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Tag: Income Tax Ordinance 2001

  • ITO explains approved funds

    ITO explains approved funds

    Income Tax Ordinance (ITO), 2001 has defined various approved funds for the chargeability of income tax.

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

    “Approved gratuity fund” means a gratuity fund approved by the Commissioner in accordance with Part III of the Sixth Schedule;

     “Approved Annuity Plan” means an Annuity Plan approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Life Insurance Company registered with the SECP under Insurance Ordinance, 2000 (XXXIX of 2000);

    “Approved Income Payment Plan” means an Income Payment Plan approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005 and offered by a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;

    “Approved Pension Fund” means Pension Fund approved by Securities and Exchange Commission of Pakistan (SECP) under Voluntary Pension System Rules, 2005, and managed by a Pension Fund Manager registered with the SECP under Voluntary Pension System Rules, 2005;

    “Approved Employment Pension or Annuity Scheme” means any employment related retirement scheme approved under this Ordinance, which makes periodical payment to a beneficiary i.e. pension or annuity such as approved superannuation fund, public sector pension scheme and Employees Old-Age Benefit Scheme;

    “Approved Occupational Savings Scheme” means any approved gratuity fund or recognized provident fund;

    “Approved superannuation fund” means a superannuation fund, or any part of a superannuation fund, approved by the Commissioner in accordance with Part II of the Sixth Schedule.

  • Foreign source of income defined by ITO 2001

    Foreign source of income defined by ITO 2001

    Income Tax Ordinance, 2001 has defined the meaning of ‘foreign source of income’ derived by Pakistani individual by working or giving services abroad.

    Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) stated that an amount shall be foreign-source income to the extent to which it is not Pakistan-source income.  

    The Ordinance further explained as:

    Any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary.

    A resident individual shall be treated as having paid foreign income tax in respect of foreign-source salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue authority of the foreign country in which the employment was exercised.

    It explains:

    Where a resident taxpayer derives foreign source income chargeable to tax under this Ordinance in respect of which the taxpayer has paid foreign income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of –

    (a) the foreign income tax paid; or

    (b) the Pakistan tax payable in respect of the income.

    (2) For the purposes of clause (b) of sub-section (1), the Pakistan tax payable in respect of foreign source income derived by a taxpayer in a tax year shall be computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign-source income for the year.

    (3) Where, in a tax year, a taxpayer has foreign income under more than one head of income, this section shall apply separately to each head of income.

    (4) For the purposes of sub-section (3), income derived by a taxpayer from carrying on a speculation business shall be treated as a separate head of income.

    (5) The tax credit allowed under this section shall be applied in accordance with sub-section (3) of section 4.

    (6) Any tax credit or part of a tax credit allowed under this section for a tax year that is not credited under sub-section (3) of section 4 shall not be refunded, carried back to the preceding tax year, or carried forward to the following tax year.

    (7) A credit shall be allowed under this section only if the foreign income tax is paid within two years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.

    (8) In this section,—

    “average rate of Pakistan income tax” in relation to a taxpayer for a tax year, means the percentage that the Pakistani income tax (before allowance of the tax credit under this section) is of the taxable income of the taxpayer for the year;

    “foreign income tax” includes a foreign withholding tax; and

    “net foreign-source income” in relation to a taxpayer for a tax year, means the total foreign-source income of the taxpayer charged to tax in the year, as reduced by any deductions allowed to the taxpayer under this Ordinance for the year that –

    (a) relate exclusively to the derivation of the foreign-source income; and

    (b) are reasonably related to the derivation of foreign-source income in accordance with sub-section (1) of section 67 and any rules made for the purposes of that section.

  • ITO 2001 explains ‘fee for technical services’

    ITO 2001 explains ‘fee for technical services’

    Income Tax Ordinance, 2001 has explained the meaning of ‘fee for technical services’ rendered by non-resident persons to users in Pakistan.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) explained the fee for offshore digital services as:

    “Fee for technical services” means any consideration, whether periodical or lump sum, for the rendering of any managerial, technical or consultancy services including the services of technical or other personnel, but does not include —

    (a) consideration for services rendered in relation to a construction, assembly or like project undertaken by the recipient; or

    (b) consideration which would be income of the recipient chargeable under the head “salary”.

    It also explained the following:

    ”Fee for offshore digital services” means any consideration for providing  or rendering services by a non-resident person for online advertising including digital advertising space, designing, creating, hosting or maintenance of websites, digital or cyber space for websites, advertising, e-mails, online computing, blogs, online content and online data, providing any facility or service for uploading, storing or distribution of digital content including digital text, digital audio or digital video, online collection or processing of data related to users in Pakistan, any facility for online sale of goods or services or any other online facility.

  • Fast moving consumer goods explained

    Fast moving consumer goods explained

    Income Tax Ordinance, 2001 has explained the meaning of ‘fast moving consumer goods’ for calculation and imposition of income tax.

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

    “Fast moving consumer goods” means consumer goods which are supplied in retail marketing as per daily demand of a consumer excluding durable goods.

    The income tax applied under Section 153 shall be:

    In the case of supplies made by the distributer of fast moving consumer goods,─

    (i) in case of a company, 2 percent of the gross amount payable; and

    (ii) in any other case, 2.5 percent of the gross amount payable.

  • ITO 2001 defines employee, employer

    ITO 2001 defines employee, employer

    Income Tax Ordinance (ITO), 2001 has explained the meaning of employee and employer for calculation and imposition of income tax.

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

    “Employee” means any individual engaged in employment;

    “Employer” means any person who engages and remunerates an employee;

    “Employment” includes –

    (a) a directorship or any other office involved in the management of a company;

    (b) a position entitling the holder to a fixed or ascertainable remuneration; or

    (c) the holding or acting in any public office.

  • Electronic record defined by ITO 2001

    Electronic record defined by ITO 2001

    Income Tax Ordinance (ITO), 2001 has defined ‘electronic record’ as electronic resources or information in electronic form.

    The Income Tax Ordinance, 2001 – updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) – explained the following:

    “Electronic record” includes the contents of communications, transactions and procedures under this Ordinance, including attachments, annexes, enclosures, accounts, returns, statements, certificates, applications, forms, receipts, acknowledgements, notices, orders, judgments, approvals, notifications, circulars, rulings, documents and any other information associated with such communications, transactions and procedures, created, sent, forwarded, replied to, transmitted, distributed, broadcast, stored, held, copied, downloaded, displayed, viewed, read, or printed, by one or several electronic resources and any other information in electronic form;

     “Electronic resource” includes telecommunication systems, transmission devices, electronic video or audio equipment, encoding or decoding equipment, input, output or connecting devices, data processing or storage systems, computer systems, servers, networks and related computer programs, applications and software including databases, data warehouses and web portals as may be prescribed by the Board from time to time, for the purpose of creating electronic record;

     “Telecommunication system” includes a system for the conveyance, through the agency of electric, magnetic, electro-magnetic, electro-chemical or electro-mechanical energy, of speech, music and other sounds, visual images and signals serving for the impartation of any matter otherwise than in the form of sounds or visual images and also includes real time online sharing of any matter in manner and mode as may be prescribed by the Board from time to time.

  • Tax law defines dividend income

    Tax law defines dividend income

    Income Tax Ordinance, 2001 has defined types of income included in dividend distribution for the purpose of tax levy.

    The Income Tax Ordinance, 2001 updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR), explained that dividend includes —

    (a) any distribution by a company of accumulated profits to its shareholders, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets including money of the company;

    (b) any distribution by a company, to its shareholders of debentures, debenture-stock or deposit certificate in any form, whether with or without profit, to the extent to which the company possesses accumulated profits whether capitalised or not;

    (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not;

    (d) any distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalised or not;  

    (e) any payment by a private company as defined in the Companies Ordinance, 1984 (XLVII of 1984)] or trust of any sum (whether as representing a part of the assets of the company or trust, or otherwise) by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company or trust, in either case, possesses accumulated profits; or

     (f) remittance of after tax profit of a branch of a foreign company operating in Pakistan;

    but does not include —

    (i) a distribution made in accordance with sub-clause] (c) or (d) in respect of any share for full cash consideration, or redemption of debentures or debenture stock, where the holder of the share or debenture is not entitled in the event of liquidation to participate in the surplus assets;

    (ii) any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

    (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause] (e) to the extent to which it is so set off; and

    (iv) remittance of after tax profit by a branch of Petroleum Exploration and Production (E&P) foreign company, operating in Pakistan.

  • Income tax law defines amalgamation

    Income tax law defines amalgamation

    The word ‘amalgamation’ has been defined under Income Tax Ordinance, 2001.

    The Ordinance updated up to June 30, 2020 issued by the Federal Board of Revenue (FBR) has defined the word ‘amalgamation’ as:

    “Amalgamation” means the merger of one or more banking companies or non-banking financial institutions, or insurance companies, or companies owning and managing industrial undertakings or companies engaged in providing services and not being a trading company or companies in either case at least one of them being a public company, or a company incorporated under any law, other than Companies Ordinance, 1984 (XLVII of 1984), for the time being in force, (the company or companies which so merge being referred to as the “amalgamating company” or companies and the company with which they merge or which is formed as a result of merger, as the “amalgamated company”) in such manner that –

    (a) the assets of the amalgamating company or companies immediately before the amalgamation become the assets of the amalgamated company by virtue of the amalgamation, otherwise than by purchase of such assets by the amalgamated company or as a result of distribution of such

    assets to the amalgamated company after the winding up of the amalgamating company or companies; and

    (b) the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation.

  • Tax Year 2020: return may be filed on payment of penalty

    Tax Year 2020: return may be filed on payment of penalty

    ISLAMABAD: A return of income and a wealth statement can be filed now after payment of fine and penalty as prescribed in the statute.

    The deadline to file income tax return for tax year 2020 was December 08, 2020. The FBR has not extended the date for filing the return of income and wealth statement despite demands from various quarters while pointing out various reasons.

    A large number of individuals and other classes of taxpayers has failed to file their returns by due date. The filing of income tax return is mandatory on classes of persons as defined under Section 114 of the Income Tax Ordinance, 2001.

    “Section 114. Return of income. — (1) Subject to this Ordinance, the following persons are required to furnish a return of income for a tax year, namely:–

    (a) every company;

    (ab) every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;or

    (ac) any non-profit organization as defined in clause (36) of section 2;

    (ad) any welfare institution approved under clause (58) of Part I of the Second Schedule;

    (ae) every person whose income for the year is subject to final taxation under any provision of this Ordinance;

    (b) any person not covered by clause (a), (ab), (ac) or (ad) who,—

    (i) has been charged to tax in respect of any of the two preceding tax years;

    (ii) claims a loss carried forward under this Ordinance for a tax year;

    (iii) owns immovable property with a land area of five hundred square yards or more or owns any flat located in areas falling within the municipal limits existing immediately before the commencement of Local Government laws in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory;

    (iv) owns immoveable property with a land area of five hundred square yards or more located in a rating area;

    (v) owns a flat having covered area of two thousand square feet or more located in a rating area;

    (vi) owns a motor vehicle having engine capacity above 1000 CC;

    (vii) has obtained National Tax Number; or

    (viii) is the holder of commercial or industrial connection of electricity where the amount of annual bill exceeds rupees five hundred thousand;

    (ix) is a resident person registered with any chamber of commerce and industry or any trade or business association or any market committee or any professional body including Pakistan Engineering Council, Pakistan Medical and Dental Council, Pakistan Bar Council or any Provincial Bar Council, Institute of Chartered Accountants of Pakistan

    or Institute of Cost and Management Accountants of Pakistan ; or

    (x) is a resident person being an individual required to file foreign income and assets statement under section 116A.

    (1A) Every individual whose income under the head ‘Income from business’ exceeds rupees three hundred thousand but does not exceed rupees four hundred thousand in a tax year is also required to furnish return of income from the tax year.”

    The mentioned above classes of taxpayers except for companies are required to file annual return by September 30 and the last date for companies is December 31.

    The individuals or companies required to file return by September 30, the date was extended up to December 08, 2020 for tax year 2020.

    In case such persons have failed to file their return they now have to pay late filing surcharge as prescribed under Section 182 of the Income Tax Ordinance, 2001.

    Under Section 182:

    Where any person fails to furnish a return of income as required under section 114 within the due date.

    Such person shall pay a penalty equal to 0.1% of the tax payable in respect of that tax year for each day of default subject to a maximum penalty of 50% of the tax payable provided that if the penalty worked out as aforesaid is less than forty thousand rupees or no tax is payable for that tax year such person shall pay a penalty of forty thousand rupees:

    Provided that If seventy-five percent of the income is from salary and the amount of income under salary is less than five million Rupees, the minimum amount of penalty shall be five thousand Rupees.

    Where any person fails to furnish wealth statement or wealth reconciliation statement then such person shall pay a penalty of 0.1% of the taxable income per week or Rs.100,000 whichever is higher.

    The late filers will also require to pay a fee for appearance in Active Taxpayers List (ATL) for tax year 2020, which will be issued on March 01, 2021.

    Section 182A. Return not filed within due date.—(1) Notwithstanding anything contained in this Ordinance, where a person fails to file a return of income under section 114 by the due date as specified in section 118 or by the date as extended by the Board under section 214A or extended by the Commissioner under section 119, as the case may be, such person shall—

    (a) not be included in the active taxpayers’ list for the year for which return was not filed within the due date:

    Provided that without prejudice to any other liability under this Ordinance, the person shall be included in the active taxpayer ‘ list on filing return after the due date, if the person pays surcharge at Rupees-

    (i) twenty thousand in case of a company;

    (ii) ten thousand in case of an association of persons;

    (iii) one thousand in case of an individual.

    Persons fail to comply with filing requirement can face harsh action including imprisonment.

    Section 191. Prosecution for non-compliance with certain statutory obligations. —(1) Any person who, without reasonable excuse, fails to —

    (a) comply with a notice under sub-section (3)and sub-section (4) of section 114 or sub-section (1) of section 116; shall commit an offence punishable on conviction with a fine or imprisonment for a term not exceeding one year, or both.

    (2) If a person convicted of an offence under clause (a) of sub-section (1) fails, without reasonable excuse, to furnish the return of income or wealth statement to which the offence relates within the period specified by the Court, the person shall commit a further offence punishable on conviction with a fine not exceeding fifty thousand rupees or imprisonment for a term not exceeding two years, or both.

    Section 192: Prosecution for false statement in verification. — Any person who makes a statement in any verification in any return or other document furnished under this Ordinance which is false and which the person knows or believes to be false, or does not believe to be true, the person shall commit an offence punishable on conviction with a fine upto hundred thousand rupees or imprisonment for a term not exceeding three years, or both.

  • ITO-2001 defines resident, non-resident persons

    ITO-2001 defines resident, non-resident persons

    ISLAMABAD: Income Tax Ordinance, 2001 has defined resident and non-resident Pakistan for the purpose of apply rate of income tax on domestic source of income.

    The Federal Board of Revenue (FBR) issued ITO 2001 (updated June 30, 2020) and differentiated residents and non-resident Pakistanis.

    Various sections of Income Tax Ordinance, 2001 explains the definition:

    Section 81. Resident and non-resident persons

    Sub-section (1): A person shall be a resident person for a tax year if the person is —

    (a) a resident individual, resident company or resident association of persons for the year; or

    (b) the Federal Government.

    Sub-section (2): A person shall be a non-resident person for a tax year if the person is not a resident person for that year.

    Section 82 – Resident individual: — An individual shall be a resident individual for a tax year if the individual —

    (a) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year;

    (ab) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and twenty days or more in the tax year and, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixty-five days or more; or

    (c) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

    Section 83 – Resident company: A company shall be a resident company for a tax year if —

    (a) it is incorporated or formed by or under any law in force in Pakistan;

    (b) the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year; or

    (c) it is a Provincial Government or Local Government in Pakistan.

    Section 84 – Resident association of persons: — An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.