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Tag: Income Tax Ordinance 2001

  • SHC declares income tax on undistributed profits as unconstitutional

    SHC declares income tax on undistributed profits as unconstitutional

    KARACHI: Sindh High Court (SHC) on Friday declared levy of tax on undistributed profits under Section 5A of Income Tax Ordinance, 2001 as unconstitutional and set aside all the show cause notices and demand notices issued by the tax authorities under the section.

    A division bench of the SHC ordered in Sapphire Textile Mills Limited vs Federation of Pakistan & Others: “insertion of Section 5A in the Income Tax Ordinance, 2001, including amendments theretho from time to time, does not fall within the parameters delineated per Article 73 of the constitution of Pakistan, 1973, hence, the provision impugned is found to be ultra vires of the constitution, and is hereby struck down.”

    It ordered further that as a consequence, any show cause / demand notices or constituents thereof, seeking enforcement of Section 5A of the Income Tax Ordinance, 2001, are hereby set aside.

    A large number of taxpayers filed petition before the higher court seeking relief against action initiated by Federal Board of Revenue (FBR).

    The petitioners challenged the Section 5A of the Income Tax Ordinance, 2001, which was initially inserted in the Ordinance through Finance Act, 2015 and amended through Finance Act, 2017, ostensibly in order to induce certain public companies to distribute dividends among their shareholders.

    In original form, as inserted through Finance Act, 2015, the tax was levied upon the reserves of a company. However, post Finance Act, 2017 the levy befell upon accounting profit before tax of a company.

    The petitioners requested the court to declare the provision as unconstitutional. The plain reading of Section 5A suggests that it amounts to double taxation, as income received or taxed in the same hand ceases to be income.

    It is submitted: “the regulation of companies is undertaken inter alia vide the Companies Act, 2017, being special in nature, and any attempt at such regulation by inserting penal provisions into the Ordinance routed through a money bill, was prima facie unmerited.”

    Counsel for the respondents submitted: “5A did not amount to double taxation as it contemplated an independent levy.”

    It was argued that 5A identified a class to be taxed, hence, could not be considered discriminatory.

    It was concluded that the legislature had ample power to regulate economic behavior and 5A was merely one specie of exercise of such power.

    The court observed that 5A of the Ordinance amounts to legislation, not contemplated in the Constitution to be undertaken vide a money bill. “In such a scenario no rationale has been articulated before us to justify the regulation of companies behavior, pertaining to dividends, to be effected vide a money bill, within the mandate of Article 73 of the Constitution, while abjuring the regular legislative process.

    “Therefore, it is our deliberated view that section 5A of Income Tax Ordinance, 2001 cannot be sustained on the constitutional anvil; hence, could not be construed to have legal effect.”

  • FBR officials given access to declarations filed under amnesty scheme

    FBR officials given access to declarations filed under amnesty scheme

    ISLAMABAD: The senior officials of the Federal Board of Revenue (FBR) have been authorized to access declarations of undisclosed income and assets under amnesty scheme of year 2019.

    The FBR issued SRO 369(I)/2021 to notify Assets Declaration Rules, 2021 dated March 31, 2021. Under rule 15 access has been authorized to declarations under the act i.e. Assets Declaration Act, 2019.

    According to the rule 15: Member Information Technology and Member IR (Operations) are authorized by the FBR to access the declarations under Section 14 of the Act, on their own or when a request by the concerned chief commissioner IR, supported with reasons, is forwarded to any of the aforementioned Members for provision of a copy of the declaration.

    Rule 8 of the notified SRO explained about treatment of asset, income or expenditure in a declaration. According to it the amount of asset, income or expenditure in a valid declaration for and upto tax year 2018 shall not be included in a taxable income of the declarant for any tax year under the Income Tax Ordinance, 2001.

    The FBR explained: “For removal of doubt it is clarified that any assets, income or expenditure that can be plausibly traced as sourced in assets or income declared in a valid deduction shall not be called into question.”

    Rule 9 has explained about the proceedings under the Income Tax Ordinance, 2001 in respect of the information received other than under Common Reporting Standards (CRS).

    Sub Rule 1 stated that subject to sub-rule (2), no proceedings under any provisions of the Income Tax Ordinance, 2001 shall be initiated on the basis of any information relating to any asset, income or expenditure as the 30th day of June 2018 or any prior period, if the information relates to a declarant under the Asset Declaration Act, 2019 and the declarant files an irrevocable written statement along with documentary evidence to the effect that the source of the asset, income or expenditure in the received information has been the assets, income or expenditure declared under the Act. The declarant shall file such a statement on a notice under Section 176 of the Income Tax Ordinance, 2001 along with the related documentary evidence.

    Sub-Rule 2 of Rule 9 stated that the nature and source of asset, income or expenditure shall not be treated as explained and the Commissioner Inland Revenue or his delegate shall be entitled to proceed under Section 111 of the Income Tax Ordinance, 2001, on the basis of definite information acquired from any source other than a valid declaration itself, in following cases:

    (a) where the value of asset, income or expenditure, as at the 30th day of June 2018 or before as per the definite information is in excess of value as per declaration; and

    (b) where the source of asset, income or expenditure relates to a person other than the declarant.

    Sub-Rule 3 of Rule 9 stated that where an action under Section 111 of the Income Tax Ordinance, 2001 as undertaken in accordance with the sub-rule (2) results in invalidation of the declaration then such an action cannot be initiated without prior approval, for reasons to be recorded in writing, of the chief commissioner inland revenue as defined in clause (11B) of the Section 2 of the Income Tax Ordinance, 2001.

    Rule 10 explained declaration filed and the information received under CRS. According to sub-rule 1 of the Rule 10, where a foreign asset or income is reported to the FBR under CRS, then prior to any action under any provision of the Income Tax Ordinance, 2001, the FBR shall ensure compliance of the condition under the protocol for CRS including exchange of information by the person whose information has been received. On completion of that process, following procedure shall be followed:

    (a) the commissioner inland revenue of the concerned person or delegate of the commissioner shall issue a notice under section 176 of the Income Tax Ordinance, 2001;

    (b) the notice referred in clause (a) of this sub-rule shall enquire as to whether or not such asset, income or expenditure has been declared under the Voluntary Declaration of Domestic Assets Act, 2018 and the Foreign Assets (Declaration and Repatriation) Act, 2018 or Asset Declaration Act, 2019;

    (c) if the taxpayer informs the commissioner Inland Revenue or his delegate that the asset, income or expenditure, as reported under the CRS has been declared in a declaration, the commissioner Inland Revenue or his delegate shall require the taxpayer to provide a copy of the declaration; and

    (d) the taxpayer on receipt of such notice under section 176 of the Income Tax Ordinance, 2001 shall:

    (i) provide a copy of his declaration where such asset, income or expenditure, as the case may be, has been declared; and

    (ii) provide a copy of the declaration of another person, being the beneficial owner, where the asset, income or expenditure referred to in the CRS has been declared.

    Sub-Rule 2 of the Rule 10 stated that subject to the provision of Section 11 of the Asset Declaration Act, 2019, in case the information received under CRS as referred above are in agreement then a confirmation in writing shall be issued by the Commissioner Inland Revenue or his delegate that the asset, income or expenditure to the extent referred to in the letter has been declared under the respective declaration law.

    Through Rule 11, the FBR explained the beneficial ownership. The sub-rule 01 of Rule 11 stated that in case of matter relating to legal or beneficial ownership of an asset, income or expenditure, the claim of beneficial ownership shall not be questioned unless there is definite information that the asset was created out of sources of a person other than the person claiming the beneficial ownership.

    The sub-rule (2) of the Rule 11 stated where in the case of a foreign trust the source of contribution to the trust is claimed by any person other than settler, beneficiary or the trustees, the person so claiming shall be entitled to declare his contribution under the Asset Declaration Act, 2019. Such declaration shall not be called in question merely on account that such person is not the settler, beneficiary or trustee of the trust.

    Provided that where the asset, income or expenditure is reported under CRS in the name of settler, beneficiary of the trust or any person, proceedings shall be initiated against such person in the absence of a declaration by such settler, beneficiary or other persons;

    Provided further that in such a case any claim, by a third person as contributor to the asset, income or expenditure, shall only be considered if supported with documentary evidence.

    Through Rule 12, the FBR also explained declaration made by relatives of holder of public office. Sub-rule 1 of the Rule 12 stated that the status of a person as to the holder of public office or otherwise and the period during which a person remained holder of public office shall not be questioned or challenged by the commissioner Inland Revenue or his delegate if the same is confirmed by the relevant office.

    Sub-rule 2 of the Rule 12 stated that no declaration by a person entitled to file a declaration under the Asset Declaration Act, 2019 shall b questioned only for the reason that the declarant is a relative other than spouse and dependent children of the declarant of a person being a holder of public office unless it is confirmed through a definite information that the asset, income or expenditure have been created out of the undisclosed sources of a holder of public office.

  • First year allowance on plant, machinery withdrawn

    First year allowance on plant, machinery withdrawn

    ISLAMABAD: First year allowance has been withdrawn that was allowed on installation of plant and machinery by any industrial unit. The concession has been withdrawn through Tax Laws (Second Amendment) Ordinance, 2021.

    The first year allowance has been abolished that was available under Section 23A of Income Tax Ordinance, 2001 at the rate of 90 percent. An initial allowance was available at 25 percent for installation of plant and machinery, according to officials of the Federal Board of Revenue (FBR).

    The omitted section 23A was:

    First Year Allowance.—(1) Plant, machinery and equipment installed by any industrial undertaking set up in specified rural and under developed areas or engaged in the manufacturing of cellular mobile phones and qualifying for exemption under clause (126N) of Part I of the Second Schedule and owned and managed by a company shall be allowed first year allowance in lieu of initial allowance under section 23 at the rate specified in Part II of the Third Schedule against the cost of the “eligible depreciable assets” put to use after July 1, 2008.

    (2) The provisions of section 23 except sub-sections (1) and (2) thereof, shall mutatis mutandis apply.

    (3) The Federal Government may notify “specified areas” for the purposes of sub-section (1).

  • Computation of taxable income defined

    Computation of taxable income defined

    Income Tax Ordinance, 2001 has explained procedure for computation of taxable income.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), explained COMPUTATION OF TAXABLE INCOME under Sections 9, 10 and 11 of the ordinance.

    9. Taxable income.—The taxable income of a person for a tax year shall be the total income under clause (a) of section 10 of the person for the year reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person for the year.

    10. Total Income.— The total income of a person for a tax year shall be the sum of the —

    (a) person’s income under all heads of income for the year; and

    (b) person’s income exempt from tax under any of the provisions of this Ordinance.

    11. Heads of income.— (1) For the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely: —

    (a) Salary;

    (b) Income from Property;

    (c) Income from Business;

    (d) Capital Gains; and

    (e) Income from Other Sources.

    (2) Subject to this Ordinance, the income of a person under a head of income for a tax year shall be the total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions, if any, allowed under this Ordinance to the person for the year under that head.

    (3) Subject to this Ordinance, where the total deductions allowed under this Ordinance to a person for a tax year under a head of income exceed the total of the amounts derived by the person in that year that are chargeable to tax under that head, the person shall be treated as sustaining a loss for that head for that year of an amount equal to the excess.

    (4) A loss for a head of income for a tax year shall be dealt with in accordance with Part VIII of this Chapter.

    (5) The income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income.

    (6) The income of a non-resident person under a head of income shall be computed by taking into account only amounts that are Pakistan-source income.

  • What is ‘start up’ under income tax ordinance?

    What is ‘start up’ under income tax ordinance?

    Income Tax Ordinance, 2001 has defined the meaning of ‘start up’ for the purpose of levying income tax.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), defined ‘startup’ as:

     (i) a business of a resident individual, AOP or a company that commenced on or after first day of July, 2012 and the person is engaged in or intends to offer technology driven products or services to any sector of the economy provided that the person is registered with and duly certified by the Pakistan Software Export Board (PSEB) and has turnover of less than one hundred million in each of the last five tax years; or

    (ii) any business of a person or class of persons, subject to the conditions as the Federal Government may, by notification in the official Gazette, specify.

  • Small company defined by income tax ordinance

    Small company defined by income tax ordinance

    Income Tax Ordinance, 2001 has defined the meaning of ‘small company for the purpose of levying income tax.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), explained ‘small company as a company registered on or after the first day of July, 2005, under the Companies Ordinance, 1984 (XLVII) of 1984, which,—

    (i) has paid up capital plus undistributed reserves not exceeding fifty million rupees;

    (ia) has employees not exceeding two hundred and fifty any time during the year;

    (ii) has annual turnover not exceeding two hundred and fifty million rupees; and

    (iii) is not formed by the splitting up or the reconstitution of company already in existence.

  • ‘Salary’ explained for determination of income tax

    ‘Salary’ explained for determination of income tax

    Income Tax Ordinance, 2001 has defined the meaning of salary for the purpose of determining income of a paid employee.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) defined the salary as :

    (1) Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Salary”.

    (2) Salary means any amount received by an employee from any employment, whether of a revenue or capital nature, including —

    (a) any pay, wages or other remuneration provided to an employee, including leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity or work condition supplements (such as for unpleasant or dangerous working conditions);

    (b) any perquisite, whether convertible to money or not;

    (c) the amount of any allowance provided by an employer to an employee including a cost of living, subsistence, rent, utilities, education, entertainment or travel allowance, but shall not include any allowance solely expended in the performance of the employee’s duties of employment;

    (d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment;

    (e) the amount of any profits in lieu of, or in addition to, salary or wages, including any amount received —

    (i) as consideration for a person’s agreement to enter into an employment relationship;

    (ii) as consideration for an employee’s agreement to any conditions of employment or any changes to the employee’s conditions of employment;

    (iii) on termination of employment, whether paid voluntarily or under an agreement, including any compensation for redundancy or loss of employment and golden handshake payments;

    (iv) from a provident or other fund, to the extent to which the amount is not a repayment of contributions made by the employee to the fund in respect of which the employee was not entitled to a deduction; and

    (v) as consideration for an employee’s agreement to a restrictive covenant in respect of any past, present or prospective employment;

    (f) any pension or annuity, or any supplement to a pension or annuity; and

    (g) any amount chargeable to tax as “Salary” under section 14.

    (3) Where an employer agrees to pay the tax chargeable on an employee’s salary, the amount of the employee’s income chargeable under the head “Salary” shall be grossed up by the amount of tax payable by the employer.

    (4) No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”.

    (5) For the purposes of this Ordinance, an amount or perquisite shall be treated as received by an employee from any employment regardless of whether the amount or perquisite is paid or provided —

    (a) by the employee’s employer, an associate of the employer, or by a third party under an arrangement with the employer or an associate of the employer;

    (b) by a past employer or a prospective employer; or

    (c) to the employee or to an associate of the employee or to a third party under an agreement with the employee or an associate of the employee.

    (6) An employee who has received an amount referred to in sub-clause (iii) of clause (e) of sub-section (2) in a tax year may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula, namely: —

    A/B%

    where —

    A is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years; and

    B is the employee’s total taxable income for the three preceding tax years.

    (7) Where —

    (a) any amount chargeable under the head “Salary” is paid to an employee in arrears; and

    (b) as a result the employee is chargeable at higher rates of tax than would have been applicable if the amount had been paid to the employee in the tax year in which the services were rendered,

    the employee may, by notice in writing to the Commissioner, elect for the amount to be taxed at the rates of tax that would have been applicable if the salary had been paid to the employee in the tax year in which the services were rendered.

    (8) An election under sub-section (6) or (7) shall be made by the due date for furnishing the employee’s return of income or employer certificate, as the case may be, for the tax year in which the amount was received or by such later date as the Commissioner may allow.

  • What is royalty under Income Tax Ordinance?

    What is royalty under Income Tax Ordinance?

    Income Tax Ordinance, 2001 has defined the meaning of royalty paid by companies for use of rights.

    The Income Tax Ordinance, 2001 up dated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), defined the meaning of ‘royalty’ as any amount paid or payable, however described or computed, whether periodical or a lump sum, as consideration for —

    (a) the use of, or right to use any patent, invention, design or model, secret formula or process, trademark or other like property or right;

    (b) the use of, or right to use any copyright of a literary, artistic or scientific work, including films or video tapes for use in connection with television or tapes in connection with radio broadcasting, but shall not include consideration for the sale, distribution or exhibition of cinematograph films;

    (c) the receipt of, or right to receive, any visual images or sounds, or both, transmitted by satellite, cable, optic fibre or similar technology in connection with television, radio or internet broadcasting;

    (d) the supply of any technical, industrial, commercial or scientific knowledge, experience or skill;

    (e) the use of or right to use any industrial, commercial or scientific equipment;

    (f) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as mentioned in sub-clauses (a) through (e); and

    (g) the disposal of any property or right referred to in sub-clauses (a) through (e).

  • ITO explains principal officer of company

    ITO explains principal officer of company

    Income Tax Ordinance (ITO), 2001 has explained principal officer of a company for the purpose or apply law and rules for the purpose of income tax payment.

    The Income Tax Ordinance, 2001 updated up to June 30, 2001 issued by the Federal Board of Revenue (FBR) defined ‘principal officer’ with reference to a company or association of persons includes –

    (a) a director, a manager, secretary, agent, accountant or any similar officer; and

    (b) any person connected with the management or administration of the company or association of persons upon whom the Commissioner has served a notice of treating him as the principal officer thereof.

  • Liaison office defined by Income Tax Ordinance

    Liaison office defined by Income Tax Ordinance

    Income Tax Ordinance, 2001 has defined the meaning of liaison office of a company for the purpose of imposition and calculation of income tax.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) defined ‘liaison office’ as a place of business acting for the principal, head office or any entity of which it is a part, and

    (a) its activities do not result in deriving income in Pakistan; and

    (b) maintains itself out of any amount remitted from outside Pakistan received through normal banking channels.

    Explanation,— It is clarified that—

    (i) a place of business shall not be treated as liaison office if it engages in –

    (a) commercial activities;

    (b) trading or industrial activities; or

    (c) the negotiation and conclusion of contracts;

    (ii) the activities shall be treated to be commercial activities, if these include—

    (a) providing after sales services for goods or services; or

    (b) marketing or promoting pharmaceutical and medical products or services;

    (iii) subject to clause (i), a place of business shall be treated as a liaison office, if it undertakes activities of—

    (a) an exploratory or preparatory nature, to investigate the possibilities of trading with, or in, Pakistan;

    (b) exploring the possibility of joint collaboration and export promotion;

    (c) promoting products where such products are yet to be supplied to, or sold in, Pakistan;

    (d) promoting technical and financial collaborations between its principal and taxpayers in Pakistan; or

    (e) provision of technical advice and assistance.