The intricacies of individual taxation within the framework of an Association of Persons (AOP) are elucidated in Section 88 of the Income Tax Ordinance, 2001.
The Federal Board of Revenue (FBR) has outlined this provision in the updated ordinance, incorporating amendments introduced through the Finance Act, 2021. Let’s delve into the details of Section 88 and understand its implications for individuals associated with AOPs.
Overview of Section 88:
Section 88 addresses the taxation of individuals who are members of an Association of Persons (AOP) during a specific tax year. The focus is on situations where an individual has taxable income and concurrently derives an amount or amounts that are exempt from tax under sub-section (1) of section 92.
Formula for Tax Calculation:
To compute the tax payable on the taxable income of the individual, Section 88 introduces a formula:
Tax Payable=(A/B)XC
Here:
• A represents the amount of tax that would be assessed to the individual for the year if the exempted amounts under sub-section (1) of section 92 were chargeable to tax.
• B is the taxable income of the individual for the year, considering the exempted amounts as chargeable to tax.
• C denotes the individual’s actual taxable income for the year.
Practical Application:
Let’s break down the formula’s components for a clearer understanding:
1. Amount Taxed (A):
• This component considers the hypothetical scenario where the exempted amounts are included in the individual’s taxable income.
• It reflects the tax assessment that would apply under the assumption that the exemptions are not applicable.
2. Taxable Income with Exemptions (B):
• B represents the taxable income of the individual, taking into account the exempted amounts as if they were subject to tax.
• It establishes a baseline for calculating the proportional tax impact of the exemptions.
3. Actual Taxable Income (C):
• C is the individual’s real taxable income for the year.
• This figure forms the basis for the application of the tax calculation formula.
Significance of Section 88:
Section 88 plays a pivotal role in ensuring a fair and proportional taxation mechanism for individuals associated with AOPs. By incorporating a formula that considers both the hypothetical tax assessment and the actual taxable income, the provision aims to maintain equity in tax treatment.
Disclaimer:
It is crucial to note the disclaimer accompanying Section 88, emphasizing that the provided text is for informational purposes only. While efforts are made to provide an accurate version of the text, any errors or omissions are not the responsibility of the team at PkRevenue.com.
Conclusion:
Section 88 of the Income Tax Ordinance, 2001 introduces a nuanced approach to the taxation of individuals as members of Associations of Persons. By considering hypothetical tax scenarios alongside actual taxable income, the provision seeks to strike a balance in tax assessments, ensuring a fair and transparent taxation process. Individuals navigating the complexities of AOP taxation should refer to Section 88 for comprehensive guidance and seek professional advice if needed.
