Notes on Income Tax

Tax Year 2012

Short Notes On INCOME TAX

Topics Covered: 1. Salary 2. Employee share scheme 3. Income from property 4. Capital Gains 5. Final Tax Regime 6. Tax Credit 7. Income From Business 8. Tax on Tax 9. Losses 10. Minimum Tax 11. AOP

BY : Kashif Nawaz Jakhar Contact No# 0331-4791167

INCOME TAX (Tax Year 2012) PREFACE

Al-Hamd-O-Lillah, the 2nd addition of “Short Notes on Income Tax” has been completed. These notes have been prepared under the senior guidance of my dearest teacher Mr. Imran Shehzad (ACA) sb, who guided me through the way in the preparation of such quality notes for the students of Module-C. In these note, I covered almost all the material areas covering upto 50 to 60 marks in the paper including numerical calculations and fair presentations of the conceptual queries frequently asked by the ICAP-Examiner. These notes include: a) Salary b) Income from property c) Income from business d) Capital Gain (37 & 37A) e) Income from other sources f) Final Tax Regime I try to retain the focus f ocus of the ICAP-examiner in paper construction relative to the marks allocation as: Topics Individual or AOP Conceptual queries

Marks 20-25 30-35

I recommend to study these notes with reference to “ INCOME TAX & SALES TAX ” Khalid Petiwala’s Notes. I hope my efforts will help you to retain maximum marks in your examination. Utmost efforts have been made to make these notes free from errors, yet there is always a room for improvement. Any suggestion from you will highly be appreciated. Kashif Nawaz

By : Kashif Nawaz Jakhar

Page 2

INCOME TAX (Tax Year 2012)

TABLE OF CONTENTS Sr. no. Topics

Page no. Sr. no. Topics

Page no.

1

Basic concepts

5

12

Bad Debts

36

2

Salary

9

13

SPV

37

3

Provident Fund

11

14

Methods of Accounting

39

4

Employee Share Scheme

12

15

Minimum Tax

40

5

Capital Gain

13

16

Losses ( concepts )

43

6

Final Tax Regime

15

17

Losses

45

7

Tax Credit

19

18

Group Taxation 49 & Group Relief

8

Income From Business

22

19

AOP

53

9

In-admissible Expenses

25

20

Tax on Tax

57

10

Depreciation

27

21

Share from AOP

59

11

Amortization

35

22


Page 3


COMPUTATION OF TAX LIABILITY (Under NTR)

Part A Profile of Assessee

Part B Computation of Income

Name:

Salary ( U/S 12 )

NTN :

Income From Business a) Speculative

Rs.

xxx

xxx

Capital Gain ( U/S 37 )

xxx

Tax Credits:

Income From Other Sources

xxx

Less: Allowances

Less:

Senior Citizen Allowances (xxx) Full time Teacher Allowances (xxx) Foreign Tax credit (xxx) (xxx) Less : Average Relief

(xxx) (xxx) (xxx)

xxx xxx

(xxx) (xxx) (xxx) (xxx)

b) Non-Speculative

Salaried

II.

Xxx

xxx xxx

AOP

IV.

Company

WWF WWPF Zakat Donations U/S 61

(2) Residential Status

II.

xxx

Non-Salaried

III.

I.

Tax on Tax Able Income

Tax on person Add : Income Prom Property Capital Gain ( U/S ) 37A

(1) Personal Status

I.

Part C Computation of Tax Liability Rs.

Resident Non-Resident

III.

Pakistan source

IV.

Foreign Source

(3) Tax Year

I. Normal tax Year

Add: Income from property Capital gain ( U/S ) 37 A

Total Income ( excluding share from AOP )

xxx

Investment in shares Contribution to PF Donation Profit On debt Less; Advance Tax

Add:

Share from AOP Total Taxable Income

II. Special Tax Year

xxx XXX

Collection of Tax Deduction of Tax Advance Tax ( u/s 147 ) Tax Payable /Refundable

III. Transitional Tax Year


Page 4

(xxx) (xxx) (xxx) XXX

INCOME TAX (Tax Year 2012) INCOME TAX (

Tax year 2012)

TAX LAWS

Income Tax Ordinance

Ordinance

Income Tax rules

Explanation

Schedule

STATUS

Personal Status

Individual

Salaried

Residential Status

AOP ( 25%)

Company ( 35%)

Resident

Non Resident

Non Salaried

Salaried Person : Total Salary Income . X 100=If answer is >50%,then salaried person. Total Taxable Income

AOP ( Association of person ) 25% 

Resident when control and management of affairs is is situated wholly or partially in Pakistan.



AOP may be a * firm * joint venture venture * Hindu undivided family * but does not include include a company. company.


Page 5

INCOME TAX (Tax Year 2012) Company : 35% (1)

private (2) Public (3) Banking



Company incorporated in Pakistan , provincial govt. , and local govt. are resident



Other companies are resident if control and management affairs are situated wholly in Pakistan.

Resident : 

183 or more days



Half day consider full day

NOTE: Only transit days are excluded.

Computation of Taxable income Income is classified as by law Geographical Source of Income 1) Pakistan source Income 2) Foreign source income

Heads of income Regimes 1) Normal 2) Final

SCOPE OF TAXABLE INCOME 1. Resident

Both incomes are taxable 2. Non resident

Only Pakistan source income is taxable


Page 6

INCOME TAX (Tax Year 2012) 3. Foreign source income of a short term resident 

Pakistan source income is taxable



Foreign source income exempt which is not brought / received in Pakistan



He is in Pakistan only for employment not for business



Present in Pakistan for not exceeding 3 years

4. Foreign source income of a Returning Expatriate 

non resident for last 4 years



National of Pakistan



An individual



Income ( current & next year exempt )

TAX YEAR

Normal Tax Year

Special Tax Year

1july 02------30june 03 A period of 12 months ending on 30th June

1-10-2008-to 30-09-2009

A period of 12 months ending on any date other than 30 th June


Transitional Tax Year

Whenever there is a change in tax year the period in between the normal tax year and special tax year is treat as transitional tax year

Page 7

INCOME TAX (Tax Year 2012) HEADS OF INCOME 1. 2. 3. 4. 5. 

Salary Income from property income from Business capital gain income from other sources

SALARY : ( taxed on receipt basis ) relationship of employee and employer Cash basis  



Income From property : ( taxed on accrual basis ) Rent from immoveable property ( Land & building ) Forfeited deposit against sale of immovable Property Only for that year in which Forfeited Advance unadjusted Rent {Unadjusted amount X 1/10} in that year Signing amount Note : I. Mod of payment is irrelevant II. Any benefit given by tenant to his landlord is rent  







Income from business Trade , manufacturing . any profession 



Capital Gain ( gain from disposal of capital assets ) Shares , coins , postage stamp, jewelry 



Income from other sources If any income does not fall under any other heads . then it will be under the head of income from other sources. e.g., Dividend 


Page 8


SALARY Any kind of benefit transfer or given by employer to employee will be taxed and it will be add in the salary income of the employee.

Components of salary

Basic Salary

T.T

  

Perquisites

Accommodation Conveyance Medical facility

Allowances

 



H.R.Allowance ( T.T ) Conveyance allowance ( T.T ) Medical allowance (exempt upto 10% of B.S)

Others benefits

   

Loans U. bills Comp. shares TA / DA

Terminal benefits

   

Gratuity Provident fund Pension Golden hand Shake

Perquisites

1) ACCOMMODATION : 45% of BS or Actual Expense of employer(rent) ( whichever is higher = add in salary ) 2) Conveyance: ( T.E ) Only for office use Owned ( cost ) ( 10% ) I. Personal II. Personal + Business use ( 5% ) Leased ( FMV ) ( 10% ) I. Personal II. Personal + Business use ( 5% ) 3) Medical Facility : a) Facility Given i. Under the contract ( T.E ) ii. Not Under the Contract (T.T ) b) Re-imbursement c) Insurance Amount contributed by employer will be added in salary By : Kashif Nawaz Jakhar

Page 9

INCOME TAX (Tax Year 2012) 4) Medical facility & medical Allowance both given i. Under the contract a. Facility ( T.E ) b. Allowance ( T.T ) ii. Not Under the contract a. Facility ( T.T ) b. Allowance (Exempt upto 10% of BS ) 5) Asset is given to employee Permanently FMV of Asset – payment by employee = add in salary 6) Marginal cost: Nothing will be added in salary, if no additional cost incurred by the employer Other Benefits : Loan provided by employer Loan X 14% X time = XXX add in salary Note : if any interest paid by employee then that amount will be deduct from above answer . and the remaining will be added in salary. Terminal Benefits 1. Pension ( Exempt ) a. In case of 2 or more than 2 pensions ( higher will be exempt ) b. In case of re-employment with same employer or group No amount will be exempt

2. Gratuity a. Approved I. Government ( T.E ) ( T.E ) II. Fund (exempt upto Rs.200,000 ) III. Scheme b. Unapproved Rs. 75000 or 50% of gratuity amount ( lower will be exempt) Note : unapproved conditions or exemptions will be not applied on the following Cases. i. Non employee ii. Non resident iii. Not received in Pakistan iv. Re-employment


Page 10

INCOME TAX (Tax Year 2012) 3. Provident Fund. = Employer + employee contribution Unrecognized PF Annual X Withdrawal Employer Contribution + interest = add in salary

Recognized PF Note X

Note:

Rs.

Employer contribution (p.a) 10% X ( BS + DA ) Whichever Or 100,000 is lower Interest on Acc. Balance (p.a ) 1/3 X ( BS + DA ) Whichever Or 16% X Acc.Balance is lower

Rs. XXX (xxx)

XXX add in salary

XXX (XXX)

XXX add in salary

Note : Acc. Balance = Employee cont. + Employer Cont. + interest Formula ::: ( For calculate missing figure )

Interest = Acc. Balance X Rate If any figure missing we can calculate with the help of above formula .


Page 11

INCOME TAX (Tax Year 2012) EMPLYEES SHARE SCHEME 60 Capital Gain

Rs.20

Benefit given by Market 40

Salary

Rs.10

Benefit given by employer or company 30

Example : Persons Kashif Rameez Farhan

2010

2011

2012

Option sale = Rs.5000 Option sale of 200 shares @ sale price Rs. 3000

Acquisition of shares Balance(300) Acquisition Sale Rs.60/ share

Sale = Rs. 70

On march 2010. FMV = Rs. 50/share Offer value = Rs. 30/share No. of share = 500 shares Advance = 2 per share On march 2011 FMV= Rs.40/ share

SOLUTON: Persons Kashif

Rameez

Salary Capital Gain Salary

2010 4000 X X

2011 X X 5000 (500 X 10 )

Capital Gain

500 X 30 = 15000 X

Farhan

Salary

2600 {3000-(200 X 2 )

Capital Gain

2012 X X X

X

X 3000 (300 X 10 ) 6000 {300 X (60-40)}

SP-FMV=70-40=30 X X

Here Rs. 10 = FMV – Offer Value


Page 12


CAPITAL GAINS Definition : The Gain from Disposal of Capital Assets. C A B Explanation:

a) Gain

b) Disposal

Sale price/FMV --- cost of disposal

c) Capital Assets

Disposal Means Sale Transfer Destroyed Gift Relinquished

Capital Assets : These are not capital assets o Immovable o Intangible o Depreciable o Stock-in-trade o Other movables ( cars )



I. Sale with in one year ,100% add in taxable income II. Disposal after one year ,75% add in salary

   

So,

These are Capital Assets o Shares o Debentures o Shares of Private company o Shares of AOP o Membership cards of stock exchange

After one year 25% of gain is Exempt. & 75% of gain is taxable

Capital Gains

37

37 A 

Gain/Loss

Gain

   

Taxable income in case of Gain I. Disposal within year, 100% add in taxable income. II. Disposal after one year , 75% add in taxable income.


Shares of public limited company Redeemable debentures Modaraba certificates PTC vouchers Derivatives

If these assets sold With in 6 months = 10% of gain is taxable With in one year = 7.5% of gain is taxable After one year = No tax   

Page 13


Non recognition rule:

under the following conditions income is not taxed. 1) Inheritance 2) Gift 3) To transfer to a spouse 4) In case of dissolution of a company

ASSETS whose Gain is Taxable But no treatment of loss

1) 2) 3) 4) 5)

Jewelry Coins Medallions Postage stamp Sculpture


etc

Page 14


Final Tax Regimes Regime: Traditions 1. NTR ( normal Tax Regime ) 2. FTR ( Final Tax Regime )

1. NTR : Just add the income on the basis of persons and applied tax.

PERSONS I. Individual Salaried Non Salaried 25% II. AOP 35% III. Company Incomes should be under there related head of incomes Revenue – Expense = Income Sale price – purchase price = income Return file in case of NTR.

2. FTR : 

    

No expenses are allowed e.g. Revenue = income No heads of incomes Tax rates are independents for persons No loss Income is Tax on gross basis Statement file in case of FTR.

Note

i.

Dividend for o Individual AOP o Shall be considered under FTR

ii.

Dividend for o Company Shall be considered under NTR. So for companies the dividend shall be recorded under the head of “Income from business “ in case of banking business.


Page 15

INCOME TAX (Tax Year 2012) Dividend Income : Dividend income shall be deducted @10% of gross dividend which shall be considered full and final tax for the other than a corporate shareholder . e.g. Net dividend after deducting Tax and Zakat is Rs. 875 Calculate gross dividend . Solution : Formula : 875 . X 100 = 1000 87.5


Page 16


Important Terms Deduction Of Tax  Collection Of Tax  Advance Tax  Final Tax 1. Deduction Of Tax: 

Deduct from Income  Payer will deduct the Tax in case of deducting authority  Income over which Deduction of Tax Applied Supply of Goods , Dividend , Services , Price winning , Salary , Export 

2. Collection Of Tax :   

Formula to Remember

Collect from expense Services provider will collect the tax Expenses over which Collection of tax applied Cell phone payment , imports D I C E

= = = =

Deduction from Income Collection from Expense

3. Advance Tax : ( NTR ) The items which fall under NTR ( according to law ). So the tax deduct or collect on such items is Advance tax

4. Final Tax :

( FTR ) The items which fall under FTR ( according to law ). So the tax deduct or collect on such items is Final tax.

Withholding TAX Aisa tax jo kisi bhi source say collect ya deduct hova hoo.


Page 17


Table For understanding Persons

Trading Manufacturing

Supply Contracts

Individual/ AOP

Unlisted companies

listed companies

FTR FTR FTR

FTR NTR FTR

NTR NTR NTR

Retailers ( sale goods for final consumptions ) Individual / AOP

Turnover < 5 million

Turnover > 5 millions

Option to pay tax @ 1% of Sale as Final Tax. Compulsory to pay as final tax

Condition Turnover > 5 m but < 10 m Turnover > 10 m


Rate of Tax Rs.25000 + 0.5% of Turnover > 5 m Rs.25000 + 0.75% of Turnover > 10 m

Page 18


TAX CREDIT Rs. XXXX (xxx) (xxx) (xxx) . A .

Tax liability Less: Senior citizen allowance Less: Full time teacher allowance Less: Foreign Tax Credit Less: Investment in shares Less: Pension fund Less: Donation Less: Profit on debt

(xxx) (xxx) (xxx) (xxx) XXXX (xxx)

Less: Advance Tax

or

Tax Payable

XXXX

Tax Refundable (f negative figure)

(XXXX)

Note( Related to Tax Credit )

Lower

Invest. In shares

Pension Fund

Donation

Actual Amount

Actual Amount

Actual Amount

15 %

20 %

500,000

------

Profit on debt Actual Amount

30 % ------

50 %

% of taxable income

750,000

FORMULA : A X Lower = Tax credit Taxable Income .


.

Page 19

INCOME TAX (Tax Year 2012) Rules Of Tax Credit : Conditions Senior citizen allowance

 

Full time teacher allowance

not

Then his tax liability shall be reduced by 50%.

A full time teacher ; or A researcher of a recognized non-profit educational or research institution including government training and research institution .

Then his tax payable shall be reduce by 75%.

If the foreign source income of a resident person is taxable in Pakistan

then the taxpayer shall be allowed tax credit in respect of foreign income tax paid by him as lower of:

 

Foreign tax credit

Age 60 years or more Taxable income does exceed Rs. 10,00,000

Eligibility amount

Foreign income tax paid; and Pakistan tax payable in respect of foreign source income at average rate of tax. Investment in shares

o

o o

Contribution fund

to

pension

   

Donation

 

Profit on debt

 

Shares must be of listed Comp. Must be original allottee Did not dispose in one year Approves Institution Govt. hospital Not trough CASH May be direct or by cheque. Eligible person (u/s 19A ) PF must be approved Loan for house build. Loan from bank or financial institution

o o o

actual 15 % of T.I Rs.500,000



actual



20% of T.I

 

  

Lower

Actual 30% of T.I

Lower

Actual 50% of T.I Rs.750,000

Lower

See illustration no. 2.9 & 2.10 of K.petiwala By : Kashif Nawaz Jakhar

Lower

Page 20




Full Time Teacher Allowance : Formula : Taxable salary(as F.T.T) X Tax payable X 75% = XXX Taxable Income

Where : F.T.T means = Full time Teacher

After deducting senior citizen allowance

Foreign Tax Credit : Formula : Tax payable(Note 1) X Foreign source income = xxxx Taxable Income Tax paid in foreign Country = xxxx

Note 1 : Tax Payable xxxxx Less: Senior citizen allowance (xxxxx) Less: Full time Teacher allowance (xxxxx) Tax Payable ( Note 1 ) xxxxxx


Lower will be deducted from tax payable

Page 21

INCOME TAX (Tax Year 2012) INCOME FROM BUSINESS

Taxable

Income

(Income – Deduction = T.Income)

Deduction ( 95 % Discussion )

( 5 % discussion)

Exempt

Non speculative

Speculative WE discuss about it: 1: Definition 2: Losses

Special (Separate Calculation)

Depreciation

Allowed (20% discussion) Or ( Admissible )

Amortization

Without any condition e.g. * Tax * Personal expenditure


Pre-commencement

Dis-Allowed (80% discussion) Or ( inadmissible )

Research & Development

Conditionally e.g. * salary in certain condition paid through cash * Tax is deducted

Page 22

INCOME TAX (Tax Year 2012) Example : ( of allowed and disallowed expenses ) !!!!!!!! Income statement according to IAS !!!!!! Particulars

Rs.

Particulars

Rs.

Purchase Opening Stock Factory Salary (10) Depreciation (70) Income Tax Admin salary

300 100 50 50 40 30

Sales Closing Stock Dividend

1000 50 20

Profit

500

1070

1070

!! Income statement according to Income Tax Ordinance 2001 !! Particulars

Rs.

Particulars

Rs.

Purchase Opening Stock Factory Salary Depreciation Admin salary

300 100 40 70 30

Sales Closing Stock

1000 50

Profit

510

1050

1050

Solution : Computation OF Taxable Income : Rs. Accounting Profit

Rs. 500

Add: Disallowed Expenses Salary Depreciation Income tax

10 50 40

100

Less: Allowed Expenses: Dividend Income Depreciation

20 70

(90)

Taxable Income


510

Page 23

INCOME TAX (Tax Year 2012) SECTION. 20. ALLOWED EXPENSES All expenses incurred for business.

Apportionment of Expenses : e.g. FTR

Common Expenses

500,000

NTR

400,000 Expenses

Expenses 333333 27778 16667

266667 22222 13333

=900,000 (turnover) Expenses

600,000 50,000 30,000

purchases salary depreciation

Income under FTR ( no expenses allowed ) = Rs. 500,000 Income under NTR ( expenses are allowed ) = Rs. 337,778 Formula for calculate Expense: Sale(under NTR) Total Turnover


X Expense = xxxx

Page 24

INCOME TAX (Tax Year 2012) Section . 21:

In-Admissible Expenses Not Allowed Expenses: Following expenses are not allowed TAX : Income Tax Sales Tax Advance Tax Violation Of Law ( Penalty )

Allowed (For Business)

Disallowed (Against Law)

AOP Salary or other benefit by AOP to its members are not allowed. Salary Paid Notes : o Salary , commission o Deducting the authority but did not deduct tax o Then the tax expense not allowed. TRADING LIABILITY

Those liabilities which effect the P & L A/C e.g. a. Cash To Loan

XXX

b. Salary XXX To Salary Payable c. Purchases To Mr. Z


XXX

( Capital Liability ) .

XXX

( Trading Liability ) .

XXX XXX

( Trading Liability ) .

Page 25


DONATION INCOME

U/S 61 of 2nd Schedule Less: ( as Zakat ) Rate:

30 %

Conditions: o Pay in cash o By cheque o In any kind

TAX

Donation to approved institution. e.g. Govt. hospital ( Chapter #2) Rate: 30 % Conditions: o Do not pay in cash o By cheque o In any kind

Preliminary Expenses: are disallowed upto commercial production ( pre-commencement expense ) Trading Liability: Not paid with in 3 years.


Page 26

INCOME TAX (Tax Year 2012) Chapter # 12

DEPRECIATION The Rules and Regulation For Depreciation Rules: Depreciation shall be charged on depreciable assets. Depreciation shall be charged after deducting initial allowance . FORMULA : ( cost – initial allowance ) X Rate of depreciation e.g. ( 100 – 50 ) X 10% = 5 INITIAL ALLOWANCE

( Rate 50% ) All depreciable assets are also eligible depreciable assets except the following : 1. Furniture and Fixture 2. Transport vehicle not plying(use) for hire e.g. business or rent a car 3. Second time used plant and machinery Note:

In Pakistan one asset is : Depreciable + eligible depreciable asset Only for 1st user . For all other users that asset will be only a depreciable asset.

INITIAL ALLOWANCE ON VEHICLE CASES

Rent a car + Daewoo ( eligible depreciable asset )


Director’s car + company car

( not plying for hire )

Page 27

INCOME TAX (Tax Year 2012) Eligible depreciable Assets: Life more than one year Subject to wear and tear For business use

IMPORTANT NOTES

Initial allowance @ 50% shall be charged on the eligible depreciable assets in the 1st year only. Depreciation shall be charged on reducing balance method.

Depreciation Rates Depreciation rates are as follows.

Rates

10 %

Assets Building

30 %

Computer and related equipment

15 %

All other assets

HINT Try to compute depreciation in the examination / prepare the depreciation schedule on written down value bases.


Page 28


Assets use partially for Business: If an asset , use partially for business and partially for other objectives , we will charge  deprecation proportionally  BUT initial allowance fully Example: Business use ( 60 % ) & for other objectives ( 40 % )

Cost Initial allowance Depreciation

Full yearly 10,00,000 (5,00,000) 5,00,000 (50,000) 4,50,000

60 % 5,00,000

5,00,000

50,000 (60%)

. 30,000. 5,30,000

NOTE Full year depreciation charge in the year of purchase. No depreciation is charged in the year of disposal.


Page 29


GAIN or LOSS in disposal of Depreciable Asset: The gain or loss on disposal of depreciable assets charged to income from business.

COMPUTATION OF GAIN or LOSS

Gain or Loss = Sale price/FMV ( higher) –- Tax WDV WHERE: Tax written down value = Cost – Tax depreciation WHERE: Tax Depreciation = Depreciation + Initial allowance

NOTE Full year depreciation charge in the year of purchase. No depreciation is charged in the year of disposal.


Page 30

INCOME TAX (Tax Year 2012) Examples :

a(I) Computation of Depreciation e.g. numerical example Year 2007

cost Initial allowance(50%) Depreciation(15%)

Furniture & Fixture

Plant

500,000

10,00,000

Tax allowance 500,000

500,000 (75000) 425,000

(500,000) 500,000 (75000) 425,000

150,000 650,000

2008

Depreciation(15%)

(63750) 361250

(63750) 361250

127500

2009

Depreciation(15%)

(54188) 307062

(54188) 307062

108376

b(II) Computation of Gain or Loss Assume the plant sold for Rs.500,000 in 2009. now compute the gain or loss. = sale price – tax WDV = 500,000 – 361250 Gain = 138750



it’s the income from business in 2009.



now less depreciation Rs. 54188 of this year from this income .


Page 31


a(II) Asset Partially Used For Business (assume 60% for business use )

Year 2007

Plant Cost Initial allowance Depreciation(15%)

2008

Depreciation(15%)

2009

Depreciation(15%)

10,00,000 (500,000) 500,000 (75000) 425,000 (63750) 361,250 (54188) 307,062

Tax Allowance/ dep. allowance 500,000 45000 545,000 38250 583,250

NOTE: the depreciation column must be draw and calculate depreciation.

b(II) !!!! Calculation of Profit or Loss !!!!!!!!! when !!!!!Asset partially used for business !!!!! Assume the plant sold for Rs.500,000 .

= sale price – Tax WDV = Sale price - ( cost – depreciation allowances ) = Sale price – [ cost – ( initial allowance + depreciation)] = 500,000 – [ 10,00,000 – 583250 ] = 83250 income from business


Page 32


Cases for Gain or Loss

( three cases )

Exceptions:

Building ( Case 1 )

Export of use asset ( Case 2 )

= sale price – Tax WDV = Sale Price – ( cost – tax Depreciation )

= sale price – Tax WDV = Sale Price – ( cost – tax Depreciation )

NOTE: If sale price is above the cost price then the cost shall be consider as sale price

NOTE: If a used asset sold, out of Pakistan , sale price will be consider as cost.

So, =Sale Price – ( sale price – tax Depreciation ) =Sale Price - sale price + tax Depreciation = Tax depreciation

So,

“”It means that the INCOME will be equal to the TAX DEPRECIATION “”. e.g. Tax depreciation = Gain 500,000 = 500,000

NOTE: It is assume that the asset , sold at price , at which that was purchased.

Case 3:

= cost – ( cost – tax Depreciation ) = cost – cost + tax Depreciation = Tax depreciation

“” CAR “”

its not about vehicle . because all cars are vehicle but all vehicles are not cars. Maximum cost of car is Rs. 1500,000 NOTE

Even it is purchased above the Rs. 1500,000 , we will consider Rs. 1500,000 and the depreciation will be calculated on this amount. e.g. Year 2010

“ X “ car Cost Depreciation ( 15 % )

20,00,000 ( 225,000 ) 1500,000 X 15 % Written Down Value *1275,000 *Where 1500,000 – 225,000 = 1275,000


“ Y “ car 1200,000 ( 180,000 ) 1200,000 X 15 % 1020,000

Page 33


ASSUME

Both cars were sold for Rs. 1500,000 each

NOTE:

sale price ki amount utni laini hai , jitni cost ki %age allow ki gai thi FORMULA : n=

1500,000 X 100 cost

only for those assets whose cost id above Rs.1500,000

So, = sale price – Tax WDV and , sale price = 1500,000 X 75% = 1125,000 1500,000 . X 100 20,00,000 “ X “ car = ( sale price x n ) – Tax WDV = 1125,000 – 1275,000 Loss = ( 150,000 )


“ Y “ car = sale price – Tax WDV = 1500,000 – 10,20,000 Gain = 480,000

Page 34


AMORTIZATION amortization is allowed on intangible assets. intangible asset--------definition . amortization shall be charged on per day used method. no amortization in the year of disposal the maximum life of a intangible asset is 10 years.

    

NOTE

if life exceeds 10 years or unknown , in this case, 10 years will be consider as the life of intangible asset.

e.g. Year Copy Right Purchase price= Rs. 200,000 Life = 7 years Date of purchase . 1-1-2011 Year end = 30 June, 2011 Solution, 2011 =

Solution,

cost . useful life

x days used

=

cost . useful life

= 200,000 . x 181

= 300,000 .

= 14168

= 14876

7 X 365

2012

Patent Purchase price= Rs. 300,000 Life = 15 years Date of purchase . 1-1-2011 Year end = 30 June, 2011

= 200,000

. x 365

7 X 365

= 28571

x days used

x 181

10 X 365

= 300,000 .

x 365

10 X 365

= 30,000

NOTE: use full life in days By : Kashif Nawaz Jakhar

Page 35


BAD DEBTS Sale to Mr. A for Rs. 100,000 on credit in 2009. it will the income for 2009 under NTR . 2010 : Mr. A didn’t pay back. we claim Rs. 100,000 in Tax`

Department for allowing us expense.( bad debts ). but tax department allow expense to us Rs. 50,000.

2011: No. A B C

Situations. (Receipts)

Actual Bad Debts

Tax Treatment

100,000 50,000 Nothing

nil 50,000 100,000

D

80,0000

20,000

50,000 ---Income No treatment 50,000 --- expense allowed 30,000 ---income

Ways of asking question about Bad Debts in exam. 1) Conditions of Bad Debts : how to claim bad debts in the department. 2) Recovery of Bad Debts : Tax treatment .

Formula : Allowed – Actual = + or – NOTE

If answer is + then = add in income from business If answer is - then = less from income from business


Page 36


!!!!!!! Perquisites for claiming Bad Debts !!!! The amount must be declared as income before.(pahly) Entry of bad debts has been passed in the books of accounts. NOTE :

it is not necessary that the department will allow the whole amount as expanse which we claimed in the department.

!!!!!!! ACCOUNTING TREATMENT OF LEASE !!!! amount paid for lease. Amount of Lease ( Rs.50,000 )

Depreciation ( 10,000 )

Capital

Interest ( 1000 )

Insurance ( 500 )

Expense claim in accounting :

depreciation Interest Insurance

10,000 1,000 500 11,500

Expense claim in Tax :

The amount which paid against lease that amount will be allowed. ( Rs. 50,000 )


Page 37


!!!!!!!!!

PROFIT ON DEBT !!!!!!!! ( Interest )  We borrow the amount .  So interest is our expense ALLOWED EXPENSE  debt is utilized for business .its not the part of cost.

SALE OF DEBTOR  SPV

Special purpose vehicle A person or Organization which used for special purpose. e.g. SPV: Originator

SPV .5 interest

Itefaq

Itefaq ( IT )

(Sugar)

Investment .5 interest 5 m loan

single company = loan 5 million Group = loan 20 million

NOTE loan from subsidiary is not allowed

BANK

NOTE Loan & lease are both allowed to

NOTE If any Income earned by SPV . That income will be exempt because income earning is not its objective.

SPV

Originator 6 million


1 m --income(exempt) 5 m – loan return

Page 38


METHODS OF ACCOUNTING

Accrual Basis ( Absorptional Costing )

Company

Cash basis ( Marginal Costing )

Individual / AOP Option

Closing Stock Valuation

Absorptional Costing ( Add all kinds of Costs )

Marginal Costing ( Fixed FOH will be excluded )

e.g. Factor of Production Material Labour FOH Variable Fixed

Absorptional Costing 50 10 20 10 90

Define Small company .


Factor of Production Material Labour FOH Variable

Marginal Costing 50 10 20 80

Rate : 25 %

Page 39


MINIMUM TAX 

Rate : 1 % of Turnover Or

Higher

Actual Tax Liability 

income is exempt . 

Who will pay Tax :   

Resident Company Individual having Turnover 50 million or Above. AOP having 50 million or Above.

Turnover : means,  Sale Excludes sales tax , excise duty  Services  Share from AOP  Provisions : Excess of actual Tax Liability shall be carry for subsequent 3 years. 

st

forward

1 Year

2nd Year

Advance Tax = Actual Tax Liability – 1 % of Turn Over

Advance Tax =Remaining Actual Tax Liability – 1 % of Turn Over

HINT Excess of 1 % of T.O from Actual Tax Liability will be advance tax and that excess amount will be deduct in the next year from actual tax liability. And then the remaining of actual tax liability will be compare with 1 % of turn over. Higher of : Actual Tax liability & 1 % of Turnover will be payable. By : Kashif Nawaz Jakhar

Page 40


EXCEPTIONS: 

 

Minimum tax not apply , if business entity declare gross loss before depreciation and other inadmissible expenses. Commissioner has the power to re-asses the income. Minimum tax not apply on certain cases. e.g. Modaraba , non-profit organization.

Employee Training and Facilities : allowed expenditures other than capital expenditures . o

o

o

Hospital or educational institution for the benefit of employees. For the training of industrial workers run by federal or Provincial Government Training of citizen of Pakistan . e.g. PHD

TAX paid on import Stage : Tax collected by collector of custom on import of, edible oil & packing material 

TAX deduct from services as minimum Tax : 6 % at source from gross income. no adjustment or refund shall be allowed.

NOTE : HINT

Services provided to a person , who is not Tax deducting authority then the said services income is not subject to minimum Tax. This provision of minimum tax is not applicable for a company , receiving income from services.


Page 41


Advance Tax on Electricity Bill As minimum Tax : advance tax is payable on 1. Commercial & 2. Industrial Bills RANGE : TAX

Amount

From Rs.80 to Rs. 1500

Monthly bill exceeds Rs.400 but does not exceeds Rs. 2000

If monthly bill exceeds Rs. 20,000 Users

Rate

Commercial Industrial

10 % 5%

Electricity bill for person other than Company :  

Bill upto Rs. 30,000 per month shall be treated as minimum tax. No refund or adjustment shall be allowed.

Scientific Research Expenditure :  

Deduction allowed , if expenditure incurred in Pakistan For business purpose

!!!!!! Scientific Research !!!!! Any activity in the field of natural (mining, oil refinery) or Applied Science (new technology) for the development of human knowledge.


Page 42


CH # 15 :

LOSSES

General concepts : in urdu

ENGINE 1

2

3

4

Categories of tickets :

A type ticket B type ticket C type ticket

Usage of tickets :

explanation in Urdu.

A type ticket: A type ticket say ap train k box 1 & 2 main baith sakty hain. ager in boxes main jaga na hoo tu ap next any wali 6 ( six ) trains main bhe ap un k box no. 1 & 2 main baith sakty hain. laiken in boxes k elawa ap kisi bhi aor box main nai baith sakty.

B type ticket: B type ticket say ap mojoda train k kisi bhi box main baith sakty hain. aor ager is train main jaga nai hai tu ap any wali kisi bhi train main nai baith sakty. By : Kashif Nawaz Jakhar

Page 43


C type ticket: C type ticket ki madad say ap mojoda train k to kisi bhi box main baith sakty hain laiken ager mojoda train main jaga na hoo to ap next any wali 6 ( six ) trains main un k box no. 3 main hii baith sakain gay.

HINT for understanding

mojoda train main bathny say morad hai ==== next train main bathny say morad hai


set off

==== carry forward.

Page 44

INCOME TAX (Tax Year 2012) Ch # 15.

LOSSES under NTR. because under FTR losses and expenses are not allowed. HEADS OF INCOMES UNDER NTR

salary income from property separate block of income

No Loss

income from business  non-speculative  speculative

C type A type



capital gain  37  37-A

other losses.

NO Loss

A type Losses can be set off only against the incomes from other items U/S 37 A.

B type

EXPLANATION: A type: can be carry forward but they can by set off only against the incomes of their heads. B type: can be set off only C type: can be carry forward and set off. but they can be set off only in 1st year. adjustment of one income or loss in Set off : other head . Inter head adjustment: adjustment in the same head. Carry forward: Transfer to next year. By : Kashif Nawaz Jakhar

Page 45


Example : 1

Salary Non-speculative business Speculative Capital gain Other Losses

Case 1 Rs.(000) 500 (800) (400) 700 (300) 1200

Case 2 Rs.(000) 500 (900) (400) 700 (300) 1200

Case 1 Rs.(000) 1200 (300) 900 (800)

Case 2 Rs.(000) 1200 (300) 900 (900)

Total Income Requirement : I. Compute taxable income II. amount of loss to be carry forward Solution: I.

Total Income Other losses Non-speculative business

Total Income II. Losses to be c/f. non-speculative


100

( 400 )

------

( 400 )

Page 46


Example : 2

Salary Non-speculative business Speculative Capital gain Other Losses or Gain

Case 1 Rs.(000) 500 (1000) (400) 700 (300) 1200

Case 2 Rs.(000) 500 (1000) (400) 700 300 1500

Case 1 Rs.(000) 1200 (300) 900 (900)

Case 2 Rs.(000) 1500

Total Income Requirement : III. Compute taxable income IV. amount of loss to be carry forward Solution: I. Total Income Other losses Non-speculative business

Total Income

-------

(1000)

500 .

II. Losses to be c/f. non-speculative (1000-900) ( 100 ) Speculative ( 400 )


------( 400 )

Page 47


HINT

A: In case set off losses. 1st set off other losses 2nd set off non-speculative business losses.

B: In case of carry forward losses. year wise. 2009 2010 2011

( 100 ) ( 200 ) ( 500 )

If there is gain in 2012 , then use FIFO method of adjustment of losses. 2012 2009 2010 2011


10000 ( 100 ) ( 200 ) ( 500 ) 200 .

Page 48


GROUP TAXATION as a single fiscal unit. Features of group taxation:

Note

100% owned group of companies locally incorporated under companies ordinance 1984. Loss of any group will be set-off against income of any other group. consolidated group accounts as required under companies ordinance , 1984 will form. I. Basis of computation of income II. tax payable by the person GT relief will not be available to losses prior to the formation of the group. Inter corporate dividend income with in the group companies entitled to group taxation shall be exempt .

GROUP RELIEF { surrender of tax loss by a subsidiary company }

Note

a subsidiary company may surrender its assessed loss ( excluding b/f loss and capital loss ) for the tax year in favor of its holding company or any subsidiary of the holding company. The holding company shall directly hold , share capital of the subsidiary company as under,  

NOTE

55% or more 75% or more

in case of listed companies. in case of non-listed companies.

The loss surrender by 1 subsidiary company may be adjusted by the holding company or subsidiary company against its business income in the tax year and the following two tax year.

Any un-adjusted loss shall be revert back to the subsidiary company and shall be carry forward in the normal manner.


Page 49

INCOME TAX (Tax Year 2012) Example :

S H

stands for stands for 1st year = 30

subsidiary company holding company

2nd year = 40

S-2

H LOSS = 100 (surrender)

Assume :

Listed Company

S-1 loss incurred in 2006 (adjusted in next 6 tax years )

2012.

the losses were surrender for two years. So, 2007----- 2008 2009, 2010, 2011, 2012 S-2 S-1 losses = 30+40= 70


Remaining 30 were adjusted by original subsidiary company.

Page 50


Conditions of Group Relief 1. Ownership of share capital shall be continued for 5 years to the extent of 75% or 55%. 2. Trading company with in the group shall be entitled to avail group relief. 3. If the holding company is a private company, it is required to be listed with in 3 years from the year in which loss is claimed. 4. group companies are locally incorporated companies under companies ordinance 1984. 5. board of directors approval of both the companies is required. 6. Subsidiary company , continuous the same business during the said period of 3 years. 7. all the companies in the group shall comply with specific corporate governance requirement. 8. Inter corporate dividend with in the group companies entitled to group taxation shall be exempt. 9. The subsidiary company cannot surrender its assessed losses for more than the 3 tax years. 10. The tax relief availed would be reversed if holding company’s equity interest falls below 75% or 55%. As a consequences of disposal of shares during the stipulated period of 5 years . 11. Loss claiming company , may , with the approval of Board of directors , transfer cash to loss surrendering company , equal to the amount of tax saving in this respect. This transfer shall would not be allowed tax expense for the loss claiming company or taxable income for the loss surrendering company.


Page 51

INCOME TAX (Tax Year 2012) Some Important Concepts

S H

stands for stands for

1st year = 30

subsidiary company holding company

2 nd year = 40

Benefit

= Rs15

S-2

H LOSS = 100 (surrender)

Cash Rs.10

S-1

This Cash of RS.10 received by Loss surrendering company will be not treated as income of this company. Transfer of shares between the c ompanies and the shareholder , in one direction , would not be taxable capital gain provided the transfer is , to acquire share capital for the formation of the SECP or STATE BANK has been obtained in this effect.


Page 52

INCOME TAX (Tax Year 2012) CH # 6

ASSOCIATION OF PERSONS ( AOP ) Im ortant Notes

1. In Case of Loss ( Loss of AOP ): Loss shall not be distributed among the partners . 2. In case of income: Income shall be distributed among the partners . 3. If any partner have no income other than the share from AOP ( income from AOP ) then his , this income ( share from AOP ) shall be exempt. 4. if any partner have income other than the share from AOP ( income from AOP ) then his , this income ( share from AOP ) shall be included only for tax purpose.

5. For checking individual status “ share from AOP “ shall be excluded.

6. For calculating full time teacher allowance “share from AOP” shall be excluded. 7. For average relief “share from AOP “ shall be included.

Rules For 1. Investment in shares 2. Donations 3. Contribution in pension fund 4. profit on debt

Assume for “ Investment in shares “ :

10% of Taxable income 300,0000 Actual

Excluding Share from AOP

Lower

And : Tax liability X Lower Taxable income (Including share from AOP ) .


Page 53


Example : Total taxable business income = Rs. 10,00,000 Tax ( 25% ) = Rs ( 2,50,000 ) Distributable Income 7,50,000 . Income After Tax Not Distributable Income

Assume there are 3 partners of AOP. Partners

Rate of share

Share from AOP

Business Income

A ( Individual ) B ( Individual ) C ( Ltd Company )

20% 30% 50%

150,000 225,000 375,000

500,000 ------------500,000

Requirement : compute taxable income of AOP and its members. Also compute tax payable .

Solution : (i) Mr. A Rs. business income Add: share from AOP Total Taxable Income Tax Liability Tax on Rs. 650,000 @ 10% Less:

500,000 150,000 650,000 65000

Tax ( individual) . X share form AOP Taxable Income ( individual ) 65000 . 650,000 X 150,000 Tax Payable


( 15000 ) 50,000 .

Page 54


(ii)Mr. B; Mr. B’s income shall be exempt because he

has no income other than share from AOP.

(iii) C ltd Company : Rs. Business income Add: share from AOP Total Taxable Income Tax Liability Tax on Rs. 875,000@ 35% Less:

Tax ( of AOP) Taxable Income ( AOP )

.

306250

X share form AOP

250,000 . 375,000 X 10,00,000 Tax payable


500,000 375,000 875,000

( 93750) 212500

.

Page 55


General Format of ( Income tax numerical ) : Compute Taxable Income Salary Income Capital Gain Business Income Other source income Zakat Donation Add : share from AOP Taxable Income

Computation of tax liability . Tax liability Property 37-A

XXXX XXXX XXXX XXXX XXXX ( XXX ) ( XXX ) XXXXX ( XXXX ) XXXX .

RS XXXXX

Tax Liability Less : Senior citizen Allowance Less : Full time Teacher Allowance Less : Foreign Tax Credit

Less : Investment in shares Less : Donation Less : Contribution Less : Profit on debt Less : Advance Tax

Tax Payable


RS

XXXXX XXXXX XXXXX (XXXX) (XXXX) (XXXX) XXXXX (XXXX) (XXXX) (XXXX) (XXXX) XXXXX (XXXX) XXXXX

Page 56


TAX ON TAX Tax of employee paid by the employer.

Impacts:

1. Income

Tax in Salary.

2. Advance Tax

Less from tax liability.

Tax Born by Employer

How to Compute:

Mostly in exam this amount will be given. Compute: Cases

1. Fully paid by employer 2. Partially paid by employer and partially paid by employee

Example Total salary = 500,000 Tax employee paid by employer = 10,000 Explanation : According to Tax department the tax paid by the employer , will be income of the employee because , it was basically the expense of employee . So now the Total salary of the employee will be Rs.510,000 instead of Rs.500,000. Case 1:

Assume Tax on Rs. 510,000 is Rs. 12,000. and paid by the employer. so now Total salary = 500,000 Tax employee paid by employer = 12,000 According to Tax department the tax paid by the employer , will be income of the employee because , it was basically the expense of employee . So now the Total salary of the employee will be Rs.512,000 instead of Rs.500,000. By : Kashif Nawaz Jakhar

Page 57

INCOME TAX (Tax Year 2012) NOTE The Tax calculation will be same as we calculte in other questions. Means : Tax on Rs. XXX @XXX % is = XXX 1 Marginal Relief Rs. XXXX @ XXX % = XXX Marginal amount {difference between total taxable income and Marginal relief @ XXX% } = XXX 2 = XXX Lower of 1 & 2 will be Tax liability = XXXX

NOTE the same calculation should be repeated for  minimum 3 times  Maximum 5 times After the repeated calculations now the individual will calculate tax as below. The following figures are assumed figures. Taxable Income = 500,000 Tax paid by employer = 13050 Total taxable Income Tax on Rs. 513050 @ 2.544% Advance Tax ( paid by employer )


513050

13050 13050 ------

Page 58

Notes on Income Tax

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