FBR clarifies rules for normal, special and transitional tax years and explains how taxpayers can apply to change their tax year.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the rules governing the normal tax year and special tax year for determining income tax and tax liability for Tax Year 2027.
The FBR has issued the updated Income Tax Ordinance, 2001, incorporating amendments up to June 30, 2026, and explained the provisions of Section 74, which establishes the framework for determining a taxpayer’s tax year.
Normal tax year
Under Section 74, the normal tax year is a period of 12 months ending on June 30. It is denoted by the calendar year in which June 30 falls.
Accordingly, a tax year ending on June 30, 2027, is denoted by the calendar year 2027 and is referred to as Tax Year 2027.
Special tax year
The law also provides for a special tax year where a person’s income year under the repealed Income Tax Ordinance was different from the normal tax year.
A taxpayer who has been allowed, through an order under Section 74, to use a 12-month period other than the normal tax year may also use that period as the person’s special tax year.
The special tax year is generally denoted by the calendar year relevant to the normal tax year in which the closing date of the special tax year falls.
FBR powers regarding tax years
Section 74(2A) empowers the FBR to change the applicable tax year for a class of persons through a notification published in the official Gazette.
For a class of persons using a special tax year, the Board may permit the use of the normal tax year.
Similarly, for a class of persons using the normal tax year, the Board may permit the use of a special tax year.
Taxpayers can apply for a special tax year
An individual or entity may apply in writing to the Commissioner Inland Revenue for permission to use a 12-month period other than the normal tax year.
The Commissioner may approve the application, subject to the relevant provisions, where the taxpayer demonstrates a compelling need to use a special tax year.
A person already using a special tax year may likewise apply to the Commissioner to switch back to the normal tax year.
The Commissioner may impose conditions while granting permission under either provision.
Opportunity of being heard
The law requires the Commissioner to provide the applicant with an opportunity of being heard before making an order under Section 74.
If an application is rejected, the Commissioner must record the reasons for rejection in the order.
The Commissioner may also withdraw previously granted permission after providing the concerned person with an opportunity of being heard.
Transitional tax year
Where a taxpayer’s tax year changes following an order under Section 74, the period between the end of the last tax year before the change and the commencement of the new tax year is treated as a separate tax year.
This period is known as the “transitional tax year”.
The provision ensures that the period created by a change in the tax year is properly accounted for under the Income Tax Ordinance, 2001.
Financial year reference
The FBR has further clarified that a reference to a particular financial year in the Income Tax Ordinance, 2001 will, unless the context requires otherwise, include a special tax year or transitional tax year commencing during that financial year.
Taxpayers have right to review
A person dissatisfied with an order made under Section 74(3), 74(4) or 74(7) may file a review application with the FBR.
The decision of the Board on such a review application will be final.
The provisions of Section 74 therefore establish a framework for normal, special and transitional tax years, while setting out the procedures and conditions applicable when taxpayers seek to change their tax year.