Income Tax Ordinance 2001: minimum tax on income of certain taxpayers

Income Tax Ordinance 2001: minimum tax on income of certain taxpayers

Karachi: The Federal Board of Revenue (FBR) has made significant amendments to the Income Tax Ordinance, 2001, introducing the concept of minimum tax on the income of certain taxpayers, including individuals and corporate entities.

This update, explained under Section 113 of the Ordinance, is designed to address scenarios where, for various reasons allowed under the tax laws, no tax is payable or paid by the taxpayer.

Section 113 of the Income Tax Ordinance, 2001, outlines the application of minimum tax on the income of specific entities, which includes resident companies, individuals with a turnover of ten million rupees or more in the tax year 2017 or any subsequent tax year, and associations of persons with a similar turnover threshold. The application of this section arises when, for various reasons specified under the Ordinance, such as incurring a loss, setting off a loss from an earlier year, exemption from tax, applying credits or rebates, or claiming allowances or deductions, no tax is payable or paid by the taxpayer for a given tax year.

In cases where no tax or an amount less than the specified percentage of the taxpayer’s turnover is paid, the minimum tax under Section 113 comes into effect.

To further clarify, the explanation in the sub-section (1) of Section 113 states that “tax payable or paid” does not include taxes already paid or payable in respect of deemed income assessed as a final discharge of tax liability under Section 169 or other provisions of the Ordinance. Additionally, it does not encompass tax payable or paid under Section 4B.

When Section 113 applies, the aggregate turnover of the taxpayer for the tax year is treated as their income chargeable to tax. Instead of the actual tax payable under the Ordinance, the taxpayer must pay a minimum tax computed based on the specified rates in Division IX of Part I of the First Schedule.

If the tax paid under sub-section (1) exceeds the actual tax payable under specific clauses of Division I or Division II of the First Schedule, the excess amount of tax paid can be carried forward for adjustment against tax liability in subsequent tax years. However, this adjustment is limited to a maximum of five tax years immediately succeeding the year in which the excess amount was paid.

The term “turnover” is defined in sub-section (4) of Section 113, and it encompasses various financial elements, including gross sales or receipts, gross fees for services, gross receipts from contract execution, and the company’s share of these amounts if it is a member of an association of persons.

The introduction of minimum tax under Section 113 seeks to ensure that even in cases where taxpayers can benefit from deductions, exemptions, or other incentives allowed under the law, they must contribute a minimum amount in taxes, thus preventing the erosion of the tax base and ensuring a more equitable tax system.

These changes in the Income Tax Ordinance, 2001, aim to promote tax compliance and revenue generation while maintaining a fair and transparent tax regime for all eligible taxpayers.