Charge of tax Residential status Geographical source of

Charge of tax, Residential status, Geographical source of income, Scheme of Taxation and Maintenance of Tax Records By: Abdul Aziz Tayabani Advocate High Court Noorani & Company at Karachi Tax Bar Association 08 August 2016

Objective ► The objective of this presentation is to discuss and develop some of the fundamental principles of taxation as applicable under the Income Tax Law in Pakistan. Page 2 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Contents 1. 2. 3. 4. 5. Page 3 Charge of tax Residential Status Geographical source of income Scheme of taxation Maintenance of Tax Records Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

1 - Charge of Tax Page 4 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income – General Meaning ► All receipts by a person does not necessarily constitute ‘Income’. ► Generally, income connotes a periodical monetary return, ‘coming in’ with certain regularity from a definite source. ► Revenue receipts are almost always taxable (being income) unless they are explicitly provided as not to be taxable. ► Following are some of the basic concepts relating to charge of tax: Page 5 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income & Tax [S. 2 (29) & S. 2 (63) ] Income ► “Income” includes any amount chargeable to tax under this Ordinance, any amount subject to collection or deduction of tax under Ordinance, any amount treated as income under any provision of this Ordinance and any loss of income. Tax ► “Tax” means any tax imposed under Ordinance, and includes any penalty, fee or other charge or any sum or amount leviable or payable under this Ordinance; Page 6 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Total Income (S. 10 ) ► The total income of a person for a tax year shall be the sum of the: q Person‘s income under following prescribed heads of income for the year namely: • Salary; (Sec. 12) • Income from Property; (Sec. 15) • Income from Business; (Sec. 18) • Capital Gains; (Sec 37) • Income from other sources; (Sec. 39) q Person‘s income exempt from tax under any of the provisions of this Ordinance. Page 7 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Deductible Allowance [S. 02 (16)] ► Deductible allowance means an allowance that is deductible from total income. Following are the deductible allowances that are allowed under the Income Tax Ordinance, 2001: q Zakat paid by the person in a tax year. q Any amount paid to Worker’s Welfare Fund by the person in a tax year. q Any amount paid to Worker’s Participation Fund by the person in a tax year. Page 8 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Taxable Income (S. 9) ► The taxable income of a person for a tax year shall be the total income of the person for the year reduced (but not below zero) by the total of any deductible allowances allowed under the Income Tax Ordinance, 2001, of the person for the year. Page 9 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Person (S. 80) ► The following shall be treated as persons for the purposes of this Ordinance, namely: q An individual. q A company or association of persons incorporated, formed, organised or established in Pakistan or elsewhere. q The Federal Government, a foreign government, a political sub-Division of a foreign government, or public international organisation. Page 10 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Salary Income (S. 12) ► Salary is charged to tax on receipt basis. ► Any amount received from the employer, whether of capital or revenue nature, is treated as salary. ► Gross salary exceeding Rs. 400, 000 is charged to tax at progressive tax rates ranging from 5% to 30%. ► Important definitions: q “Employee” means any individual engaged in employment; q “Employer” means any person who engages and remunerates an employee; Page 11 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Salary Income (S. 12) (Cont. d. ) q “Employment” includes: • A directorship or any other office involved in the management of a company; • A position entitling the holder to a fixed or ascertainable remuneration; or • The holding or acting in any public office. Page 12 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income from property (S. 15) ► Rent received or receivable by a person for a tax year (other than exempt from tax) shall be chargeable to tax in that year under the head “Income from Property”. ► “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. ► Income from property is charged to tax rates applicable to respective taxpayer as per First Schedule after allowing certain deductions as provided in section 15 A. ► Any amount received which is not adjustable against the monthly rent will be divided into 10 years and will be taxed as Rent. Page 13 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income from Business (S. 18) �‘Income from Business’ includes any profits and gains of any business carried on by a person at any time in the year. �In computing ‘Income from Business’ deduction is allowed for any expenditure incurred by the person in the year, wholly and exclusively for the purpose of business. �Special provisions have been laid down for specified deductions / allowances which inter alia include: q Depreciation on fixed assets, q Amortization of intangibles, q Amortization of pre-commencement expenditure, q Bad debts, q Profit on debts, financial costs and lease payments. �Certain expenditure may not be deductible unless specified conditions are met, commonly known as legally inadmissible expenditures. Page 14 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income from Capital Gain (S. 37) ► Section 37: Gain derived on disposal of a “capital asset” is charged to tax under the head ‘Capital Gains’. If disposal is made after holding for more than one year, the 25% gain shall be exempt from tax and remaining 75% gain shall be charged to tax. The term ‘capital asset’ includes property of every kind, whether or not connected with a business, excluding specified items. ► Section 37(1 A): Gain arising on disposal of immovable property held for a period of upto three years is chargeable to tax as per the applicable rates in the 1 st schedule. ► Section 37 A: Capital gain arising from the disposal of securities (including shares of listed companies) held for a period of less than a year is chargeable to tax at prescribed rates. Page 15 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income from Other Sources (S. 39) �Any income not covered under any of the above heads of income is classified as ‘Income from Other Sources’. �In computing the income from other sources, deduction is allowed for any expenditure incurred in deriving such income. �Dividend Income �Profit on Debt Page 16 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Tax Credits ► A tax credit is a tax incentive which allows taxpayer to subtract the amount of the credit from the total tax they owe. ► Incentive tax credits may be used to encourage behaviors like investments or for giving benefits to certain persons. ► A tax credit directly reduces tax liability ► Most tax credits are non-refundable in nature and so do not apply if no tax is payable. Page 17 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Tax Credits (Cont. d. ) ► Following are the tax credits allowed under the Ordinance: q Tax credit on charitable donations. q Tax credit for investment in shares and insurance. q Tax credit for contribution to an approved pension fund. q Tax credit for investment. q Tax credit for enlistment. Page 18 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Tax Year (S. 74) Normal Tax Year ► A period of twelve months from 1 July to 30 June referred to as ‘normal tax year’ and is denoted by the calendar year in which the tax year ends. For the year ending 30 June 2016 the tax year shall be 2016. Special Tax Year ► Any income year ending other than 30 June is ‘special tax year’ and is denoted by the calendar year relevant to the normal tax year in which closing date of the special tax year falls. Special year 1 Jan 2016 to 31 Dec 2016 is a special tax year. This year end falls in normal tax year 2017, therefore tax year 2017 will be the tax year for this special year. Page 19 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

2 - Residential Status

Resident & Non Resident Person (S. 81) ► A person shall be a resident person for a tax year if the person is q A resident Individual, resident Company or resident Association of Persons for the year. q The Federal Government. ► A person shall be a non-resident person for a tax year if the person is not a resident person for that year. Page 21 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Resident Individual (S. 82) ► Residential status for tax purpose has no relationship with nationality. Residential status of an individual is based on physical number of days he is physically present in Pakistan during a tax year. Therefore a foreigner can also be a resident person and a Pakistani national may become non resident for tax purpose. ► An individual shall be a resident individual for a tax year if the individual : q Is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty three days or more in the tax year. q Is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year. Page 22 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Resident Company (S. 83) ► A company shall be a resident company for a tax year if q It is incorporated or formed by or under any law in force in Pakistan. q The control and management of the affairs of the company is situated wholly in Pakistan at any time in the year. q It is a Provincial Government or Local Government in Pakistan. Page 23 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Resident Association of Person (S. 84) ► An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year. Page 24 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

3 - Geographical Source of Income Page 25 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Geographical Source of Income (S. 101) ► As per the provisions of Income Tax Ordinance, 2001 (“Ordinance”), income has been divided into two heads on the basis of geographical source namely: ►Pakistan Source Income ►Income Outside Pakistan Page 26 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Pakistan Source Income – Salary (S. 101) ► Salary shall be Pakistan source income to the extent to which the salary : q Is received from any employment exercised in Pakistan, wherever paid. q Is paid by, or on behalf of, the Federal Government, a Provincial Government, or a Local Government in Pakistan, wherever the employment is exercised. Page 27 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Pakistan Source Income – Business Income (S. 101) ► Business Income can be Pakistan source income based on status of the person i. e. Resident or Non-Resident. ► Business income of a resident person shall be Pakistan source income to the extent to which the income is derived from any business carried on in Pakistan. ► Business income of a non-resident person shall be Pakistan-source income to the extent to which it is directly or indirectly attributable to: q A permanent establishment of the non-resident person in Pakistan Page 28 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Income Outside Pakistan [S. 101 (16)] ► An amount shall be foreign source income to the extent to which it is not Pakistan source income i. e. if any income does not fall under any category of the Pakistan source income it shall be treated as foreign source income. Page 29 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

4 - Scheme of Taxation

Scheme of Taxation - NTR and FTR ► The Income Tax Ordinance, 2001 (“Ordinance”) provides for two distinct and parallel scheme of taxation vis-à-vis a Normal Tax Regime (NTR) and a Final Tax Regime (FTR) Page 31 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Schemes of Taxation Normal Tax Regime (NTR) ► The computation of income and tax thereon under the NTR is governed by the provisions of sections 9, 10 and 11 of the Ordinance. Under NTR, tax is imposed on heads of income of a taxpayer by applying the rates as prescribed in the First Schedule. ► For each head of income, certain deductions are allowable while computing income under the respective head. Moreover, the tax liability under NTR is available for adjustments against certain tax credits as specified, including the amount of tax deducted at the time of making payment to the recipient. Page 32 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Schemes of Taxation Final Tax Regime (FTR) ► Under the Ordinance (section 4), amounts governed under FTR are not to be included in the computation of “taxable income”. Sections 8 and 169 of the Ordinance, being the governing sections prescribe the following distinct features of income governed under FTR: q Income falling under FTR shall not be chargeable to tax under any head of income in computing the taxable income of the person who derives it for any tax year; q No deduction is allowable for any expenditure incurred in deriving the income falling under FTR Page 33 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Schemes of Taxation Final Tax Regime (FTR) (Cont. d. ) ► Examples of income that is subject to FTR include but not limited to the following: q Dividend income earned by a shareholder, other than Company q Export of goods and receipt of indenting commission q Royalty and Fee for Technical Services of a non-resident person. q Commercial imports made by an importer, other than a “large import house” q Prizes and winnings q Sale of goods by a trader not being a public company listed on a registered stock exchange in Pakistan q Brokerage and commission Page 34 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

5 - Maintenance of Tax Records Page 35 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Records (S. 174) ► Every taxpayer deriving income chargeable under the head "Income from Business" shall maintain proper books of account, documents and records with respect to: q All sums of money received and expended and the matters in respect of which the receipt and expenditure takes place. q All sales and purchases of goods and all services q All assets q All liabilities q In case of a taxpayer engaged in assembly. Production processing, manufacturing, mining or like activities, all items of cost relating to the utilization of materials, labour and other inputs. Page 36 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Records (S. 174) (Cont. d. ) ► Taxpayers deriving income from salary shall maintain salary certificate indicating the amount of salary and tax deducted there from. ► Taxpayers deriving income from property shall maintain, tenancy agreement, receipt for amount of rent received and evidence of deductions claimed in respect of rental income. ► Taxpayers deriving income from capital gains shall maintain, evidence of cost of acquiring the capital asset, and evidence for consideration received on disposal of capital asset. ► Taxpayers deriving income from other sources shall maintain relevant records of income received under this head Page 37 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Records (S. 174) (Cont. d. ) ► The accounts and documents are required to be maintained for six (06) years after the end of the tax year to which they relate. ► The books of accounts, records and other documents required to be maintained by a taxpayer may be kept on electronic media, provided sufficient steps have been taken to ensure the sanctity and safe keeping of such accounts, documents and records. ► Where any proceeding is pending before any authority or court the taxpayer shall maintain the record till final decision of the proceedings. Page 38 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Records (S. 174) (Cont. d. ) ► The books of accounts, documents and records are required to be maintained by a company in accordance with international accounting standards and as required under the Companies Ordinance, 1984. ► The books of accounts, documents and records required to be maintained by a taxpayer shall be kept at the place where the taxpayer is carrying on the business or, where the business is carried on in more places than one, at the principal place of business or at each of such places if separate books of accounts are maintained in respect of each place. Page 39 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records

Thank You Page 40 Charge of tax, Residential statues, Geographical source of income, Scheme of taxation and Maintenance of Records