Normal tax year to run through July 01 to June 30 as defined under Section 74 of the Income Tax Ordinance, 2001. This provision has been updated with the Finance Act, 2021, and includes some important special provisions.
Section 74 of the Income Tax Ordinance, 2001, defines the tax year as a period of twelve months ending on the 30th day of June, referred to as the “normal tax year.” This means that the tax year in Pakistan typically starts on July 1st and ends on June 30th each year. However, there are exceptions and special provisions that allow for variations from this norm.
The law recognizes that there may be situations where a person’s income year, as defined under the repealed ordinance, differs from the normal tax year or where there is a compelling need to use a different twelve-month period as a tax year. In such cases, Section 74 allows for a “special tax year” to be established, which can be denoted by the calendar year relevant to the normal tax year in which the closing date of the special tax year falls.
Under subsection 2A, the Federal Board of Revenue (FBR) has the authority to permit certain classes of individuals or entities to use either a normal tax year or a special tax year, depending on their unique circumstances. This authority is exercised through official notifications in the Gazette. Additionally, taxpayers can apply in writing to the Commissioner to allow them to use a special tax year. The Commissioner may grant permission, subject to certain conditions and after providing the applicant with an opportunity to be heard.
Furthermore, individuals or entities using a special tax year can later apply to revert to the normal tax year. The Commissioner has the authority to grant such permission, again subject to conditions and after providing an opportunity for the applicant to be heard.
It’s important to note that permission to use a special tax year is not granted without reason. Section 74(5) specifies that the Commissioner can only grant such permission when a compelling need is demonstrated by the taxpayer. The Commissioner is also authorized to impose additional conditions, if necessary.
If a taxpayer’s application to use a special tax year is rejected, the Commissioner must provide reasons for the rejection in the order. Additionally, the Commissioner has the power to withdraw permission previously granted under subsection 3 or 4, provided that the individual or entity concerned is given an opportunity to be heard.
The effective date of an order under subsection 3 or 4 is specified in the order and typically corresponds to the first day of the special tax year or normal tax year, as the case may be.
A unique provision is also found in Section 74(9), which deals with transitional tax years. If a person’s tax year changes as a result of an order under subsection 3 or 4, the period between the end of the last tax year prior to the change and the date on which the changed tax year commences is treated as a separate tax year, known as the “transitional tax year.”
Furthermore, the ordinance clarifies in Section 74(10) that a reference to a particular financial year includes special tax years or transitional tax years that commence during the financial year, unless the context requires otherwise.
In the event of dissatisfaction with an order under subsection 3, 4, or 7, taxpayers have the option to file a review application with the Board. The decision made by the Board on such applications is considered final.
