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Tag: Income Tax Ordinance 2001

  • Tax rate on interest income for Tax Year 2020

    Tax rate on interest income for Tax Year 2020

    KARACHI: Federal Board of Revenue (FBR) issued tax rate to be imposed on interest income during Tax Year 2020.

    The FBR issued Income Tax Ordinance, 2001 updated up to June 30, 2019 incorporating changes brought through Finance Act, 2019.

    The Section 7B of the Income Tax Ordinance, 2001 explained the application of income tax on profit on debt derived by a person during a tax year.

    Section 7B: Tax on profit on debt

    Sub-Section (1): Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IIIA of Part I of the First Schedule, on every person, other than a company, who receives a profit on debt from any person mentioned in clauses (a) to (d) of sub-section (1)of section 151.

    Sub-Section (2): The tax imposed under sub-section (1) on a person, other than a company, who receives a profit on debt shall be computed by applying the relevant rate of tax to the gross amount of the profit on debt.

    Sub-Section (3): This section shall not apply to a profit on debt that –

    (a) is exempt from tax under this Ordinance; or

    (b) exceeds thirty six million Rupees.

    Division IIIA of Part I of the First Schedule for the rate of tax for profit on debt imposed under section 7B shall be—

    1. Where profit on debt does not exceed Rs.5,000,000: the tax rate shall be 15 percent

    2. Where profit on debt exceeds Rs.5,000,000 but does not exceed Rs.25,000,000: the tax rate shall be 17.5 percent

    3. Where profit on debt exceeds Rs.25,000,000 but does not exceed Rs. 36,000,000: the tax rate shall be 20 percent

    Section 151 explains persons receiving profit on debt


    Section 151: Profit on debt:

    Sub-Section (1) Where –

    (a) a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account;

    (b) a banking company or financial institution pays any profit on a debt, being an account or deposit maintained with the company or institution;

    (c) the Federal Government, a Provincial Government or a Local Government pays to any person profit on any security other than that referred to in clause (a) issued by such Government or authority; or

    (d) a banking company, a financial institution, a company referred

    to in sub-clauses (i) and (ii) of clause (b) of sub-section (2) of section 80, or a finance society pays any profit on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) to any person other than financial institution.

  • No income tax on employee share schemes

    No income tax on employee share schemes

    KARACHI: Federal Board of Revenue (FBR) has said that the value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax.

    The FBR issued Income Tax Ordinance, 2001 up to June 30, 2019 under which it explained the taxability on employee share scheme through Section 14 of the Ordinance.

    Section 14: Employee share schemes

    Sub-Section (1): The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax.

    Sub-Section (2): Subject to sub-section (3), where, in a tax year, an employee is issued with shares under an employee share scheme including as a result of the exercise of an option or right to acquire the shares, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.

    Sub-Section (3): Where shares issued to an employee under an employee share scheme are subject to a restriction on the transfer of the shares —

    (a) no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier of —

    (i) the time the employee has a free right to transfer the shares; or

    (ii) the time the employee disposes of the shares; and

    (b) the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the employee has a free right to transfer the shares or disposes of the shares, as the case may be, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.

    Sub-Section (4): For purposes of this Ordinance, where sub-section (2) or (3) applies, the cost of the shares to the employee shall be the sum of —

    (a) the consideration, if any, given by the employee for the shares;

    (b) the consideration, if any, given by the employee for the grant of any right or option to acquire the shares; and

    (c) the amount chargeable to tax under the head “Salary” under those sub-sections.

    Sub-Section (5): Where, in a tax year, an employee disposes of a right or option to acquire shares under an employee share scheme, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount of any gain made on the disposal computed in accordance with the following formula, namely:—

    A—B

    where —

    A is the consideration received for the disposal of the right or option; and

    B is the employee’s cost in respect of the right or option.

    Sub-Section (6): In this sub-section, “employee share scheme” means any agreement or arrangement under which a company may issue shares in the company to —

    (a) an employee of the company or an employee of an associated company; or

    (b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company.

  • FBR explains salary tax to be chargeable for Tax Year 2020

    FBR explains salary tax to be chargeable for Tax Year 2020

    KARACHI: Federal Board of Revenue (FBR) has explained the treatment of salary tax to be applicable during Tax Year 2020.

    The FBR issued Income Tax Ordinance, 2001 updated till June 30, 2019 and explained the taxability on salary received by an employee.

    Under Section 12 of the Income Tax Ordinance, 2001 the salary chargeable to tax as:

    Section 12: Salary

    Sub-Section (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”.

    Sub-Section (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.

    Sub-Section (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.

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

    Sub-Section (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.

    Sub-Section (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.

    Sub-Section (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.

    Sub –Section (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.

  • FBR issues computation of taxable income for tax year 2020

    FBR issues computation of taxable income for tax year 2020

    KARACHI: Federal Board of Revenue (FBR) has issued computation of taxable income for the tax year 2020 (July 01, 2019 to June 30, 2020).

    The FBR issued Income Tax Ordinance, 2001 updated till June 30, 2019 under which the computation of taxable income for tax year 2020 has also been updated.

    According to Section 09 of the Ordinance, 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.

    Section 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.

    Section 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.

  • Resident having foreign income above $10,000 required to file return, wealth statement

    Resident having foreign income above $10,000 required to file return, wealth statement

    KARACHI: A resident person having foreign income of above $10,000 is required to income tax return and wealth statement from tax year 2019 and onwards.

    According to officials of Federal Board of Revenue (FBR) the income tax return and wealth statement filing had been made mandatory for a Pakistani individual having foreign income above $10,000 or having foreign assets above $100,000.

    The officials said that the law was introduced through Finance Act, 2018 and from tax year 2019 such persons are required to file their income tax returns.

    Through Finance Act, 2018, Section 116A was inserted to Income Tax Ordinance, 2001, which stated:

    Section 116A: Foreign income and assets statement.

    (1) Every resident taxpayer being an individual having foreign income of not less than ten thousand United States dollars or having foreign assets with a value of not less than one hundred thousand United States dollars shall furnish a statement, hereinafter referred to as the foreign income and assets statement, in the prescribed form and verified in the prescribed manner giving particulars of—

    (a) the person’s total foreign assets and liabilities as on the last day of the tax year;

    (b) any foreign assets transferred by the person to any other person during the tax year and the consideration for the said transfer; and

    (c) complete particulars of foreign income, the expenditure derived during the tax year and the expenditure wholly and necessarily for the purposes of deriving the said income.

    (2) The Commissioner may by a notice in writing require any person being an individual who, in the opinion of the Commissioner on the basis of reasons to be recorded in writing, was required to furnish a foreign income and assets statement under sub-section (1) but who has failed to do so to furnish the foreign income and assets statement on the date specified in the notice.

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  • Filing wealth statement mandatory along with annual return for Tax Year 2019

    Filing wealth statement mandatory along with annual return for Tax Year 2019

    KARACHI: The filing of wealth statement has been made mandatory for persons filing annual income tax return for tax year 2019.

    (more…)
  • Persons not required filing income tax return, wealth statement

    Persons not required filing income tax return, wealth statement

    The Income Tax Ordinance, 2001, under Section 115, specifies classes of persons exempted from filing annual income tax returns and wealth statements for the tax year 2019.

    (more…)
  • FBR bars tax officials from entering taxpayers premises for search, audit

    FBR bars tax officials from entering taxpayers premises for search, audit

    ISLAMABAD: Federal Board of Revenue (FBR) has barred officers of Inland Revenue from entering premises of taxpayers for search and audit purposes.

    The FBR issued a notification on Monday and restricted IR officers for invoking Section 175(1) of Income Tax Ordinance, 2001.

    The FBR received numerous complaints of taxpayers that tax officials were abusing powers available under this section.

    The IR officers were allowed under this section to enter and search premises.—

    (1) In order to enforce any provision of this Ordinance (including for the purpose of making an audit of a taxpayer or a survey of persons liable to tax), the Commissioner or any officer authorised in writing by the Commissioner for the purposes of this section –

    (a) shall, at all times and without prior notice, have full and free access to any premises, place, accounts, documents or computer;

    (b) may stamp, or make an extract or copy of any accounts, documents or computer-stored information to which access is obtained under clause (a);

    (c) may impound any accounts or documents and retain them for so long as may be necessary for examination or for the purposes of prosecution;

    (d) may, where a hard copy or computer disk of information stored on a computer is not made available, impound and retain the computer for as long as is necessary to copy the information
    required; and

    (e) may make an inventory of any articles found in any premises or place to which access is obtained under clause (a).

    The FBR said that in exceptional cases the section may be invoked but with the prior permission of the chief commissioner of Inland Revenue.

  • Abolition of SRO 1125 does not affect income tax concessions

    Abolition of SRO 1125 does not affect income tax concessions

    KARACHI: The abolition of SRO 1125(I)/2011 has not taken away concessions available under income tax laws, the ministry of law and justice said in its opinion.

    The SRO 1125(I)/2011 has been rescinded through Finance Act, 2019 and all the benefits available under this such as zero-rating of sales tax and reduced rates of sales tax had been abolished.

    The Federal Board of Revenue (FBR) sent an Office Memorandum (OM) to the ministry of law and justice explaining that SRO 1125(I)/2011 dated December 31, 2011 had prescribed zero-rate sales tax for a particular class of taxpayers, while SRO 480(I)/2007 dated June 09, 2007 had specified the Sales Tax Procedure Rules, 2007.

    Both SROs stood rescinded through SRO 694(I)/2019 dated June 29, 2019.

    “Thus, in view of the aforesaid recession there is no doubt that the sales tax concession available under SRO 1125 and SRO 480 is no longer available.”

    The ministry said that the answer to the queries raised in the OM warrants to be divided into two parts. The first part deals with Part II of the First Schedule to the Income Tax Ordinance, 2001, which deals with imports under Section 148 of the 2001 Ordinance; while the second part deals with Section 235-B(1) of the 2001 Ordinance.

    “We have been instructed to the effect that Part II of the First Schedule to the 2001 Ordinance has given a certain reprieve to a ‘specified class of taxpayers’ for the purposes of import under section 148 of the 2001 Ordinance. In prescribing the said reprieve of income tax, the specified class of taxpayers who qualify for the said concession have been described in Part II of the First Schedule to the 2001 Ordinance to be those who are covered under SRO 1125 i.e. the notification which had prescribed the zero rated sales tax.”

    “Therefore, the precise query posed to us is whether the repeal of SRO 1125 automatically also takes away the income tax concession given under Part II of the First Schedule to the 2001 Ordinance, in respect of imports under Section 148 of the 2001 Ordinance, 2001? The simple answer is that the concession prescribed in Part II of the First Schedule to the 2001 Ordinance has not been taken away.”

    It is only for the purpose of a handy and convenient description of the person who are meant to enjoy the benefit or reprieve under Part II of the First Schedule to the 2001 Ordinance have been cross referred or defined to be the ‘specified class of taxpayers’ who qualify for the reprieve under SRO 1125.

    The said reference is only for the purpose of a convenient identification of that class which is meant to enjoy the concession under Part II of First Schedule to the Income Tax Ordinance, 2001, the ministry said.

  • FBR explains tax treatment on foreign controlled entity by resident Pakistani

    FBR explains tax treatment on foreign controlled entity by resident Pakistani

    ISLAMABAD: Federal Board of Revenue (FBR) on Tuesday explained treatment of tax on foreign controlled entity by a resident Pakistani.

    The FBR issued Circular No. 13/2019 for explaining the Section 109A of Income Tax Ordinance, 2001.

    The FBR said that a new section 109A had been introduced through Finance Act, 2018, which is effective from July 01, 2018. “Return for tax year 2019 will be the first year when provision of this section will become applicable.”

    This section states the taxable income of resident person shall include income attributable to a “Controlled Foreign Company.”

    The FBR said that in ordinary sense, income of a foreign company owned by a Pakistani resident is taxable in Pakistan only when such income is received from the non-resident entity.

    Section 109A(1) of the Ordinance is a deeming provision which essentially creates legal fiction resulting in following exceptions:

    (a) Corporate veil is pierced and income of a company is deemed to be the income of controlling entity; and

    (b) income is taxed in the year it is earned not when it is actually received. This is the consequence of the first action because when corporate veil is pierced the income becomes taxable when earned.

    Explaining the CFC, the FBR said that in order determine that a foreign company is a controlled foreign company either of the two conditions regarding control of the resident over foreign company has to be fulfilled:

    (i) more than fifty percent of the capital or voting rights of the non-resident company are held, directly or indirectly, by one or more persons resident in Pakistan; or

    (ii) more than forty percent of the capital of the voting rights of the non-resident company are held, directly or indirectly, by a single resident person in Pakistan.

    However, a foreign entity which fulfills either of the above condition, cannot be treated as a CFC if:

    (i) the shares of the company are traded on any stock exchange recognized by law of the country or jurisdiction of which the non-resident company is resident for tax purpose;

    (ii) the non-resident company derives active business income as defined under Sub-Section (3) of Section 109A; and

    (iii) tax paid, after taking into account any foreign tax credits available to the non-resident company, on the income derived or accrued, during a foreign tax year, by the non-resident company to any tax authority outside Pakistan is less than sixty percent of the tax payable on the said income under the Ordinance.

    The FBR further explained the concept of active business income: It said that ‘Active Income’ for the purpose of exclusion from CFC regime requires simultaneous fulfillment of two conditions:

    (i) cumulative income from dividend, interest, property, capital gains, royalty, annuity payment, supply of goods or services to an associate, sale or licensing of intangibles and management, holding or investment in securities and financial assets is less than 20 percent of the total income of the said company; and

    (ii) principal source of the company is under the head ‘income from business’ in the country or jurisdiction of which it is a resident.

    The FBR said that the term ‘direct control’ refers to direct ownership of capital or voting right in the foreign entity. However, the term ‘indirect control’ is very wide in its connotation. “It includes indirect control by a company through subsidiary companies in which the resident person holds capital or voting rights but also includes other companies in which the resident person exercises control through ownership of capital or voting rights.”

    Regarding ‘attributable income’ under Section 109A(1) of the Ordinance the FBR said that it is in the hand of resident person. The taxable income is income generated by a controlled company that should have been taxed ‘when earned’ instead of ‘when distributed.’

    The attributable income of the resident person shall be determined by comparing the percentage of control (whether direct or indirect) held by the said person over the CFC.

    Certain other exclusion have also been prescribed by law which are:

    (i) Income of a controlled foreign company shall be treated as zero, if it is less than ten million rupees.

    (ii) If direct/indirect capital or voting right held by the resident person is less than 10 percent in the foreign entity.