INCOME TAX MANUAL
PART I
INCOME TAX ORDINANCE, 2001
AMENDED UPTO
30th June, 2011
GOVERNMENT OF PAKISTAN
FEDERAL BOARD OF REVENUE
(REVENUE DIVISION)
….
INCOME TAX MANUAL
PART I
INCOME TAX ORDINANCE, 2001
AMENDED UPTO 30TH JUNE, 2011
Published by:
FACILITATION AND TAXPAYERS
EDUCATION WING
INCOME TAX ORDINANCE 2001
TABLE OF CONTENTS
CHAPTER 1
PRELIMINARY
1.
Short title, extent and commencement
1
2.
Definitions
1
3.
Ordinance to override other laws
22
CHAPTER II
CHARGE OF TAX
4.
Tax on taxable income
23
5.
Tax on dividends
24
6.
Tax on certain payments to non-residents
24
7.
Tax on shipping and air transport income of a non-resident person
24
8.
General provisions relating to taxes imposed under sections 5, 6 and 7
25
CHAPTER III
TAX ON TAXABLE INCOME
PART I
COMPUTATION OF TAXABLE INCOME
9.
Taxable income
27
10.
Total income
27
11.
Heads of income
27
PART II
HEAD OF INCOME
SALARY
12.
Salary
29
13.
Value of perquisites
31
14.
Employee share schemes
34
PART III
HEAD OF INCOME
INCOME FROM PROPERTY
15.
Income from property
37
16.
Non-adjustable amounts received in relation to buildings
38 17. Omitted by the Finance Act, 2006.
PART IV
HEAD OF INCOME
INCOME FROM BUSINESS
Division I
Income from Business
18.
Income from business
40
19.
Speculation business
41
Division II
Deductions
General Principles
20.
Deductions in computing income chargeable under the head “Income from Business”
42
21.
Deductions not allowed
43
Division III
Deductions
Special Provisions
22.
Depreciation
45
23.
Initial allowance
49
23A.
First Year Allowance
50
23B.
Accelerated depreciation to alternate energy projects.
50
24.
Intangibles
50
25.
Pre-commencement expenditure
53
26.
Scientific research expenditure
53
27.
Employee training and facilities
54
28.
Profit on debt, financial costs and lease payments
54
29.
Bad debts
56
29A
Provision regarding consumer loans
57
30.
Profit on non-performing debts of a banking company or development finance institution
58
31.
Transfer to participatory reserve
58
Division IV
Tax Accounting
32.
Method of accounting
59
33.
Cash-basis accounting
59
34.
Accrual-basis accounting
59
35.
Stock-in-trade
61
36.
Long-term contracts
63
PART V
HEAD OF INCOME
CAPITAL GAINS
37.
Capital gains
64
37A.
Capital gain on disposal of securities
65
38.
Deduction of losses in computing the amount chargeable under the head “Capital Gains”
66
PART VI
HEAD OF INCOME
INCOME FROM OTHER SOURCES
39.
Income from other sources
68
40.
Deductions in computing income chargeable under the head “Income from Other Sources”
70
PART VII
EXEMPTIONS AND TAX CONCESSIONS
41.
Agricultural income
72
42.
Diplomatic and United Nations exemptions
72
43.
Foreign government officials
73
44.
Exemptions under international agreements
73
45.
President’s honours
74
46.
Profit on debt
74
47.
Scholarships
75
48.
Support payments under an agreement to live apart
75
49.
Federal and Provincial Government, and local authority income
75
50.
Foreign-source income of short-term resident individuals
76
51.
Foreign-source income of returning expatriates
76 52. Omitted by Finance Ordinance, 2002
53.
Exemptions and tax concessions in the Second Schedule
77
54.
Exemptions and tax provisions in other laws
77
55.
Limitation of exemption
78
PART VIII
LOSSES
56.
Set off of losses
79
56A.
Set off of losses of companies operating hotels.
79
57.
Carry forward of business losses
79
57A.
Set off of losses consequent to amalgamation
80
58.
Carry forward of speculation business losses
81
59.
Carry forward of capital losses
82
59A.
Limitations on set off and carry forward of losses
82
59AA.
Group Taxation.
83
59B.
Group relief
84
PART IX
DEDUCTIBLE ALLOWANCES
60.
Zakat
87
60A.
Workers’ Welfare Fund
87
60B.
Workers’ Participation Fund
87
PART X
TAX CREDITS
61.
Charitable donations
88
62.
Tax credit for investment in shares and insurance
89
63.
Contribution to an Approved Pension Fund.
91
64.
Profit on debt
92
65.
Miscellaneous provisions relating to tax credits
93
65A.
Tax credit to a person registered under the Sales Tax Act, 1990
94
65B.
Tax credit for investment
94
65C.
Tax credit for enlistment
95
65D.
Tax credit for newly established undertakings
95
65E.
Tax credit for industrial undertakings established before the first day of July, 2011
96
CHAPTER-IV
COMMON RULES
PART I
GENERAL
66.
Income of joint owners
98
67.
Apportionment of deductions
98
68.
Fair market value
98
69.
Receipt of income
99
70.
Recouped expenditure
99
71.
Currency conversion
99
72.
Cessation of source of income
99
73.
Rules to prevent double derivation and double deductions
100
PART II
TAX YEAR
74.
Tax year
101
PART III
ASSETS
75.
Disposal and acquisition of assets
103
76.
Cost
103
77.
Consideration received
105
78.
Non-arm’s length transactions
106
79.
Non-recognition rules
106
CHAPTER V
PROVISIONS GOVERNING PERSONS
PART I
CENTRAL CONCEPTS
Division I
Persons
80.
Person
108
Division II
Resident and Non-resident Persons
81.
Resident and non-resident persons
109
82.
Resident individual
110
83.
Resident company
110
84.
Resident association of persons
110
Division III
Associates
85.
Associates
110
PART II
INDIVIDUALS
Division I
Taxation of Individuals
86.
Principle of taxation of individuals
113
87.
Deceased individuals
113
Division II
Provisions Relating to Averaging
88.
An individual as a member of an association of persons
114
88A.
Share profits of company to be added to taxable income
114
89.
Authors
115
Division III
Income Splitting
90.
Transfers of assets
115
91.
Income of a minor child
116
PART III
ASSOCIATIONS OF PERSONS
92.
Principles of taxation of associations of persons
117 93. Omitted by the Finance Act, 2007.
PART IV
COMPANIES
94.
Principles of taxation of companies
118
95.
Disposal of business by individual to wholly-owned company
118
96.
Disposal of business by association of persons to wholly-owned company
120
97.
Disposal of asset between wholly-owned companies
121
97A.
Disposal of asset under scheme of arrangement and reconstruction.
123
PART V
COMMON PROVISIONS APPLICABLE TO ASSOCIATIONS OF PERSONS AND COMPANIES
98.
Change in control of an entity
125
PART VA
TAX LIABILITY IN CERTAIN CASES
98A.
Change in the constitution of an association of persons
126
98B.
Discontinuance of business or dissolution of an association of persons
126
98C.
Succession to business, otherwise on death
126
CHAPTER-VI
SPECIAL INDUSTRIES
PART I
INSURANCE BUSINESS
99.
Special provisions relating to insurance business
128
PART II
OIL, NATURAL GAS AND OTHER MINERAL DEPOSITS
100.
Special provisions relating to the production of oil and natural gas, and exploration and extraction of other mineral deposits
129
100A.
Special provisions relating to banking business.
129
CHAPTER VII
INTERNATIONAL
PART I
GEOGRAPHICAL SOURCE OF INCOME
101.
Geographical source of income
130
PART II
TAXATION OF FOREIGN-SOURCE INCOME OF RESIDENTS
102.
Foreign source salary of resident individuals
133
103.
Foreign tax credit
133
104.
Foreign losses
134
PART III
TAXATION OF NON-RESIDENTS
105.
Taxation of a permanent establishment in Pakistan of a non-resident person
135
106.
Thin capitalization
137
PART IV
AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND
PREVENTION OF FISCAL EVASION
107.
Agreements for the avoidance of double taxation and prevention of fiscal evasion
139
CHAPTER VIII
ANTI-AVOIDANCE
108.
Transactions between associates
140
109.
Re-characterization of income and deductions
140
110.
Salary paid by private companies
140
111.
Unexplained income or assets
140
112.
Liability in respect of certain security transactions
142
CHAPTER IX
MINIMUM TAX
113.
Minimum tax on the income of certain persons.
143
113A.
Tax on income of certain persons
144
113B.
Taxation of income of certain retailers
145
CHAPTER X
PROCEDURE
PART I
RETURNS
114.
Return of income
147
115.
Persons not required to furnish a return of income
151
116.
Wealth statement
153
117.
Notice of discontinued business
155
118.
Method of furnishing returns and other documents
155
119.
Extension of time for furnishing returns and other documents
157
PART II
ASSESSMENTS
120.
Assessments
159
120A.
Investment Tax on income
160
121.
Best judgment assessment
161
122.
Amendment of assessments
162
122A.
Revision by the Commissioner
165
122B.
Revision by the Regional Commissioner
166
122C.
Provisional assessment
166
123.
Provisional assessment in certain cases
167
124.
Assessment giving effect to an order
167
124A.
Powers to tax authorities to modify orders, etc.
169
125.
Assessment in relation to disputed property
169
126.
Evidence of assessment
169
PART III
APPEALS
127.
Appeal to the Commissioner (Appeals)
171
128.
Procedure in appeal
173
129.
Decision in appeal
173
130.
Appointment of the Appellate Tribunal
175
131.
Appeal to the Appellate Tribunal
177
132.
Disposal of appeals by the Appellate Tribunal
178
133.
Reference to High Court
180 134. Omitted by Finance Act, 2005
134A.
Alternative Dispute Resolution
182 135. Omitted by the Finance Ordinance, 2002
136.
Burden of proof
184
PART IV
COLLECTION AND RECOVERY OF TAX
137.
Due date for payment of tax
185
138.
Recovery of tax out of property and through arrest of taxpayer
186
138A.
Recovery of tax by District Officer (Revenue)
187
138B.
Estate in bankruptcy
187
139.
Collection of tax in the case of private companies and associations of persons
187
140.
Recovery of tax from persons holding money on behalf of a taxpayer
188
141.
Liquidators
189
142.
Recovery of tax due by non-resident member of an association of persons
191
143.
Non-resident ship owner or charterer
191
144.
Non-resident aircraft owner or charterer
192
145.
Assessment of persons about to leave Pakistan
193
146.
Recovery of tax from persons assessed in Azad Jammu and Kashmir
193
146A.
Initiation, validity, etc., of recovery proceedings.
194
146B.
Tax arrears settlement incentives scheme
194
PART V
ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE
Division I
Advance Tax Paid by the Taxpayer
147.
Advance tax paid by the taxpayer
196
Division II
Advance Tax Paid to a Collection Agent
148.
Imports
201
Division III
Deduction of Tax at Source
149.
Salary
204
150.
Dividends
205
151.
Profit on debt
205
152.
Payments to non-residents
206
153.
Payments for goods, services and contracts
209
153A.
Payments to non-resident media persons
214
154.
Exports
214
155.
Income from property
215
156.
Prizes and winnings
216
156A.
Petroleum products
216
156B.
Withdrawal of balance under pension fund
217 157. Omitted by the Finance Ordinance, 2002
158.
Time of deduction of tax
218
Division IV
General Provisions Relating to the Advance Payment of Tax or the Deduction of Tax at Source
159.
Exemption or lower rate certificate
218
160.
Payment of tax collected or deducted
219
161.
Failure to pay tax collected or deducted
220
162.
Recovery of tax from the person from whom tax was not collected or deducted
221
163.
Recovery of amounts payable under this Division
221
164.
Certificate of collection or deduction of tax
221
165.
Statements
222
166.
Priority of tax collected or deducted
224
167.
Indemnity
224
168.
Credit for tax collected or deducted
224
169.
Tax collected or deducted as a final tax
226
PART VI
REFUNDS
170.
Refunds
229
171.
Additional payment for delayed refunds
230
PART VII
REPRESENTATIVES
172.
Representatives
231
173.
Liability and obligations of representatives
233
PART VIII
RECORDS, INFORMATION COLLECTION AND AUDIT
174.
Records
234
175.
Power to enter and search premises
234
176.
Notice to obtain information or evidence
236
177.
Audit
237
178.
Assistance to Commissioner
240
179.
Accounts, documents, records and computer-stored information not in Urdu or English language
240
180.
Power to collect information regarding exempt income
240
PART IX
NATIONAL TAX NUMBER CERTIFICATE
181.
Taxpayer’s Registration
241
181A.
Active taxpayers’ list
241
PART X
PENALTY
182.
Exemption from penalty and default surcharge
242
183.
Penalty for non-payment of tax
246
184. Omitted by the Finance Act, 2010.
185. Omitted by the Finance Act, 2010.
186. Omitted by the Finance Act, 2010.
187. Omitted by the Finance Act, 2010.
188. Omitted by the Finance Act, 2010.
189. Omitted by the Finance Act, 2010.
190. Omitted by the Finance Act, 2010.
PART XI
OFFENCES AND PROSECUTIONS
191.
Prosecution for non-compliance with certain statutory obligations
249
192.
Prosecution for false statement in verification
249
192A.
Prosecution for concealment of income.
250
193.
Prosecution for failure to maintain records
250
194.
Prosecution for improper use of National Tax Number Card
250
195.
Prosecution for making false or misleading statements
250
196.
Prosecution for obstructing an income tax authority
251
197.
Prosecution for disposal of property to prevent attachment
251
198.
Prosecution for unauthorized disclosure of information by a public servant
251
199.
Prosecution for abetment
252
200.
Offences by companies and associations of persons
252
201.
Institution of prosecution proceedings without prejudice to other action
252
202.
Power to compound offences
252
203.
Trial by Special Judge
253
203A.
Appeal against the order of a Special Judge
254
204.
Power to tender immunity from prosecution
254
PART XII
ADDITIONAL TAX
205.
Default surcharge
255
205A.
Reduction in default surcharge, consequential to reduction in tax or penalty
257
PART XIII
CIRCULARS
206.
Circulars
258
206A.
Advance ruling
268
CHAPTER XI
ADMINISTRATION
PART I
GENERAL
207.
Income tax authorities
259
208.
Appointment of income tax authorities
260
209.
Jurisdiction of income tax authorities
261
210.
Delegation
263
211.
Power or function exercised
264
212.
Authority of approval
265
213.
Guidance to income tax authorities
265
214.
Income tax authorities to follow orders of the Board
265
214A.
Condonation of time limit
265
214B.
Power of the Board to call for records
266
214C.
Selection for audit by the Board
266
215.
Furnishing of returns, documents etc.
267
216.
Disclosure of information by a public servant
267
217.
Forms and notices; authentication of documents
271
218.
Service of notices and other documents
271
219.
Tax or refund to be computed to the nearest Rupee
272
220.
Receipts for amounts paid
272
221.
Rectification of mistakes
272
222.
Appointment of expert
273
223.
Appearance by authorized representative
273
224.
Proceedings under the Ordinance to be judicial proceedings
276
225.
Proceedings against companies under liquidation
276
226.
Computation of limitation period
276
227.
Bar of suits in Civil Courts
277
PART II
DIRECTORATE-GENERAL OF INSPECTION
228.
The Directorate-General of Inspection and Internal Audit
278
229.
Directorate General of Training and Research
278 230. Omitted by Finance Act, 2005
230A.
Directorate-General of Withholding Taxes
280 231. Omitted by Finance Act, 2005
CHAPTER XII
TRANSITIONAL ADVANCE TAX PROVISIONS
231A.
Cash withdrawal from a bank
281
231AA.
Advance tax on transactions in bank
281
231B.
Purchase of motor cars and jeeps
282 232. Omitted by the Finance Ordinance, 2002
233.
Brokerage and Commission
283
233A.
Collection of tax by a stock exchange registered in Pakistan
283
234.
Tax on motor vehicles
284
234A.
CNG Stations.
285
235.
Electricity Consumption
285
236.
Telephone users
286
236A.
Advance tax at the time of sale by auction
287
236B.
Advance tax on purchase of air ticket
287
CHAPTER XIII
MISCELLANEOUS
237.
Power to make rules
288
237A.
Electronic record
289
238.
Repeal
289
239.
Savings
289
239A.
Transition to Federal Board of Revenue.
293
239B.
Reference to authorities
293
240.
Removal of difficulties
293
SCHEDULES
FIRST SCHEDULE
PART I
RATES OF TAX
295
Division I
Rates of Tax for Individuals and Association of Persons
295
Division IA
Rate of Tax on Certain Persons
300
Division IB
Rates of Tax for Association of Persons
300
Division II
Rates of Tax for Companies
301
Division III
Rate of Dividend Tax
302
Division IV
Rate of Tax on Certain Payments to Non-residents
302
Division V
Rate of Tax on Shipping or Air Transport Income of a Non-resident Person
302
Division VI
Income from Property
303 Division VII
Capital Gains on disposal of Securities
305 PART II
RATES OF ADVANCE TAX