Student Name: Tahmina aslam

Registration No CE522933

Semester: Autumn, 2022

Q.1Discuss in detail the taxation of income from business under
the Income Tax Ordinance 2001.

Income Tax Ordinance, 2001 was promulgated on 13th September 2001. It shall come into force
on July 01, 2002 and will be applicable from the said date. The new income tax law is in simple
language and is easy to understand. You can now prepare your income tax return and compute
your tax liability without any diffi culty. The new income tax law will bring a complete change
in the philosophy of income tax proceedings and it will make life easier. The salient features
are:

 No assessing offi cer will determine your income and compute your tax liability. Now you
will yourself declare your income and determine your tax liability.

 Your income tax return shall be accepted without any conditi ons. There will be no
compulsory enhancement of tax liability over previous year to qualify for acceptance.
Even your loss return shall also qualify for acceptance.

 Filing of your income tax return itself will be an assessment order and your eligibility for
refund will fl ow from your tax return.
  A certain percentage of returns fi led shall be selected for tax audit on the basis of risk
assessment to verify the accuracy and correctness of your income tax return.

 Tax audit will not necessarily mean an amendment of the assessment originally made
based by you in your return of income.

 Your original assessment can only be amended on the basis of informati on acquired
during tax audit or any other source.

 If selected for audit, there will be no pre-designated auditors to carry out audit. The
offi cials making selecti on for audit will be diff erent from those who do actual audit. In
other words you have no designated Income Tax Offi cer holding jurisdicti on on you.

Thus universal self-assessment in its true sense will be available to all taxpayers irrespecti ve of
quantum, status, locati on or size. This is the fi rst such experience in this part of the world. The
new law and the universal self-assessment system will take away the discreti onary powers of
the tax collectors and place great responsibility and obligati on on you as a taxpayer and an
honorable citi zen. The new Income Tax Ordinance, 2001 and its salient features, briefl y
explained above, are not workable without adequate records to support the items reported by
you on the income tax return and allied statements. The Central Board of Revenue is fully
aware of your (small taxpayers) problems and diffi culti es in maintaining adequate records.
Therefore only bare minimum books of account; documents and records (that you generally
maintain to run your business) have been prescribed.

The taxable income of a person for a tax year shall be the total income person’s income under
all heads of income for the year person’s income exempt from tax under any of the provisions
of this Ordinance.

For the purposes of the impositi on of tax and the computati on of total income, all income shall
be classifi ed under the following heads, namely:

 Salary

 Income from Property

 Income from Business

 Capital Gains

 Income from Other Sources

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”. Salary means any amount received
by an employee from any employment, whether of a revenue or capital nature, including — 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
 any perquisite, whether convertible to money or not;

 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. 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;

 the amount of any profits in lieu of, or in addition to, salary or wages, including any amount received

as consideration for a person’s agreement to enter into an employment relationship;

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

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

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

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

 any pension or annuity, or any supplement to a pension or annuity; and

 any amount chargeable to tax as “Salary” under section 14.

 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.

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

 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 —
 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;

by a past employer or a prospective employer; or

to the employee or to an associate of the employee 1[or to a third party under an agreement with the
employee or an associate of the employee.

Where, in a tax year, an obligation of an employee to pay or repay an amount owing by the employee to the
employer is waived by the employer, the amount chargeable to tax to the employee under the head “Salary”
for that year shall include the amount so waived. Where, in a tax year, an obligation of an employee to pay or
repay an amount 8[owing]by the employee to another person is paid by the employer, the amount chargeable
to tax to the employee under the head “Salary” for that year shall include the amount so paid.

Where, in a tax year, property is transferred or services are provided by an employer to an employee, the
amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market
value of the property or services determined at the time the property is transferred or the services are
provided, as reduced by any payment made by the employee for the property or services.

Income from property

The rent received or receivable by a person 1 for a tax year, other than rent exempt from tax under this
Ordinance, shall be chargeable to tax in that year under the head “Income from Property”.

Subject to sub-section (3), “rent” means any amount received or receivable by the owner of land or a building
as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes
any forfeited deposit paid under a contract for the sale of land or a building.

This section shall not apply to any rent received or receivable by any person in respect of the lease of a
building together with plant and machinery and such rent shall be chargeable to tax under the head “Income
from Other Sources”. Where any amount is included in rent received or receivable by any person for the
provision of amenities, utilities or any other service connected with the renting of the building, such amount
shall be chargeable to tax under the head “Income from Other Sources”. Subject to sub-section (5), where the
rent received or receivable by a person is less than the fair market rent for the property, the person shall be
treated as having derived the fair market rent for the period the property is let on rent in the tax year.

Sub-section (4) shall not apply where the fair market rent is included in the income of the lessee chargeable to
tax under the head “Salary”.

 In respect of repairs to a building, an allowance equal to one-fifth of the rent chargeable to tax in respect
of the building for the year, computed before any deduction allowed under this section;

 any premium paid or payable by the 7[ ] 8[person] in the year to insure the building against the risk of
damage or destruction;
  any local rate, tax, charge or cess in respect of the property or the rent from the property paid or
payable by the 9[ ] 10[person] to any local authority or government in the year, not being any tax
payable under this Ordinance;

 any ground rent paid or payable by the 11[ ] 12[person] in the year in respect of the property;

 any profit paid or payable by the 13[ ] 14[person] in the year on any money borrowed including by way
of mortgage, to acquire, construct, renovate, extend or reconstruct the property

Where any unpaid rent allowed as a deduction under clause (j) of sub-section (1) is wholly or partly recovered,
the amount recovered shall be chargeable to tax in the tax year in which it is recovered.

Where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to tax
under the head “Income from Property” and the person has not paid the liability or a part of the liability to
which the deduction relates within three years of the end of the tax year in which the deduction was allowed,
the unpaid amount of the liability shall be chargeable to tax under the head “Income from Property” in the first
tax year following the end of the three years. Where an unpaid liability is chargeable to tax as a result of the
application of sub-section (3) and the person subsequently pays the liability or apart of the liability, the person
shall be allowed a deduction for the amount paid in the tax year in which the payment is made. Any
expenditure allowed to a person under this section as a deduction shall not be allowed as a deduction in
computing the income of the person chargeable to tax under any other head of income.

The provisions of section 21 shall apply in determining the deductions allowed to a person under this section in
the same manner as they apply in determining the deductions allowed in computing the income of a person
chargeable to tax under the head “Income from Business”.

Q.2 a. What is advance tax and withholding tax? Explain

the legal provisions as per the Income Tax Ordinance
2001.
Withholding Tax Regime is a global phenomenon and in Pakistan the major source of the
Federal revenue collected on national level. The collection as well as dependence on
Withholding Taxes is on the rise over the years. Out of total Direct Taxes collection of
Rs, 740(b) for financial year 2012 Rs, 422(b) with percentage share of 57% came from
various Withholding Taxes, which are characterized by their adjustable and presumptive
nature. Withholding Taxes regime in one or the other way is part of tax system ever since
imposition of direct taxes by the governments and taxpayers on two scores;
 To the government, provides revenue regularly throughout the year for its expenditure
and operations.
 To the taxpayers, provides an opportunity to discharge their obligations in
manageable instalments.
In recent years, globalization has forced many countries to alter their economies to
harmonize tax polices and alignment thereof with new trade and investment policies
embodied in the free trade agreements. The concept of “Hang Together” is more relevant
today than ever before. Countries can neither close their borders nor their economies.
Tax policies can not be isolated from the international economies either. In view of such
competitive environment there was a need to have an organization to monitor and manage
the system of Withholding Tax Regime, therefore the Directorate General of Withholding
Taxes was created through Finance Act of 2008 under section 230A of the Income Tax
Ordinance 2001.
Withholding is an act of deduction or collection of tax at source, which has generally
been in the nature of an advance tax payment. It is an effective mechanism and
important/timely source of revenue. Their contribution is about 41 percent of total direct
tax revenues. Increase from Rs.5(b) in 1991 to above Rs 422(b) in 2012 speaks of
exponential growth and consequential heavy reliance on withholding taxes in Pakistan.
Under the repealed Income Tax Act, 1922, tax was deducted from two main sources of
income; namely, salaries and interest on securities. Over the period of time, Withholding
Tax net was extended, by steadily introducing different Provisions in the Tax Laws. The
repealed Income Tax Ordinance, 1979, brought in all the provisions of the Income Tax
Act, 1922. However, in the 1990s, withholding tax net was expanded extensively by
providing for withholding tax on a wider variety of transactions and making most of them
presumptive. Provisions of the Income Tax Ordinance, 2001, are more or less the same,
except for a few changes and additions. Important withholding provisions relate to
salary, imports, exports, commission and brokerage, dividend, contracts, profit on debt,
utilities, vehicles tax, stock exchange-related provisions and non-residents, etc., with
varying rates. Sales Tax Act of 1990 also provides for mechanism of Withholding. Vide
SRO No. 660(1)/2007 dated 30th June 2007 special procedure under the title of Sales Tax
special procedure (Withholding Tax) Rules 2007, was introduced. Though within the
Sales Tax structure share of Withholding Tax is quite minor and its scope is limited only
to five types of Withholding Agents. But still there is further room for broadening its
base.
b. Compute the tax liability of a registered firm XY where X & Y equal partners are
working.
Expenses Rs. Revenues Rs.
Purchases 180,000
Wages to workers 20,000 Sales 800,000
Maintenance 10,000 Interest on bank Deposits 15,000
Personal expenses X 4000
Personal expenses Y 5000
Commission X 10,000
Commission Y 9000
Depreciation 12,000
Salaries 50,000
Net Profit 515,000
815,000 815,000
Additional information:
1. Tax deprecation is of Rs. 20,000
2. The travelling expenses of Rs. 12000 have not been recorded.
3. The salaries include salary of X of Rs. 20000 & salary of Y of Rs. 22000.
4. The maintenance expenses include a payment of Rs. 3000 to Mr. X.
Q.3 a. Calculate the tax liability of M.Y Ltd from the
following:
Expenses Rs. Revenues Rs.
Cost of goods sold 510,000 Sales 11,00,000
Travelling 15,000 Dividend received 14,000
Legal Fee 10,000 Capital gain on sale of shares of
Zakat Fee 5000 public company 25000
Rent 16000
Withholding Tax paid 11,000
Net Profit 572,000
11,39,000 11,39,000
Additional information:
1. Tax deprecation amounts to Rs. 35,000
2. Cost of goods sold include a payment of Rs. 12000 to an advertising
agency for last year advertisement.
 3. Travelling expenses of Rs. 5000 are recorded without invoices proof.
4. The corporate income tax rate is 29% & alternate corporate tax rate is 17%.

b. What are the corporate tax credits under the Income Tax
Ordinance 2001.Explain in detail.

The Income Tax Ordinance, 2001 (i.e the local tax law) provides for exemptions of whole or part of tax,
reduced applicable tax rates, inapplicability of certain provisions, and reduction in tax liability. These
exemptions are either based on specific categories of taxpayers or for a specific time period.

Significant tax credits/exemptions under the local income tax law are provided as under:

 Profits and gains derived from an electric power generation project set up in Pakistan are exempt from
tax. This exemption is restricted to persons entering into agreement with, or to whom a letter of intent
is issued by, the Federal or Provincial Government for setting up an electric power generation project
in Pakistan up to 30 June 2021, and who obtained letter of support on or before 30 June 2023.
 Any income derived by a collective investment scheme or a REIT scheme (Real-estate investment trust)
shall be exempt from tax, if not less than 90% of its accounting income of the year, as reduced by
capital gains, is distributed amongst the unit holders. Profit & gains accruing to a person on the sale of
immovable property to a REIT scheme shall be exempt from tax till 30 June 2023. Reduced withholding
tax rate of 3% (instead of 8%) is prescribed for payment against management services provided by REIT
management companies.

 Profits and gains derived from a transmission line project setup in Pakistan on or after 1 July 2015 are
exempt from income tax for a period of ten years, subject to certain conditions. , which inter-alia
includes projects setup till 30 June 2022.

 Low-cost housing projects have been incentivised by allowing a reduction in tax liability (arising on
profits and gains) by 50%, subject to fulfilment of certain conditions, which inter-alia includes project
that are set up until 30 June 2024.

 The tax payable on the income, profits, and gains of projects of low-cost housing developed or
approved by the Naya Pakistan Housing and Development Authority (NAPHDA) or under the Ehsaas
Programme shall be reduced by 90%. Moreover, in case of banking companies, the taxable income
arising from additional advances to NAPHDA for low-cost housing schemes shall be taxed at the rate of
10%. However, the said relief shall be available only for the projects that commence on or before 30
June 2024.

 Income derived by an enterprise set up in ‘special economic zones’ is exempt from tax for a period of
ten years, starting from commencement of commercial operations/production, subject to certain
conditions. These ‘special economic zones’ have been established in different territories of the
country.

 Profit and gains derived from a bagasse/biomass-based cogeneration power project having certain
level of capacity is made exempt from income tax. A reduced WHT rate (7.5%) is introduced on
payment of dividend by these entities, subject to certain conditions.

 Profit and gains derived by new deep conversion refineries (approved by the Federal Government
before 31 December 2021) have also been made exempt from income tax for 20 years (10 years for
existing refineries from date of upgrading), subject to certain conditions.

 Profit and gains derived from a sale of electricity by the National Power Parks Management Company
(Private) Limited or by its demerged entities have been made exempt from income tax commencing
 from commercial operations dates and continuing after the dates of change of ownership through
privatisation.

 Income from cinema operations has been exempted from tax for a period of five years from the
commencement of its operations.

 Profit and gains derived by venture capital companies and venture capital funds till 30 June 2025.

 Additionally, tax exemption is provided to certain charitable organisation prescribed and enlisted in

the local law, subject to certain conditions.

Q.4 a. Mr. Raheem has recorded the following transection

for the last tax year 2018. (Tax rates are given at the end of
the assignment)

1. Rent received rs. 30,000 per month.

2. Income from fruit selling business Rs. 200000

3. Income from Sale of juices Rs. 10,00,000

4. Ground rent received= Rs. 30000

5. Royalty income received= 60000

6. Capital gain on sale of shares of a pvt Ltd. Of Rs. 70000. The holiday period is 6 months.

7. Donation to a govt. school of Rs. 15000

8. Share of income received from AOP Rs. 90000

9. Mr. Raheem is claiming a senior citizen tax rebate

b. Explain in detail the provisions of group taxation as per the Income Tax Ordinance 2001.

Every time you read about any aspect of income tax, you will come across several sections and
provisions under the income tax laws. However, not all of us have a clear understanding of what it is
exactly and what it consists of. Here is a brief structure of the important components of income tax
laws every common man must know.

Income Tax Act, 1961

The Income Tax Act, 1961 is an act to levy, administer, collect, and recover income tax in India. The
act is effective from 1 April 1962. It consists of 298 sections and 14 schedules. The act helps determine
a taxpayer’s taxable income, tax liability, appeals, penalties, and prosecution. The government has
been making amendments to the act from time to time.

Income Tax Rules, 1962

Income tax rules act as a supplement to the Income Tax Act, 1961. Income tax rules are effective from
1 April 1962. The Central Board of Direct Taxes (CBDT) has the power to amend the income tax
rules. For example, Section 10 (13A) (1) of the Income Tax Act states that the house rent
allowance can be exempted up to a certain limit. Rule 2A under income tax rules states how the limit
can be calculated.
The Finance Act
The Finance Minister of India presents a Finance Bill every year that proposes amendments to the
direct and indirect taxes. When both the houses of the Parliament passes the bill, it receives consent
from the President of India and becomes the Finance Act. Such amendments will become a part of the
Income Tax Act and will be implemented from the first day of the next financial year usually.
In addition, the Finance Act consists of four parts:
Part I: It specifies the rate at which income tax is levied for various income categories during a
financial year.
Part II: It specifies the rate at which tax must be deducted at source during the financial year.
Part III: It states the changes in income tax rates in specific cases, i.e. the rate for income chargeable
under salary head and rate for computing advance tax for a financial year.
Part IV: It explains the rules for calculating agricultural income in this part.

Circulars
In order to avoid confusion and make the provisions of the Income Tax Act more clear, CBDT issues
circulars from time to time.

Government Notifications
The Central Government has the authority to issue notifications on various provisions according to the
Income Tax Act and income tax rules. The Ministry of Finance issues these notifications on exemption
of payments to employees such as allowance, pension, cost inflation, leave encashment, index for long-
term capital gains, and exemption of interest on a certain security.

Court Decision (Judicial Pronouncements)

 The decisions given by the Supreme Court becomes law and are applicable to all courts,
appellate authorities, income tax authorities, and the assessees. If there are two contradictory
decisions given, the decision given by the larger bench prevails.

 High Court decisions bind the tribunal, income tax authorities, and all assessees in the
jurisdiction.
It is always advisable to have a basic knowledge of the income tax rules and acts you have to abide by.
If you find it interesting, you can go on and read about these sections in detail to build your
knowledge.

Q.5 Calculate Sales Tax Due/Refundable in each case:

a) Supplies to registered person Rs. 12,00,000.

b) Supplies to an NGO Rs. 100,000.

c) Supplies to non-registered persons on discount (5%) Rs.80,000.

d) Supplies to registered government supplies Rs. 100,000.

e) Purchases from registered persons Rs. 500,000.

f) Imports of Raw Materials Rs. 40,000.

g) Purchase from non-registered persons on discount (10%)= Rs. 50,000

h) Sales tax refund due Rs. 10,000

b. Explain in detail the key features of the customs Act, 1969.
The Federal Government may, by notification in the official Gazette, declare that any or all of the
provisions of the Customs Act, 1969 (IV of 1969), shall, with such modifications and alterations it may
specify, consider necessary or desirable to adapt them to the circumstances, be applicable in regard to
like matters in respect of the duties levied by sections 3 and 8.
i. All goods imported, produced or manufactured in Pakistan and services provided or rendered except
such goods and services as are specified in the First Schedule shall be exempt from whole of excise
duties 1[levied under section 3]: Provided that goods and services specified in the Third Schedule
shall be exempt from duty subject to such conditions and restrictions, if any, specified therein and no
adjustment in terms of section 6 shall be admissible in respect of goods exempt from duty of excise
whether conditionally or otherwise.
ii. The Federal Government may by notification in the official Gazette, exempt subject to such
conditions as may be specified therein, any goods or class of goods or any services or class of services
from the whole or any part of the duty leviable under this Act.
iii. The Board may, by special order, exempt from the payment of the whole or any part of the duty
leviable under this Act, under circumstances of exceptional nature, any goods or services on which
such duty is leviable.
iv. Notwithstanding the provisions of sub-sections (2) and (3), the Federal Government or the Board
may, by a notification in the official Gazette, for reasons to be recorded, exempt any person or class of
persons from payment of the whole or part of the default surcharge imposed under section 8 2[and
penalties] subject to the such conditions or limitations as may be specified in such notification.