ending on June 30, 2024, would be referred to as the tax year 2024.
Normal vs. Special Tax Year
The FBR further elaborated on the distinctions between a “normal tax year” and a “special tax year.” A normal tax year applies to most taxpayers, where the 12-month period for tax calculation aligns with the fiscal year, from July 1 to June 30. However, certain individuals or entities may have different income periods under the repealed Ordinance or specific cases where they are permitted to use a “special tax year.” This special tax year may follow a different 12-month cycle than the normal tax year and is denoted by the calendar year in which it closes.
Flexibility in Tax Year Selection
The FBR has made provisions for taxpayers with varying income cycles to apply for the use of a special tax year. Section 74(3) of the Ordinance allows taxpayers to request the Commissioner of Income Tax to grant permission for using a 12-month period other than the normal tax year. The application must demonstrate a compelling need, and the Commissioner has the authority to grant or reject the request after providing an opportunity for the applicant to present their case.
The Ordinance also stipulates that any taxpayer using a special tax year can apply to revert to the normal tax year by submitting a written application. Similar to the process of adopting a special tax year, this request is subject to the Commissioner’s approval, and the decision is based on the taxpayer’s justification.
Special Circumstances and Transitional Tax Year
In cases where there is a transition from a normal tax year to a special tax year, or vice versa, the FBR has introduced the concept of a “transitional tax year.” This refers to the period between the end of the last tax year before the change and the start of the new tax year. This separate tax year helps ensure a smooth transition for taxpayers when changing their tax year cycle.
The FBR has also highlighted the option for a class of persons to be allowed, by official notification in the Gazette, to adopt a different tax year. The Board can permit certain groups to switch between the normal and special tax years based on their specific circumstances.
Appeals and Review Process
If a taxpayer is dissatisfied with a decision by the Commissioner under Sections 74(3), 74(4), or 74(7), they have the right to appeal. The dissatisfied party can file a review application with the FBR, and the Board’s decision on such applications will be considered final.
Conclusion
The FBR’s clarification on the tax year duration serves as an important reminder for all taxpayers in Pakistan to comply with the tax system’s requirements. By offering flexibility through the option of a special tax year and a detailed review process, the FBR ensures that the tax system can accommodate diverse business and income cycles while maintaining a transparent and fair tax administration.
Taxpayers are encouraged to stay informed and consult with tax professionals or the FBR for any specific queries regarding their tax year and related obligations.
