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 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 Petiwalas 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

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INCOME TAX (Tax Year 2012)

TABLE OF CONTENTS
Sr. no. Topics
1 2 3

Page no. Sr. no. Topics

5 9 11
12 13 14

Page no.
36 37 39

Basic concepts Salary Provident Fund

Bad Debts SPV Methods of Accounting Minimum Tax

Employee Share Scheme Capital Gain

12

15

40

13

16

Losses ( concepts ) Losses

43

Final Tax Regime Tax Credit

15

17

45

19

18

Group Taxation 49 & Group Relief AOP 53

Income From Business In-admissible Expenses Depreciation

22

19

25

20

Tax on Tax

57

10

27

21

Share from AOP

59

11

Amortization

35

22

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

COMPUTATION OF TAX LIABILITY (Under NTR)

Part A Profile of Assessee Name: NTN : (1) Personal Status I. II. III. IV. Salaried Non-Salaried AOP Company

Part B Computation of Income Salary ( U/S 12 ) Income From Business a) Speculative b) Non-Speculative Capital Gain ( U/S 37 ) Income From Other Sources Less: WWF WWPF Zakat Donations U/S 61 Add: Income from property Capital gain ( U/S ) 37 A Total Income ( excluding share from AOP ) Add: Share from AOP Total Taxable Income

Rs. xxx Xxx xxx xxx xxx

Part C Computation of Tax Liability Rs. Tax on Tax Able Income Tax on person Add : Income Prom Property Capital Gain ( U/S ) 37A Tax Credits: Less: Allowances (xxx) (xxx) (xxx) xxx xxx xxx

(2) Residential Status I. II. III. IV. Resident Non-Resident Pakistan source Foreign Source

Senior Citizen Allowances (xxx) Full time Teacher Allowances (xxx) Foreign Tax credit (xxx) (xxx) Less : Average Relief xxx xxx xxx Investment in shares Contribution to PF Donation Profit On debt Less; Advance Tax xxx XXX Collection of Tax Deduction of Tax Advance Tax ( u/s 147 ) Tax Payable /Refundable

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

(3) Tax Year I. Normal tax Year II. Special Tax Year
III. Transitional Tax Year

(xxx) (xxx) (xxx) XXX

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

INCOME TAX ( Tax year 2012) TAX LAWS

Income Tax Ordinance

Income Tax rules

Ordinance

Schedule

Explanation

STATUS

Personal Status

Residential Status

Individual

AOP ( 25%)

Company ( 35%)

Resident

Non Resident

Salaried

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 situated wholly or partially in Pakistan. AOP may be a * firm * joint venture * Hindu undivided family * but does not include a company.
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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

By : Kashif Nawaz Jakhar

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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

Transitional 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 30th June

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

By : Kashif Nawaz Jakhar

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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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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

Perquisites

Allowances

Others benefits

Terminal benefits

T.T

Accommodation Conveyance Medical facility

[Link] ( T.T ) Conveyance allowance ( T.T ) Medical allowance (exempt upto 10% of B.S)

Loans U. bills Comp. shares TA / DA

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: Only for office use Owned ( cost ) I. Personal II. Personal + Business use Leased ( FMV ) I. Personal II. Personal + Business use 3) Medical Facility : a) Facility Given
i. ii.

( T.E ) ( 10% ) ( 5% ) ( 10% ) ( 5% )

Under the contract Not Under the Contract

( T.E ) (T.T )

b) Re-imbursement c) Insurance
Amount contributed by employer will be added in salary
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INCOME TAX (Tax Year 2012)

4) Medical facility & medical Allowance both given
i. ii. Under the contract a. Facility ( T.E ) b. Allowance ( T.T ) Not Under the contract a. Facility ( T.T ) b. Allowance (Exempt upto 10% of BS )

5) Asset is given to employee Permanently 6) Marginal cost:

FMV of Asset payment by employee = add in salary 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 II. Fund III. Scheme b. Unapproved

( T.E ) ( T.E ) (exempt upto Rs.200,000 )

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. ii. iii. Non employee Non resident Not received in Pakistan Re-employment

iv.

By : Kashif Nawaz Jakhar

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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:
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 [Link] is lower

Rs.
XXX (xxx) XXX (XXX)

Rs.
XXX

add in salary

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 .

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

EMPLYEES SHARE SCHEME
60 Capital Gain Rs.20 40 Salary Rs.10 30 Benefit given by employer or company Benefit given by Market

Example : Persons
Kashif Rameez Farhan

2010
Option sale = Rs.5000 Option sale of 200 shares @ sale price Rs. 3000

2011
Acquisition of shares Balance(300) Acquisition Sale Rs.60/ share

2012
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 Capital Gain

2010 4000 X X X

2011 X X 5000 (500 X 10 ) X 3000 (300 X 10 ) 6000 {300 X (60-40)}

2012 X X X 500 X 30 = 15000

Farhan

Salary Capital Gain

2600
{3000-(200 X 2 )

SP-FMV=70-40=30 X X

Here Rs. 10 = FMV Offer Value

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By : Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2012)

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

a) Gain

b) Disposal

c) Capital Assets

Sale price/FMV --- cost of disposal I. Sale with in one year ,100% add in taxable income II. Disposal after one year ,75% add in salary

Disposal Means Sale Transfer Destroyed Gift Relinquished

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

These o o o o o

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

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

Capital Gains

37

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

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.

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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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 II. AOP 25% III. Company 35% 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 o AOP Shall be considered under FTR 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.

ii.

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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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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 :

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

Formula to Remember

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

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

4. Final Tax :

( FTR )

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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

Table For understanding

Persons Supply Contracts Trading Manufacturing Individual/ AOP FTR FTR FTR Unlisted companies FTR NTR FTR listed companies 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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

TAX CREDIT
Tax liability Less: Senior citizen allowance Less: Full time teacher allowance Less: Foreign Tax Credit Less: Less: Less: Less: Investment in shares Pension fund Donation Profit on debt Rs. XXXX (xxx) (xxx) (xxx) . A . (xxx) (xxx) (xxx) (xxx) XXXX (xxx) XXXX (XXXX)

Less: Advance Tax Tax Payable or Tax Refundable (f negative figure)

Note( Related to Tax Credit )

Invest. In shares
Actual Amount Lower 15 % 500,000

Pension Fund
Actual Amount 20 % ------

Donation
Actual Amount 30 % ------

Profit on debt
Actual Amount 50 % 750,000 % of taxable income

FORMULA :
A X Lower = Tax credit Taxable Income
.
.

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

Rules Of Tax Credit :
Conditions
Senior citizen allowance Age 60 years or more Taxable income does exceed Rs. 10,00,000 not

Eligibility amount
Then his tax liability shall be reduced by 50%. Then his tax payable shall be reduce by 75%.

Full time teacher allowance

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

Foreign tax credit

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 income tax paid; and Pakistan tax payable in respect of foreign source income at average rate of tax. actual 15 % of T.I Rs.500,000 actual 20% of T.I

Investment in shares

o o o

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

Lower

Contribution fund

to

pension

Lower

Donation

Actual 30% of T.I Actual 50% of T.I Rs.750,000

Lower

Profit on debt

Lower

See illustration no. 2.9 & 2.10 of [Link]

By : Kashif Nawaz Jakhar Page 20

INCOME TAX (Tax Year 2012)

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

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INCOME TAX (Tax Year 2012)

INCOME FROM BUSINESS
Taxable
(Income Deduction = [Link])

Income

( 5 % discussion)

Deduction

( 95 % Discussion )

Exempt

Non speculative

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

Special
(Separate Calculation)

Allowed (20% discussion) Or ( Admissible )

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

Depreciation

Amortization

Pre-commencement

Research & Development

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

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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

Example : ( of allowed and disallowed expenses ) !!!!!!!! Income statement according to IAS !!!!!! Particulars Rs. Particulars
Purchase Opening Stock Factory Salary (10) Depreciation (70) Income Tax Admin salary Profit 300 100 50 50 40 30 500 Sales Closing Stock Dividend

Rs.
1000 50 20

1070

1070

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

Purchase Opening Stock Factory Salary Depreciation Admin salary Profit

Rs.
300 100 40 70 30 510

Particulars
Sales Closing Stock

Rs.
1000 50

1050 Solution : Computation OF Taxable Income : Rs.

Accounting Profit Add: Disallowed Expenses Salary Depreciation Income tax Less: Allowed Expenses: Dividend Income Depreciation 10 50 40 20 70

1050

Rs.
500

100

(90)

Taxable Income

510
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By : Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2012)

SECTION. 20. ALLOWED EXPENSES All expenses incurred for business. Apportionment of Expenses : e.g.
FTR

Common Expenses

NTR

500,000 Expenses 333333 27778 16667

400,000 Expenses 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

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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)

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 XXX XXX XXX ( Capital Liability ) . ( Trading Liability ) . ( Trading Liability ) .

AOP

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

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INCOME TAX (Tax Year 2012)

DONATION
INCOME U/S 61 of 2nd Schedule Less: ( as Zakat ) Rate: 30 % 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

Conditions: o 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.

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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 )

Directors car + company car ( not plying for hire )

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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 % 30 % 15 % Assets Building Computer and related equipment All other assets

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

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INCOME TAX (Tax Year 2012)

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 % ) Full yearly
Cost Initial allowance Depreciation 10,00,000 (5,00,000) 5,00,000 (50,000) 4,50,000 5,00,000 50,000 (60%)

60 %
5,00,000 . 30,000. 5,30,000

NOTE
Full year depreciation charge in the year of
purchase.

No depreciation is charged in the year of disposal.

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INCOME TAX (Tax Year 2012)

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.

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INCOME TAX (Tax Year 2012)

Examples :

a(I)

Computation of Depreciation
e.g. numerical example Year
2007 cost Initial allowance(50%) Depreciation(15%) 2008 2009 Depreciation(15%) Depreciation(15%)

Furniture & Fixture

500,000 500,000 (75000) 425,000 (63750) 361250 (54188) 307062

Plant
10,00,000

Tax allowance
500,000

(500,000) 500,000 (75000) 425,000 (63750) 361250 (54188) 307062

150,000 650,000 127500 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

its the income from business in 2009. now less depreciation Rs. 54188 of this year from this income .

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INCOME TAX (Tax Year 2012)

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

Year
2007 Cost Initial allowance Depreciation(15%) 2008 2009 Depreciation(15%) Depreciation(15%)

Plant
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

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INCOME TAX (Tax Year 2012)

Cases for Gain or Loss

Exceptions:

( three cases )

Building ( Case 1 )
= sale price Tax WDV = Sale Price ( cost tax Depreciation )

Export of use asset ( Case 2 )

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

NOTE:

NOTE:

If sale price is above the cost price If a used asset sold, out of Pakistan , then the cost shall be consider as sale price sale price will be consider as cost. So, So, =Sale Price ( sale price tax Depreciation ) = cost ( cost tax Depreciation ) =Sale Price - sale price + tax Depreciation = cost cost + tax Depreciation = Tax depreciation = Tax depreciation 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:

CAR
Maximum cost of car is Rs. 1500,000

its not about vehicle . because all cars are vehicle but all vehicles are not cars.
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 Cost Depreciation ( 15 % )

X car

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

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

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INCOME TAX (Tax Year 2012)

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

X car

= ( sale price x n ) Tax WDV = 1125,000 1275,000 Loss = ( 150,000 )

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INCOME TAX (Tax Year 2012)

AMORTIZATION
NOTE 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.

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 = useful life
cost . x days used

Patent Purchase price= Rs. 300,000 Life = 15 years Date of purchase . 1-1-2011 Year end = 30 June, 2011 Solution, =
cost . useful life x days used

= 200,000 . x 181
7 X 365

= 300,000 .
10 X 365

x 181

= 14168 2012 = 200,000

7 X 365 . x 365

= 14876 = 300,000 .
10 X 365 x 365

= 28571

= 30,000

NOTE: use full life in days

By : Kashif Nawaz Jakhar Page 35

INCOME TAX (Tax Year 2012)

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 didnt 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 D Situations. (Receipts)
100,000 50,000 Nothing 80,0000

Actual Bad Debts

nil 50,000 100,000 20,000

Tax Treatment
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

By : Kashif Nawaz Jakhar

Page 36

INCOME TAX (Tax Year 2012)

!!!!!!! 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 Expense claim in Tax : The amount which paid against lease that amount will be allowed. ( Rs. 50,000 ) 10,000 1,000 500 11,500

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INCOME TAX (Tax Year 2012)

!!!!!!!!!

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
Itefaq (Sugar)
single company = loan 5 million Group = loan 20 million

SPV
.5 interest Itefaq ( IT ) Investment .5 interest 5 m loan

NOTE NOTE
loan from subsidiary is not allowed . Loan & lease are both allowed to SPV.

BANK

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

SPV Bank

1 m --income(exempt) 5 m loan return Page 38

By : Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2012)

METHODS OF ACCOUNTING

Accrual Basis ( Absorptional Costing )

Cash basis ( Marginal Costing )

Company

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

Factor of Production
Material Labour FOH Variable

Marginal Costing
50 10 20 80

Define Small company .

Rate : 25 %

By : Kashif Nawaz Jakhar

Page 39

INCOME TAX (Tax Year 2012)

MINIMUM TAX
Rate :
1 % of Turnover Or Actual Tax Liability income is exempt .
Higher

Who will pay Tax :

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

Turnover :
means,

Sale

Provisions :
1st Year

Excludes sales tax , excise duty Services Share from AOP

forward

Excess of actual Tax Liability shall be carry for subsequent 3 years.

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

INCOME TAX (Tax Year 2012)

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.

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

Advance Tax on Electricity Bill As minimum Tax :
advance tax is payable on 1. Commercial & 2. Industrial Bills RANGE : TAX
From Rs.80 to Rs. 1500

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

If monthly bill exceeds Rs. 20,000 Users

Commercial Industrial

Rate
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.

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

CH # 15 :

LOSSES
in urdu

General concepts :

ENGINE 1

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.
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By : Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2012)

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.

By : Kashif Nawaz Jakhar

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 income from business

NO Loss No Loss C type A type A type

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

separate block of income non-speculative speculative 37 37-A

capital gain

other losses.
EXPLANATION:
A type:

B 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.

Set off :

adjustment of one income or loss in

other head . Inter head adjustment: adjustment in the same head. Carry forward: Transfer to next year.
By : Kashif Nawaz Jakhar Page 45

INCOME TAX (Tax Year 2012)

Example : 1
Case 1 Rs.(000)
Salary Non-speculative business Speculative Capital gain Other Losses 500 (800) (400) 700 (300)

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

Total Income 1200 1200 Requirement : I. Compute taxable income II. amount of loss to be carry forward Solution: I. Case 1 Rs.(000)
Total Income Other losses Non-speculative business 1200 (300) 900 (800)

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

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

100 ( 400 )

-----( 400 )

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

Example : 2
Case 1 Rs.(000)
Salary Non-speculative business Speculative Capital gain Other Losses or Gain 500 (1000) (400) 700 (300)

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

Total Income 1200 1500 Requirement : III. Compute taxable income IV. amount of loss to be carry forward Solution: I. Case 1 Rs.(000)
Total Income Other losses Non-speculative business 1200 (300) 900 (900)

Case 2 Rs.(000)
1500 (1000)

Total Income II. Losses to be c/f.

-------

500 .

non-speculative (1000-900) ( 100 ) Speculative ( 400 )

------( 400 )

By : Kashif Nawaz Jakhar

Page 47

INCOME TAX (Tax Year 2012) 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 .

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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

Note

GROUP RELIEF
{ surrender of tax loss by a subsidiary company } 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, 55% or more 75% or more in case of listed companies. in case of non-listed companies.

Note

NOTE

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.

By : Kashif Nawaz Jakhar

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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)

Listed Company

S-1
loss incurred in 2006 (adjusted in next 6 tax years) 2012.

Assume :

the losses were surrender for two years.

So, 2007----- 2008

S-2
losses = 30+40= 70

2009, 2010, 2011, 2012

S-1
Remaining 30 were adjusted by original subsidiary company.

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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 companys 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.

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

Some Important Concepts

S H

stands for stands for

subsidiary company holding company

1st year = 30

2nd 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 companies 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.

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

CH # 6

ASSOCIATION OF PERSONS ( AOP )

1. In Case of Loss ( Loss of AOP ):
Loss shall not be distributed among the partners .

Important Notes

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 And :

Excluding Share from AOP

Lower

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

.

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INCOME TAX (Tax Year 2012)

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

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

Rate of share
20% 30% 50%

Share from AOP

150,000 225,000 375,000

Business Income
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 .

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012) (ii) Mr. B;

Mr. Bs 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 ) 250,000 . X 375,000 10,00,000 Tax payable . 500,000 375,000 875,000 306250

X share form AOP

( 93750) 212500

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

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

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

Computation of tax liability .

Tax liability Property 37-A Tax Liability Less : Senior citizen Allowance Less : Full time Teacher Allowance Less : Foreign Tax Credit

RS
XXXXX

Less Less Less Less

: : : :

Investment in shares Donation Contribution Profit on debt Tax Payable

Less : Advance Tax

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

By : Kashif Nawaz Jakhar

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INCOME TAX (Tax Year 2012)

TAX ON TAX
Tax of employee paid by the employer.

Impacts:
Tax Born by Employer

1. Income 2. Advance Tax

Tax in Salary. Less from tax liability.

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
Case 1: 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. 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 ------

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INCOME TAX (Tax Year 2012)

SHARE FROM AOP

Computation of taxable income Taxation of members

Computation of taxable income :

Assume share fro AOP is equally distributed among the members of AOP. EXAPMLE : Mr. X ( 50% )
Salary Electricity Bills Share from AOP 50 ------200

Mr. Y ( 50% )
10 40 200

Total
60 40 400

250
This amount will be added in the income from other sources of the Mr. X only for Rate purpose

250
If we assume that Mr. Y have no any source of income other than share from AOP. So in this condition the share from AOP for Mr. Y will be exempt

500

Rs.400 is balancing figure

Distributable Income

Calculation of distributable income taxable Income ( AOP ) Less: Tax liability Distributable income 1200 (700) 500

THE END
By : Kashif Nawaz Jakhar Page 59