Karachi, August 17, 2024 – The Federal Board of Revenue (FBR) has officially released the guidelines for computing taxable income for the Tax Year (TY) 2024-25, outlining the specific methodologies and provisions to be followed by taxpayers.
This detailed framework has been issued through the updated Income Tax Ordinance, 2001, which incorporates all amendments and updates up to June 30, 2024.
In its latest release, the FBR has clarified the procedure for calculating taxable income as per Section 4 of the Income Tax Ordinance, 2001. The section elaborates on how income tax is to be levied on individuals and entities that generate taxable income within the year.
Understanding Tax on Taxable Income
Section 4 of the Income Tax Ordinance, 2001, serves as the cornerstone for determining the taxable income for the current tax year. According to the FBR, the income tax for each tax year is imposed based on the rate or rates specified in Division I or II of Part I of the First Schedule of the Ordinance. The tax applies to every person with taxable income for the year, and the taxable income is calculated by applying the applicable tax rate to the total income, after which any eligible tax credits are subtracted.
The FBR has outlined that the computation of taxable income includes several key steps:
1. Application of Tax Rates: The applicable tax rate is applied to the taxable income of the taxpayer, depending on the category under which they fall, as per the schedules provided in the Ordinance.
2. Subtraction of Tax Credits: Tax credits allowed for the tax year are subtracted from the computed tax liability. The order of application of tax credits is specified, starting with any foreign tax credit allowed under Section 103, followed by tax credits under Part X of Chapter III, and finally, credits allowed under Sections 147 and 168.
3. Special Provisions for Certain Income Classes: Certain classes of income, or income of specific classes of persons, may be subject to separate taxation or final tax under different provisions. The Ordinance stipulates that such income, while subject to tax, will not be included in the computation of taxable income according to Sections 8 or 169, as applicable.
4. Tax Deduction at Source and Advance Payments: The FBR has also addressed situations where income tax is to be deducted at source or collected in advance. Such amounts are to be handled according to the relevant provisions of the Ordinance, ensuring compliance with the legal requirements.
Implications for Taxpayers
The FBR’s release provides much-needed clarity for taxpayers preparing for the 2024-25 tax year. By explicitly detailing the computation process, the FBR aims to facilitate accurate tax filings and reduce potential disputes. Taxpayers are encouraged to familiarize themselves with the updated Ordinance to ensure compliance and to take advantage of any eligible tax credits.
The FBR’s guidelines emphasize the importance of understanding the tax computation process, especially for those with complex income streams or who may qualify for various tax credits. The clarity provided in the updated Ordinance is expected to ease the tax filing process for businesses and individuals alike, enabling them to accurately calculate their tax liabilities and benefit from available credits.
As the tax season approaches, the FBR urges all taxpayers to review the updated Income Tax Ordinance and seek professional advice if necessary, to ensure a smooth and compliant tax filing process for TY 2024-25.
