Format for Computation of Input Tax

Sunday, December 20, 2009

Total Input Tax

Local taxable purchases from registered person 16%

Local taxable purchases against tax invoices 16%

Taxable goods imported 16%

Taxable goods imported in respect of which bill of entry

is available 16%

Taxable goods purchased in auction (Treasury challan is available) 16%

Goods imported specified under Table-1 of SRO 644 (1)/ 2007 21%

Goods imported specified under Table-2 of SRO 644 (1)/ 2007 18.5%

Taxable purchases from distributor 16%

Exempted purchases from distributor (Exempt) Nil

Taxable purchases from wholesaler 16%

Exempted purchases form wholesaler (Exempt) Nil

Sales tax credit Full amount

Input tax carry forwarded from previous month Full amount

Purchase of fixed asset (Cost × 16% × 1/12) XXX

Sales tax paid on purchase of fixed asset (Amount of sales tax divided by 12) XXX

Sales tax paid on electricity bill (Only allowed to manufacturer where sales tax registration number is printed on bill) Full amount

Sales tax paid on sui gas bill (Only allowed to manufacturer where sales tax

registration number is printed on bill) Full amount

Local exempted purchases from registered person (Exempt) Nil

Exempted goods imported (Exempt) Nil

Local taxable purchases from non-registered person (No input tax)

Local exempt purchases from non-registered person (No input tax)

Local taxable purchases against commercial invoices (No input tax)

Goods imported in respect of which bill of entry is not available (No input tax)

Taxable purchases in respect of which invoices are not available (No input tax)

Taxable purchases in respect of which fake invoices are available (No input tax)

Taxable purchases in respect of which commercial invoices

are available (No input tax)

Sales tax paid on telephone bill (No input tax)

Sales tax paid on electricity used in residential colonies (No input tax)

Sales tax paid on sui gas used in residential colonies (No input tax)

Sales tax paid on tissue papers purchased by manufacturer (No input tax)

Sales tax paid on lunch provided to staff (No input tax)

Format for Computation of Output Tax

Total Output Tax

Supplies to registered person (N-1) 16% or 21% or 18.5% or 0% or Exempt

Supplies to non-registered person (N-2) 16% or 21% or 18.5% or 0% or Exempt

Normal taxable supplies 16%

Supplies specified under Table-1 of SRO 644(1)/ 2007 21%

Supplies specified under Table-2 of SRO 644(1)/ 2007 18.5%

Local zero rated supplies 0%

Supplies exported (N-3) 0%

Supplies to DTRE registered person (N-4) 0%

Exempt supplies Exempt

Supplies to government hospital Exempt

Supplies to private charitable operating hospital of less than 50 beds 16%

Supplies to private charitable operating hospital of fifty or more beds Exempt

Supplies to teaching hospital of statutory university consists of

less than 200 beds 16%

Supplies to teaching hospital of statutory university consists of

200 or more beds Exempt

Supplies donated to hospital run by the government Exempt

Supplies donated to non-profit educational institution Exempt

Supplies donated to non-profit research institution Exempt

Supplies to distributor 16%

Supplies to wholesaler 16%

Supplies to retailer 16%

Supplies to consumers 16%

Supplies to employees 16%

Supplies for personal use 16%

Sales tax debit Full amount

Tutorial Notes:

1) Supplies to registered person:

Where normal supplies are made to registered person---------------------16%

Where supplies are made under Table-1 of SRO 644/2007

to registered person-----------------------------------------------------------------21%

Where supplies are made under Table-2 of SRO 644/2007

to registered person---------------------------------------------------------------18.5%

Where zero rated supplies are made to registered person------------------0%

Where exempt supplies are made to registered person----------------Exempt

2) Supplies to non-registered person:

Where normal supplies are made to non-registered person----------------16%

Where supplies are made under Table-1 of SRO 644/2007

to non-registered person------------------------------------------------------------21%

Where supplies are made under Table-2 of SRO 644/2007

to non-registered person-----------------------------------------------------------18.5%

Where zero rated supplies are made to non-registered person--------------0%

Where exempt supplies are made to non-registered person-----------Exempt

3) Exports are taxable @ 0%, so, these are also called zero rated supplies.

4) DTRE means Duty Tax Remission Export, as you know export are taxable @ 0%, so DTRE are also included in the category of zero rated supplies.

Definitions_3

Sunday, December 6, 2009

Local Government [2(31A)]

“Local Government” shall have the same meaning as in the Punjab, Sindh, NWFP and Blochistan Local Government Ordinances, 2001.

Minor Child

"Minor Child" means an individual who is under the age of eighteen (18) years at the end of a tax year.

Non-Profit Organization [2(36)]

"Non-Profit Organization" means any person, other than an individual:

a) An organization established for religious, educational, charitable, welfare or developmental purposes; or for the promotion of an amateur sport:

b) An organization formed and registered under any law as a non-profit organization;

c) It is approved by the Commissioner for specified period;

d) Its assets may not be applied for the private benefit of any person.

Pakistan Source Income: [2(40)]

"Pakistan-Source Income" means Pakistan-source income as defined in section 101. According to section 101:

Different provisions have been discussed regarding various natures of incomes to be Pakistan-source income.

Pakistan Source Salary Income [101 (1)]

A salary shall be 'Pakistan-source income' if any of the following conditions is fulfilled:

1) The salary is received from any employment exercised in Pakistan, wherever is paid (It has no concern with place of payment of such salary.)

2) The salary is paid by, or on behalf of:

i) The Federal Government;

ii) A Provincial Government; or

iii) A local authority in Pakistan;

Wherever the employment is exercised (salary is Pakistan-source income if it paid by above-mentioned persons although; it is paid outside Pakistan.)

Pakistan Source Business Income of a Resident Person:

Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried out in Pakistan.

Pakistan Source Business Income of a Non-resident person:

Business income of a non-resident person shall be Pakistan-source income to the extent to which it is directly or indirectly derived from:

a) A permanent establishment of the non-resident person in Pakistan;

b) Sales in Pakistan of goods of the same kind as are being sold by the person through a permanent establishment in Pakistan.

c) Other business activity carried out, in Pakistan of the same kind as is being arrived out by the permanent establishment of a non-resident; or

d) Any business connection in Pakistan.

Foreign Source Income [2(26)]

"Foreign Source Income" means foreign-source income as defined in sub- section - 16 of sec - 101.

According to section 101(16):

An amount shall be foreign-source income to the extent to which it is not Pakistan-source income.

Explanation:

To understand the concept of foreign-source income, there must be a complete awareness of Pakistan-source income because foreign-source income has been defined in respect of Pakistan-source income. Briefly speaking, any income which is not a Pakistan-source income is a foreign source income.

Definitions_2

Employer [(21)]

"Employer" means any person who engages and remunerates an employee.

Employment [2(22)]

"Employment" includes:

a) A directorship or any other officer involved in the management of a company;

b) A position entitling the holder to a fixed or ascertainable remuneration;

c) The holding or acting in any public office.

Explanation:

The relationship between the employer and employee is called employment. Working in Public sector by a person as a result of fixed or ascertainable remuneration is called employment. Directorship of a company is also referred as employment.

Financial Institution: [2(24)]

"Financial Institution" means as an institution defined under the Companies Ordinance, 1984.

Under the Companies Ordinance, 1984, financial institution includes the following institutions:

1) A company or an institution, which transacts the business of banking or any associated or ancillary business, through its branches.

2) A Modaraba;

3) A leasing company;

4) An investment bank;

5) A venture capital company;

6) A financing company;

7) A housing finance company; and

8) Such other institution or company authorized by the law to undertake any 'Similar Business'.

Finance Society [2(25)]

"Finance Society" includes a co-operative society which accepts money on deposits or otherwise for the purposes of advancing loans or making investments in the ordinary course of business

Firm [2(26)]

"Firm" means a firm as defined in section 80. According to section 80:

Firm means the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.

Income [2(29)]

Income Includes:

a) Any amount chargeable to tax under the Income Tax Ordinance, 2001;

b) Any amount subject to collection or deduction of tax at source u/s 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A and 234(5);

c) Any amount treated as income under any provision of the Income Tax Ordinance, 2001;

d) Any loss of income.

Note: Any bonus or bonus shares declared, issued or paid by a company to the shareholders with a view to increase its paid-up share capital is not considered as income.

Explanation:

Any amount subject to deduction or collection of tax at Source under the above mentioned sections is considered as income in the hands of recipient. So, the person paying such amount is required to collect tax on such payment.

Note: The term income not only covers the incomes profits and gains but also loss from any particular head of income.

Remember, loss is a negative income; such negative income is adjusted against other incomes during the tax year while computing the total income of a person.

Industrial Undertaking [2(29C)]

"Industrial Undertaking" means

1) An undertaking which is setup in Pakistan.

2) It employs:

i) Ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or

ii) Twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; and

3) Undertaking which is engaged in:

i) Manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition;

ii) Ship-building;

iii) Generation, conversion, transmission or the distribution of the electrical energy, or the supply of hydraulic power; or

iv) The working of any mine, oil-well or any other source of mineral deposits.

4) Any other industrial undertaking which is specified by the FBR as industrial undertaking.

Intangible [2(30)]

"Intangible" means an intangible as defined u/s 24.

According to section 24(11), Intangible means:

a) Any patent;

b) Invention;

c) Design or model;

d) Secret formula or process;

e) Copy right;

f) Trade mark;

g) Scientific or technical knowledge;

h) Computer software;

i) Motion picture film;

j) Export quotas;

k) Franchise;

I) License;

m) Intellectual property or other like property or right; or

n) Contractual rights; and

o) Any expenditure that provides an advantage or benefit for a period of more than one year;

Note: Such expenditure does not include expenditure incurred to acquire a depreciable asset or unimproved land.

Definitions_1

Board [2(11)]

"Board" means the Federal Board of Revenue (FBR) established u/s 3 of the Federal Board of Revenue Act, 2007.

Charitable Purpose [2(11A)]

"Charitable Purpose" includes:

a) Relief of the poor

b) Education

c) Medical relief

d) The advancement of any other object of general public utility.

Explanation:

The term 'Charitable Purpose' has been defined in respect of section 61 of the Income Tax Ordinance, 2001, where a tax credit is allowed to a taxpayer for donations made for charitable purpose.

Company [2(12)]

Company means a company as defined u/s 80.

According to section 80, company means:

i) A company as defined in the Companies Ordinance, 1984;

ii) A body corporate formed by or under any law in force in Pakistan;

iii) A Modaraba;

iv) A body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies;

v) A trust, a co-operative society or a finance society or any other society established under any law for the time being in force;

vi) A foreign association, whether incorporated or not, which the FBR has declared to be a company for the purposes of the Income Tax Ordinance, 2001;

vii) A Provincial Government;

viii) A local authority in Pakistan'

ix) A small company;

Explanation:

Generally, a company represents that form of organization that has separate legal entity, formed under particular law and has distinct features from sole proprietorship and partnership.

However, under the Income Tax Ordinance, 2001, it has been granted broad concept merely from business organization of shareholders. For example; a Provincial Government, a local authority, a foreign association declared by the FBR to be a company, a trust etc.

So, under the Income Tax Ordinance, 2001, the term company should be considered from its all angles.

Commissioner [2(13)]

"Commissioner" means a person appointed as a Commissioner of the Income Tax (CIT) u/s 208, and includes a taxation officer vested with all or any of the powers, and functions of the Commissioner.

Explanation:

1) Who Appoints the Commissioner?

Commissioner is appointed by the FBR u/s 208 of the Income Tax Ordinance, 2001.

2) Basic function of the Commissioner:

Commissioner performs all such functions as are required by any provision of the Income Tax Ordinance and as directed by the FBR.

3) Powers of the Commissioner:

Briefly speaking, the Income Tax Ordinance, 2001 revolves around the Commissioner because lot of powers has been granted under such Ordinance to the Commissioner.

4) Authority which supervises the CIT:

FBR and RCIT under whose jurisdiction, the Commissioner works, supervise the Commissioner of Income Tax.

Note: Income Tax Ordinance, 2001 also permits the delegation of work. If some work of Commissioner is delegated to a taxation officer, such taxation officer may enjoy all powers of the Commissioner.

Co-operative Society [2(14)]

"Co-operative Society" means a co-operative society registered under the Co- operative Societies Act, 1925 or under any other law for the time being in force in Pakistan for the registration of co-operative societies

Debt [2(15]

Debt means any amount owing, including:

a) Accounts payable;

b) Promissory notes;

c) Bills of exchange;

d) Debentures;

e) Securities;

f) Bonds; or

g) Other financial instruments.

Explanation:

Any amount payable by the person is called debt, whether such amount is:

i) Long term or short term

ii) Interest bearing or interest free

iii) Trade debt or any other debt

Depreciable Asset:

"Depreciable Asset" means a depreciable asset as defined in section 22. According to section 22:

"Depreciable asset" means any

a) Tangible movable property

For example: Furniture, Machinery etc.

b) Immovable property (other than unimproved land)

For example: Land, Building etc.

c) Structural improvement to immovable property owned by a person

For example: Road, Car parking, Airport runway, Railway line etc.

that:

i) has a normal useful life exceeding one year.

ii) is likely to loose value as a result of normal wear and tear, or obsolescence; and

iii) is used wholly or partly by the person in deriving income from business chargeable to tax.

Note: Where the total cost of any asset has been allowed as a deduction in the year of its purchase, then such asset shall not be treated as "depreciable asset".

Dividend [2(19)]

Dividend is that part of divisible profits of a company which is distributed among its members. For the, purpose of the Income Tax Ordinance, 2001, dividend includes the following transactions:

1) Any distribution of accumulated profits by a company to its shareholders;

2) Any distribution of profits to modaraba certificate holders

3) Any distribution of profits to the shareholders or Modaraba certificate holders by way of debenture or any other deposit certificate.

4) Any distribution to the shareholders or Modaraba certificate holders on the liquidation of the company to the extent of the accumulated profit of the company (if the recipient is entitled to participate in the surplus assets in the event of the liquidation of a company).

5) Any distribution to the shareholders or Modaraba certificate holders on the reduction of capital to the extent of the accumulated profits of the company (if the recipient is entitled to participate in the surplus assets in the event of the liquidation of a company).

6) Any payment made by a private company or trust of any sum to its shareholders, if the following conditions are fulfilled:

i) The payment is made by way of:

a) Advance,

b) Loan,

c) Payment on behalf of a shareholder, or

d) Payment for the individual benefits of a shareholder,

ii) The payment is made to the extent to which the company possesses accumulated profits.

However, the following payments by a private company shall not be treated as dividend'

i) Any loan or advance made in the ordinary course of the company's business where the lending of the money is the business of the company.

ii) Any dividend which is adjusted against the amount of loan or advance given by the company to its shareholders and was previously treated as dividend.

i) Any distribution to such a shareholder or debenture holder who is not entitled to participate in surplus assets of the company in the event of its winding-up.

7) Any after tax profit of a branch of a foreign company operating in Pakistan.

Eligible Person [(19A)]

"Eligible Person" for the purpose of Voluntary Pension System Rules, 2005 means

Employee [2(20)]

"Employee" means any individual engaged in employment,

Definitions

Accumulated profits [2(1)]

For the purposes of distribution or payment of dividend, the term "accumulated profits" has been defined to include the following:

1) Reserve of any type. It may be made up by the company (wholly or partly) out of any allowance, deduction or exemption available under the Income Tax Ordinance, 2001.

2) All profits of the company up to the date of distribution of dividend. The dividend may be distributed under the normal procedure (i.e., declaration and payment of dividend), or on the reduction of capital or may be treated as dividend in a case where the private company has given loans, etc. to its shareholders.

3) In case of liquidation of a company or a trust, all profits upto the date of its liquidation.

Explanation:

Accumulated profit performs the vital role in the distribution and payment of dividend. Dividend is declared and paid by considering the amount of accumulated profit. The term accumulated profit has special meanings in the Income Tax Ordinance, 2001, in addition to its accounting concept. For example; in accounting only revenue reserves are normally considered as the part of accumulated profit but under the income tax, reserves of any types are known as accumulated profit.

Appellate Tribunal:

"Appellate Tribunal" means the Appellate Tribunal established under section 130.

Explanation:

1) Status of the ITAT

Income Tax Appellate Tribunal is the highest appellate authority under the Income Tax Ordinance, 2001.

2) Who appoints the ITAT?

The Income Tax Appellate Tribunal (ITAT) is appointed by the Federal Government.

3) Who may appeal to the ITAT?

If a taxpayer or Commissioner of Income Tax (CIT) is not satisfied with the decision of the Commissioner's (Appeals). The un-satisfied party may appeal to the appellate tribunal.

4) Basic function of the tribunal:

The basic function of the tribunal is to hear the appeals against the decisions of Commissioner (Appeals)

5) Head of the appellate tribunal:

Head of the appellate tribunal is called Chairman. Chairman is appointed by the Federal Government, generally, out of the judicial members of the tribunal.

6) Members of the ITAT:

There are two types of the Income Tax Appellate Tribunal (ITAT) members.

i) Judicial members

ii) Accountant members

Approved Gratuity Fund [2(3)]

"Approved Gratuity Fund" means a gratuity fund approved by the Commissioner under part-III of the Sixth Schedule.

According to Part-III of the Sixth Schedule, Gratuity is a lump sum payment received by the employee at the time of retirement. So, employer creates a fund in the name of gratuity fund for future benefits of their employees. If employer applies to the Commissioner of Income Tax (CIT) for approval of such gratuity fund and approval is granted by the CIT, it is known as approved gratuity fund. Approval of gratuity fund is demanded to avail certain benefits attached with approval.

Approved Employment Pension or Annuity Scheme [2(3D)]:

"Approved Employment Pension or Annuity Scheme" means any employment related retirement annuity scheme approved under the Income Tax Ordinance, 2001, which makes periodical payment to a beneficiary:

For example: i) Approved Superannuation Fund

ii) Public Sector Pension Scheme

iii) Employees Old-Age Benefit (EOAB) Scheme

Approved Superannuation Fund [2(4)]

"Approved Superannuation Fund" means a superannuation fund or any part of it, approved by the Commissioner under part-II of the Sixth Schedule.

According to Part-II of the Sixth Schedule, Approved Superannuation Fund is maintained by employer for the future benefits of the employees. If employer applies to the Commissioner for approval of such fund and approval is granted by the CIT, it is known as Approved Superannuation Fund. Approval of Superannuation Fund is demanded to avail certain benefits attach with approval.

Assessment [2(5)]

Assessment includes re-assessment and amended assessment and the cognate expressions shall be construed accordingly.

Explanation:

Assessment is the process under which taxable income, tax liability or refund of the taxpayer is determined under the Income Tax Ordinance, 2001. Assessment is the responsibility of the Commissioner of Income Tax.

However, if complete return is filed by the taxpayer, such complete return may be considered as assessment order. Assessment also includes re-assessment and amended assessment.

Association of Persons [2(6)]

"Association of persons" means an association of persons as defined u/s 80.

According to section 80, "Association of person" includes:

a) A firm

b) A Hindu undivided family (HUF)

c) Any artificial judicial person (AJP)

d) Any body of persons formed under a foreign law

However, the term "Association of Persons" does not include a company.

Banking Company [2(7)]

"Banking Company" means a banking company as defined in the Banking Companies Ordinance, 1962 and includes any body corporate which transacts the business of banking in Pakistan.

Explanation:

For the income tax purposes, banking company has the same meanings as are assigned to this term under the Banking Companies Ordinance, 1962. It is inclusive definition; it not only covers the meanings given to such term under the Banking Companies Ordinance, 1962 but also includes such body corporate, which transacts the business of banking in Pakistan.

Business [2(9)]

"Business" includes any:

a) Trade;

b) Commerce;

c) Manufacture;

d) Profession;

e) Vocation; or

f) Adventure or concern in the nature of trade, commerce, manufacture, profession or vocation.

However, the term business does not include employment.

Explanation:

Business not only depicts its original meanings like any activity undertaken with the motive of earning profit but also includes trade, commerce, manufacture etc.

Trade:

Purchase and sale of goods with a motive of earning profit, undertaken by a person is called trade.

Commerce:

All those activities which facilitate the trade represent commerce.

For example, Insurance, transportation, warehousing, marketing, banking etc.

Manufacture:

Any process in which an article is either converted into another article or product or is so changed or reshaped that it becomes capable of being put to use differently or distinctly.

Profession:

Profession means an ability of a person to do some particular work purely by the application of intellectual skill or through manual skill controlled by intellectual skill.

For example: Professor, Doctor, Lawyer etc.

Vocation:

Vocation means an ability of a person to do some particular work, generally, by the application of manual skill. For example: Carpenter, dancer etc.

Capital Asset:

"Capital Asset" means property of any kind held by a person, whether or not connected with a business, but does not include:

1) Any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the purpose of business.

Under the Income Tax Ordinance, 2001, Stock-in-Trade means only those goods which are kept by the person for resale purpose with the motive of earning profit.

On the other side, if shares are kept for resale purpose (It means stock of shares for shares trading), these are not included in the definition of stock-in-trade.

Point to be noted:

Shares always represent capital asset.

Purpose of holding of shares is immaterial.

Note: Any profit and gains arising from sale of capital asset is taxable under the head capital gains.

2) Any depreciable asset (Asset on which depreciation is allowed u/s 22).

For example: Plant, machinery, building etc.

3) Any intangible asset on which amortization is allowed u/s 24.

For example: Patent, copy right, trade mark etc.

4) Any immovable property.

For example: Land, building etc.

5) Any movable property held for personal use by the person or any member of the person's family dependent on the person.

For example: Car held by the person's family etc.

Note: Following movable property is included in the definition of capital asset:

a) A painting, sculpture, drawing or any other work of art.

b) Jewelry

c) A rare manuscript, folio or book.

d) A postage stamp or first day cover

e) A coin or medallion; or

f) An antique

Further Examples of Capital Assets:

1) Modaraba Certificates

2) Participation Term Certificates (PTCs)

3) Term Finance Certificates (TFCs)

4) Musharka Certificates

5) Shares of Companies

6) Pakistan Telecommunication Corporation (PTC) vouchers issued by the Government of Pakistan.

7) Partner's share in an AOP