Income Tax Law Definitions

In the Name of Allah, the Most Beneficent, the Most Merciful

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Income Tax Law – Lectures
Based On Income Tax Ordinance, 2001 As
Amended upto 30th June, 2011 And As
Applicable For The Tax Year 2012

Habib Fakhruddin, FCA
Amir Alam Khan & Co.,
Chartered Accountants
55/1, Bank Road, Rawalpindi

2

CHAPTER I
PRELIMINARY

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DEFINATIONS
Section 2

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ACCUMULATED PROFITS – Clause (1) of Section
2

“ Accumulated profits" in relation to distribution or payment
of a dividend , include –
 Any reserve made up wholly or partly of any allowance,

deduction, or exemption admissible under this Ordinance;
 For the purposes of
sub-clauses (a), (b) and (e) of clause (19) all profits
of the company including income and gains of a trust up
to the date of such distribution or such payment, as the case
may be; and
 For the purposes of sub-clause (c) of clause (19) ,

includes all profitsEDITED company including income and
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gains of a trust up to the date of its liquidation.
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AMALGAMATION - Clause (1A) of Section 2
“ Amalgamation” means the merger of one or more:
• Banking companies ;
• Non-banking financial institutions ;
• Insurance companies;
• companies owning and managing
industrial undertakings ; or
• companies engaged in providing services and not being a
trading company or companies ;
in either case at least one of them being a public company , or a
company incorporated under any law, other than Companies
Ordinance, 1984, for the time being in force, in such manner that
–
• The assets of the amalgamating company or companies
immediately before the amalgamation become the assets of
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the amalgamated company by virtue of the amalgamation,
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otherwise than by purchase of such assets by the
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amalgamated company or as a result of distribution of
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such assets to the amalgamated company after the
6 Continued

AMALGAMATION - clause (1A) of Section 2
• The liabilities of the amalgamating company or
companies immediately before the amalgamation become
the liabilities of the amalgamated company by virtue of
the amalgamation.
“ Amalgamating company or companies ” means the
company or companies which so merge.
“ Amalgamated company ” means the company with which
they merge or which is formed as a result of merger.

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APPROVED GARTUITY FUND - Clause (3) of
Section 2
“Approved gratuity fund ” means a gratuity fund approved
by the Commissioner in accordance with Part III of the Sixth
Schedule (This is not covered in the present course).

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APPROVED ANNUITY PLAN - Clause (3A) of
Section 2
“Approved Annuity Plan ” means an Annuity Plan approved
by Securities and Exchange Commission of Pakistan (SECP)
under Voluntary Pension System Rules, 2005 and offered by a
Life Insurance Company registered with the SECP under
Insurance Ordinance, 2000.

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APPROVED INCOME PAYMENT PLAN
– Clause (3B) Of Section 2
“Approved income payment plan ” means an income
payment plan approved by securities and exchange
commission of Pakistan (SECP) under voluntary pension
system rules, 2005 and offered by a pension fund manager
registered with the SECP under voluntary pension system
rules, 2005.

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APPROVED PENSION FUND - Clause
(3C) Of Section 2
“Approved Pension Fund ” means Pension Fund approved
by Securities and Exchange Commission of Pakistan (SECP)
under Voluntary Pension System Rules, 2005, and managed
by a Pension Fund Manager registered with the SECP under
Voluntary Pension System Rules, 2005.

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APPROVED EMPLOYMENT PENSION
OR ANNUITY SCHEME - Clause (3D)
Of Section 2.
“Approved employment pension or annuity scheme ”
means any employment related retirement scheme approved
under this ordinance, which makes periodical payment to a
beneficiary i.e. Pension or annuity such as approved
superannuation fund, public sector pension scheme and
employees old-age benefit scheme.

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APPROVED OCCUPATIONAL
SAVINGS SCHEME - Clause (3E) of
Section 2
“Approved Occupational Savings Scheme ” means any
approved gratuity fund or recognized provident fund.

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APPROVED SUPERANNUATION FUND - Clause
(4) of Section 2
“Approved superannuation fund ” means a
superannuation fund, or any part of a superannuation fund,
approved by the Commissioner in accordance with Part II of
the Sixth Schedule (This is not covered in the present course).

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ASSESSMENT - Clause (5) of Section 2

“Assessment ” includes provisional assessment, re-
assessment and amended assessment and the cognate
expressions shall be construed accordingly.

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ASSET MANAGEMENT COMPANY- Clause (5B)
of Section 2
“Asset management company ” means an asset
management company as defined in the Non-Banking Finance
Companies and Notified Entities Regulations, 2007.

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BANKING COMPANY - Clause (7) of Section 2

“ 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.

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BUSINESS - Clause (9) of Section 2

“ Business” includes any:
• Trade;

• Commerce;

• Manufacture;

• Profession;

• Vocation; or

• Adventure or concern in the nature of trade, commerce,

manufacture, profession or vocation;
but does not include employment .

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BOARD - Clause (11) of Section 2

“Board ” means the Central Board of Revenue established
under the Central Board of Revenue Act, 1924 (IV of 1924),
and on the commencement of Federal Board of Revenue Act,
2007, the Federal Board of Revenue established under section
3 thereof.

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CHIEF COMMISSIONER - Clause (11B) of Section
2
“Chief Commissioner ” means a person appointed as Chief
Commissioner Inland Revenue under section 208 and includes
a Regional Commissioner of Income Tax and a Director-
General of Income Tax and Sales Tax.

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CONTRIBUTION TO AN APPROVED PENSION
FUND - Clause (13B) of Section 2
“Contribution to an Approved Pension Fund ” means
contribution as defined in rule 2(j) of the Voluntary Pension
System Rules, 2005.

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CO-OPERATIVE SOCIETY - Clause (14) of Section
2
“ 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 cooperative societies.

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DEBT - Clause (15) of Section 2

“ Debt” means any amount owing, including accounts payable
and the amounts owing under promissory notes, bills of
exchange, debentures, securities, bonds or other financial
instruments.

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DIVIDEND - Clause (19) of Section 2
“ Dividend” includes –
a. Any distribution by a company of accumulated profits to its
shareholders , whether capitalized or not, if such distribution entails
the release by the company to its shareholders of all or any part of
the assets including money of the company ;
b. Any distribution by a company , to its shareholders of debentures,
debenture-stock or deposit certificate in any form, whether with or
without profit, to the extent to which the company possesses
accumulated profits whether capitalized or not;
c. Any distribution made to the shareholders of a company on its
liquidation, to the extent to which the distribution is attributable to the
accumulated profits of the company immediately before its
liquidation, whether capitalized or not;
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“ Dividend” includes –
d. Any distribution by a company to its shareholders on the
reduction of its capital, to the extent to which the company
possesses accumulated profits , whether such
accumulated profits have been capitalized or not;
e. Any payment by a private company as defined in the
Companies Ordinance, 1984 or trust of any sum (whether
as representing a part of the assets of the company or
trust , or otherwise) by way of advance or loan to a
shareholder or any payment by any such company or
trust on behalf, or for the individual benefit, of any such
shareholder, to the extent to which the company or trust, in
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either case, possesses accumulated profits ; or
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f. Remittance of after tax profit of a branch of a foreign
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company operating in Pakistan;

but dividend does not include -
i. A distribution made in accordance with sub-clause (c) or (d) in
respect of any share for full cash consideration, or redemption of
debentures or debenture stock, where the holder of the share or
debenture is not entitled in the event of liquidation to participate in
the surplus assets;
ii. Any advance or loan made to a shareholder by a company in
the ordinary course of its business, where the lending of money is
a substantial part of the business of the company ;
iii. Any dividend paid by a company which is set off by the
company against the whole or any part of any sum previously
paid by it and treated as a dividend within the meaning of sub-
clause (e) to the extent to which it is so set off; and
iv. Remittance of after tax profit by a branch of Petroleum Exploration
and Production (E&P) foreign company, operating in Pakistan.
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ADDRESSEE ETC - Clause (19B) of Section 2

The expressions “addressee ”, “automated ”, “electronic ”,
electronic signature ”, “information ”, “information
system ”, “originator ” and “transaction ”, have the same
meanings as are assigned to them in the Electronic
Transactions Ordinance, 2002

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ELECTRONIC RECORD - Clause (19C) of Section
2

“Electronic record ” includes the contents of
communications, transactions and procedures under this
Ordinance, including attachments, annexes, enclosures,
accounts, returns, statements, certificates, applications, forms,
receipts, acknowledgements, notices, orders, judgments,
approvals, notifications, circulars, rulings, documents and any
other information associated with such communications,
transactions and procedures, created, sent, forwarded, replied
to, transmitted, distributed, broadcast, stored, held, copied,
downloaded, displayed, viewed, read, or printed, by one or
several electronic resources and any other information in
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ELECTRONIC RESOURCE - Clause (19D) of
Section 2

“Electronic resource ” includes telecommunication systems,
transmission devices, electronic video or audio equipment,
encoding or decoding equipment, input, output or connecting
devices, data processing or storage systems, computer
systems, servers, networks and related computer programs,
applications and software including databases, data
warehouses and web portals as may be prescribed by the
Board from time to time, for the purpose of creating electronic
record.

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TELECOMMUNICATION SYSTEM – Clause (19E)
of Section 2

“Telecommunication system ” includes a system for the
conveyance, through the agency of electric, magnetic, electro-
magnetic, electrochemical or electro-mechanical energy, of
speech, music and other sounds, visual images and signals
serving for the impartation of any matter otherwise than in the
form of sounds or visual images and also includes real time
online sharing of any matter in manner and mode as may be
prescribed by the Board from time to time.

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EMPLOYEE - Clause (20) of Section 2

“ Employee ” means any individual engaged in employment .

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EMPLOYER - Clause (21) of Section 2

“ Employer ” means any person who engages and
remunerates an employee .

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EMPLOYMENT - Clause (22) of Section 2

“ 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.

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FEE FOR TECHNICAL SERVICES - Clause (23) of
Section 2

“ Fee for technical services” means any consideration,
whether periodical or lump sum, for the rendering of any
managerial, technical or consultancy services including the
services of technical or other personnel, but does not include
–
 Consideration for services rendered in relation to a

construction, assembly or like project undertaken by the
recipient; or
 Consideration which would be income of the recipient

chargeable under the head “Salary ”.
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FINANCIAL INSTITUTION - Clause (24) of Section
2

“Financial institution ” means an institution as defined under
the Companies Ordinance, 1984.

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FINANCE SOCIETY - Clause (25) of Section 2

“ Finance society” includes a co-operative society which
accepts money on deposit or otherwise for the purposes of
advancing loans or making investments in the ordinary course
of business.

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INCOME - Clause (29) of section 2

“ Income” includes
• Any amount chargeable to tax under the Ordinance;
• Any amount subject to final taxation by way of
collection or deduction of tax at source under
section 148, 150, 152(1), 153, 154, 156, 156A, 233, 233A
and, sub-section (5) of section 234;
• Any amount treated as income under any provision of the
Ordinance; and
• Any loss of income;
But does not include,
In case of a shareholder of a company , the amount
representing the face value of any bonus share [including
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bonus units in a unit trust – Section 2(8)] or the amount of any
bonus declared, issued or paid HAQ the company to the
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INDIVIDUAL PENSION ACCOUNT - Clause (29B)
of section 2

“Individual Pension Account ” means an account
maintained by an eligible person with a Pension Fund Manager
approved under the Voluntary Pension System Rules, 2005.

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INDUSTRIAL UNDERTAKING – Clause (29C) of
section 2
“Industrial undertaking ” means –
• an undertaking which is set up in Pakistan and which employs,
– 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
– 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 which is engaged in:
– the manufacture of goods or materials or the subjection of goods or
materials to any process which substantially changes their original
condition;
– Ship-building;
– Generation, conversion, transmission or distribution of electrical
energy, or the supply of hydraulic power; or
– The working of any mine, oil-well or any other source of mineral
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deposits; and
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• any other industrial undertaking which the Board may by notification in
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the official Gazette, specify.
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INVESTMENT COMPANY - Clause (30A) of
section 2

“Investment company ” means an investment company as
defined in the Non-Banking Finance Companies (Establishment
and Regulation) Rules, 2003.

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KIBOR - Clause (30AA) Of Section 2

“KIBOR” means Karachi Inter Bank Offered Rate prevalent on
the first day of each quarter of the financial year.

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LEASING COMPANY - Clause (30B) of section 2

“ Leasing company” means a leasing company as defined in
the Non-Banking Finance Companies and Notified Entities
Regulation, 2007.

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LOCAL GOVERNMENT - Clause (31A) of
Section 2
“ Local Government” has the same meaning as defined in
the Punjab Local Government Ordinance, 2001, the Sindh
Local Government Ordinance, 2001, the NWFP Local
Government Ordinance, 2001 and the Balochistan Local
Government Ordinance, 2001.

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MEMBER - Clause (32) of section 2

“ Member” in relation to an association of persons ,
includes a partner in a firm .

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MODARABA - Clause (34) Of Section 2

“ Modaraba” means a modaraba as defined in the Modaraba
Companies and Modarabas (Floatation and Control)
Ordinance, 1980.

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MODARABA CERTIFICATE - Clause (35) of
Section 2

“Modaraba certificate ” means a modaraba certificate as
defined in the Modaraba Companies and Modarabas
(Floatation and Control) Ordinance, 1980.

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MUTUAL FUND - Clause (35A) of Section 2

“ Mutual Fund” means a mutual fund registered or approved
by the Securities and Exchange Commission of Pakistan.

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NON-BANKING FINANCE COMPANY - Clause
(35B) of Section 2
“ Non-banking finance company” means an NBFC as
defined in the Non-Banking Finance Companies (Establishment
and Regulation) Rules, 2003.

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NON-PROFIT ORGANIZATION - Clause (36) of
Section 2
“Non-profit organization ” means any person other than an
individual, which is –
• established for religious, educational, charitable, welfare or
development purposes, or for the promotion of an amateur
sport;
• formed and registered under any law as a non-profit
organization;
• approved by the Commissioner for specified period, on
an application made by such person in the prescribed form
and manner, accompanied by the prescribed documents
and, on requisition, such other documents as may be
required by the Commissioner ;
and none of the assets of such person confers, or may confer,
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a private benefit to any other person .
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Commissioner ”
“Approved by the HASSAM_RAJPOOin accordance with the
Rules 211 to 220 (This is not covered in the present course).
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OFFICER OF INLAND REVENUE - Clause (38A) of
Section 2
“Officer of Inland Revenue ” means any Additional
Commissioner Inland Revenue, Deputy Commissioner Inland
Revenue, Assistant Commissioner Inland Revenue, Inland
Revenue Officer, Inland Revenue Audit Officer or any other
officer however designated or appointed by the Board for the
purposes of this Ordinance

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ORIGINATOR - Clause (39) of Section 2
“Originator ” means Originator as defined in the Asset Backed
Securitization Rules, 1999.

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PENSION FUND MANAGER - Clause (40A) of
Section 2
“Pension Fund Manager ” means an asset management
company registered under the Non-Banking Finance
Companies (Establishment and Regulations) Rules, 2003, or a
life insurance company registered under Insurance Ordinance,
2000, duly authorized by the Securities and Exchange
Commission of Pakistan and approved under the Voluntary
Pension System Rules, 2005, to manage the Approved
Pension Fund.

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PERMANENT ESTABLISHMENT - Clause (41) of
Section 2
“ Permanent establishment” in relation to a person , means a fixed
place of business through which the business of the person is wholly
or partly carried on, and includes –
 A place of management, branch, office, factory or workshop,

premises for soliciting orders, warehouse, permanent sales exhibition
or sales outlet, other than a liaison office except where the office
engages in the negotiation of contracts (other than contracts of
purchase);
 A mine, oil or gas well, quarry or any other place of extraction of

natural resources;
 An agricultural, pastoral (rural) or forestry property;
 A building site, a construction, assembly or installation project or

supervisory activities connected with such site or project but only
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where such site, project and its connect supervisory activities
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or periods aggregating more than ninety days
within any twelve-months period;
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PERMANENT ESTABLISHMENT - Clause (42) of
Section 2
 The furnishing of services, including consultancy services, by
any person through employees or other personnel
engaged by the person for such purpose;
 A person acting in Pakistan on behalf of the person
(hereinafter referred to as the “agent”, other than an agent of
independent status acting in the ordinary course of business
as such, if the agent –
 Has and habitually exercises an authority to conclude
contracts on behalf of the other person ;
 Has no such authority, but habitually maintains a stock-
in-trade or other merchandise from which the agent
regularly delivers goods or merchandise on behalf of the
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or
 Any substantial equipment UL HAQ
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property capable of activity giving rise to income.
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PRINCIPAL OFFICER - Clause (44A) of Section 2

“Principal officer ” used with reference to a company or
association of persons includes –
• A director, a manager, secretary, agent, accountant or any

• similar officer; and

• Any person connected with the management or
administration of the company or association of
persons upon whom the Commissioner has served a
notice of treating him as the principal officer thereof.

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PRIVATE COMPANY - Clause (45) of Section 2

“ Private company” means a company that is not a
public company .

Note: The definition of ‘Private Company’ under the Ordinance
is different from one generally under stood or as defined
under the Companies Ordinance, 1984.

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PROFIT ON DEBT - Clause (46) of Section 2

“ Profit on a debt” whether payable or receivable, means–
 Any profit, yield, interest, discount, premium or other amount,

owing under a debt , other than a return of capital; or
 Any service fee or other charge in respect of a debt ,
including any fee or charge incurred in respect of a credit
facility which has not been utilized.

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PUBLIC COMPANY - Clause (47) of Section 2

“ Public company ” means –
• a company in which not less than fifty per cent of the
shares are held by the Federal Government or Provincial
Government;
• a company in which not less than fifty per cent of the
shares are held by a foreign Government, or a foreign
company owned by a foreign Government;
• a company whose shares were traded on a registered
stock exchange in Pakistan at any time in the tax year and
which remained listed on that exchange at the end of that
year; or
• a unit trust whose units are widely available to the public
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and any other trust as defined in the Trusts Act, 1882.
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‘Public Company’ under the Income Tax
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Ordinance, 2001 is different from one generally under stood or as
defined under the Companies Ordinance, 1984.
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RECOGNIZED PROVIDENT FUND - Clause (48) of
Section 2

“Recognized provident fund ” means a provident fund
recognized by the Commissioner in accordance with Part I of
the Sixth Schedule (This is not covered in the present course).

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ROYALTY - Clause (54) of Section 2

“ Royalty” means any amount paid or payable,
however described or computed, whether periodical
or a lump sum, as consideration for -
 The use of, or right to use any patent, invention,
design or model, secret formula or process,
trademark or other like property or right;
 The use of, or right to use any copyright of a literary,
artistic or scientific work, including films or video
tapes for use in connection with television or tapes
in connection with radio broadcasting, but shall not
include consideration for the sale, distribution or
exhibition of cinematograph films;
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 The supply of any technical, industrial, commercial
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or scientific knowledge, experience or skill;
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ROYALTY - Clause (54) of Section 2

 The receipt of, or right to receive, any visual images or
sounds, or both, transmitted by satellite, cable, optic fiber or
similar technology in connection with television, radio or
internet broadcasting;
 The use of or right to use any industrial, commercial or
scientific equipment;
 The supply of any assistance that is ancillary and subsidiary
to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as mentioned
above; and
 The disposal of any property or right referred to above.
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SECURITIZATION - Clause (57) of Section 2

“Securitization ” means securitization as defined in the Asset
Backed Securitization Rules, 1999.

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SHARE - Clause (58) of Section 2

“ Share” in relation to a company , includes a modaraba
certificate and the interest of a beneficiary in a trust (including
units in a trust)

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SHAREHOLDER - Clause (59) of Section 2

“ Shareholder” in relation to a company , includes a
modaraba certificate holder, a unit holder of a unit trust
and a beneficiary of a trust .

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SMALL COMPANY - Clause (59A) of Section 2

“ Small company ” means a company registered on or after
the first day of July, 2005, under the Companies Ordinance,
1984 (XLVII) of 1984, which,-
 Has paid up capital plus undistributed reserves not

exceeding Rs. 25,000,000;
 Has employees not exceeding 250 any time during the

year;
 Has annual turnover not exceeding Rs. 250,000,000; and

 Is not formed by the splitting up or the reconstitution of

business already in existence.
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SPECIAL PURPOSE VEHICLE – Clause (60) of
Section 2

“Special Purpose Vehicle ” means a Special Purpose
Vehicle as defined in the Asset Backed Securitization Rules,
1999.

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TAX - Clause (63) of Section 2

“ Tax” means any tax imposed on:
• Taxable income (Income Tax);

• Income subject to a separate charge (Fixed Tax);

• Income subject to final taxation (Final Tax);

• Separate block of income (Fixed Tax);

and includes:
• Income tax to be collected or deducted at source ;

• Income tax to be paid in advance ;

• Penalty ;

• Fee; or
EDITED BY
• Any other charge or any sum or amount;
HASSAM UL HAQ
leviable or payable under the Ordinance.
HASSAM_RAJPOO
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TAXPAYER - Clause (66) of Section 2

“Taxpayer ” means any person who derives an amount
chargeable to tax under the Ordinance, and includes –
• Any representative of a person who derives an amount

chargeable to tax under the Ordinance;
• Any person who is required to
collect or deduct tax at source under Part V of
Chapter X and Chapter XII; or
• Any person required to furnish a return of income or

pay tax under the Ordinance;

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VENTURE CAPITAL COMPANY AND VENTURE
CAPITAL FUND - Clause (74) of Section 2
“ Venture Capital Company” and “Venture Capital Fund”
shall have the same meanings as are assigned to them under
the Non-Banking Finance Companies (Establishment and
Regulation) Rules, 2003.

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ORDINANCE TO OVERRIDE OTHER LAWS
Section 3

The provisions of the Income Tax Ordinance, 2001 apply
notwithstanding anything to the contrary contained in any other
law for the time being in force.

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CHAPTER II
CHARGE OF TAX

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CHARGE OF TAX - Section 4
The Federal levy (Tax ) on income , with effect from July 01,
2002, in Pakistan is governed by the Income Tax Ordinance,
2001 (hereinafter referred to as ‘Ordinance’) and Income Tax
Rules, 2002 (hereinafter referred to as ‘Rules’) . It is an annual
charge for a tax year on a person .

For the purposes of levy of tax , income is classified in
following three broad categories:
• Taxable income ;

• Income subject to a separate charge ; and

• Income subject to final taxation .

Taxable income isEDITEDdivided into two sub-categories:
further BY
• Taxable HASSAM UL HAQ
income excluding separate block of
income; and HASSAM_RAJPOO
T@YAHOO.COM
• Taxable income taxed as a separate 72 block of income
Continued

“Tax ” is the amount computed by applying the applicable rate
or rates of tax specified in the First Schedule to the
Ordinance , on each category/sub-category of income i.e.,
• Income Tax on

taxable income excluding separate block of income;
• Fixed Income Tax on

taxable income taxed as a separate block of
income ;
• Final Tax on

income subject to a separate charge ; and
• Final Tax on
EDITED BY
income subject to final taxation .
HASSAM UL HAQ
HASSAM_RAJPOO

“Income tax ” payable on taxable income excluding
separate block of income is:
• Gross income tax ; minus
• Reductions in tax liability ; minus
• Foreign tax credit ; minus
• Tax credits on* ; minus
• Tax credit on exempt share from association of perso
; minus
• Advance tax paid credit ; minus
• Adjustable tax collected or deducted credit .

* Charitable donations, Investment in shares, Contribution to an
approved pension fund, Profit on debt, On being registered under
the Sales Tax Act, 1990 as a manufacturer, Investment (Balancing,
EDITED BY
modernization and replacement of plant and machinery), Enlistment
on Stock Exchange, Equity investment in newly established
industrial undertaking and EquityHAQ
HASSAM UL investment in purchase and
installation of plant HASSAM_RAJPOO purposes of balancing,
and machinery for the
modernization, replacement or expansion in an industrial
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undertaking established before July 01, 2011 74

“Fixed income tax ” payable on taxable income taxed as
a separate block of income is:
• Tax worked as per applicable rates on each type of such

income; minus
• Adjustable tax collected or deducted at source out

of such income, if any.

“Final tax ” payable on income subject to a separate
charge and income subject to final taxation is:
• Tax worked as per applicable rates on each type of such

income; minus
• Non-adjustable
EDITED collected or deducted at
tax BY
source out of such income,UL HAQ
HASSAM if any.
HASSAM_RAJPOO
T@YAHOO.COM 75

INCOME SUBJECT TO A SEPARATE CHARGE
OF TAX

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INCOME SUBJECT TO A SEPARATE CHARGE -
Sections 5 to 8
Income subject to a separate charge are:-
• Dividend ;

• Royalty of non-residents ;

• Fee for technical services of non-residents ; and

• Shipping and air transport income of non-residents

.

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Sections 5 to 8
Following rules apply to income subject to a separate charge:
• Tax imposed is a final tax;

• Such income is not chargeable to tax under any

head of income in computing the taxable income of the
person ;
• No deduction is allowed for any expenditure incurred in

deriving such income;
• The amount of the such income is not reduced by –

– Any deductible allowance ; or

– The set off of any loss ;

• The final tax payable is BY reduced by any tax credit
EDITED not
allowed HASSAM UL HAQ credit
(foreign tax or
tax credits on donations, investments etc. );
HASSAM_RAJPOO

Sections 5 to 8
• The liability of the recipient of such income is discharged to
the extent that –
– In the case of shipping and air transport income, the tax

is paid in accordance with section 143 or
section 144 ; or
– In any other case, the final tax payable has been

deducted at source ; and
• An assessment is treated to have been made under
section 120 and the person is not required to
furnish a return of income under section 114 for the
year in respect such income [section 169(3)].
EDITED BY
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Sections 5 to 8
• “Dividend ” received from a company by a person other
than a company * is subject to final tax at a flat rate of 10%
(except as stated below) of the gross amount of the
dividend .
• “Dividend ” received from:
– A company which has purchased a power project

privatized by WAPDA; or
– A company set up for power generation

is subject to a reduced rate of tax of 7.5% instead of
10% (Clause (17) and (20) of Part-II of 2nd Schedule).
EDITED BY
* By virtue of proviso to section 8, dividend received by a company is
HASSAM UL HAQ
excluded from the ambit of the income subject to a separate charge and
HASSAM_RAJPOO
is therefore chargeable to tax as one of the component of ‘income from
T@YAHOO.COM
other sources’ and forms part of the taxable income.80

Section 5 to 8
“Royalty ” received by a non-resident person is subject to
final tax at the rate of 15% of gross amount of royalty or
applicable reduced rate of tax as per tax treaty with the country
of such non-resident .

If the property or right giving rise to the royalty is effectively
connected with a permanent establishment in Pakistan of
the non-resident , then such royalty is excluded from the
ambit of the income subject to a separate charge and is
chargeable to tax under the head ‘income from business ’.
EDITED BY
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HASSAM_RAJPOO
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Section 5 to 8

“Fee for technical services ” received by a non-resident
person is subject to final tax at the rate of 15% of the gross
amount of fee for technical services or applicable reduced
rate of tax as per tax treaty with the country of such
non-resident .

If the services giving rise to fee for technical services is
rendered through a permanent establishment in Pakistan
of the non-resident , then such fee for technical services
is excluded from the ambit of the income subject to a
EDITED BY
separate charge and is chargeable to tax under the head ‘
HASSAM UL HAQ
income from business ’.
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INCOMES SUBJECT TO A SEPARATE CHARGE -
Section 5 to 8
Shipping and air transport income received by a
non-resident is subject to final tax the rate of 8% and 3% of
the gross amount of the shipping and air transport
income respectively.
“Shipping and air transport income ” means carrying on
the business of operating ships or aircraft as the owner or
charterer thereof in respect of –
 The gross amount received or receivable (whether in
or out of Pakistan) for the carriage of passengers,
livestock, mail or goods embarked in Pakistan; and
 The gross amount received or receivable in Pakistan
EDITED BY
for the carriage of passengers, livestock, mail or
HASSAM UL HAQ
goods embarked outside Pakistan.
HASSAM_RAJPOO
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CHAPTER III
TAX ON TAXABLE INCOME
PART I
COMPUTATION OF TAXABLE INCOME

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TAXABLE INCOME - Section 9

“ Taxable Income” means:
• Total income ; minus

• Deductible allowances ; minus

• Donations qualifying for straight deduction .

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TOTAL INCOME - Section 10

“ Total Income” is the aggregate of
income chargeable to tax under each head of income .

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HEADS OF INCOME – Section 11

For the purposes of imposition of income tax and
computation of total income , all incomes are classified
under the following five heads, namely:-
• Salary ;

• Income from property ;

• Income from business ;
• Capital gains ; and
• Income from other sources [like dividend, royalty, profit
on debt, ground rent, rent from sub-lease of land or building,
income from lease of any building together with plant or
EDITED BY
machinery, prize on bonds, UL HAQ from a raffle, lottery or
HASSAM winnings
crossword puzzle, or a loan, advance, deposit or gift
HASSAM_RAJPOO
(subject to certain T@YAHOO.COM
conditions).
87 Continued

HEADS OF INCOME – Section 11

The extent of income under each head of income is
dependent upon the residential status of a person .

In case of a resident person ,
it is both Pakistan source income and
foreign source income ; and

In case of a non-resident person ,
it is only Pakistan source income .

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T@YAHOO.COM 88

CHAPTER III
PART II
HEADS OF INCOME
“SALARY”

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SALARY – Sections 12 TO 14
This head of income (‘salary’) is further classified as under:
• Salary chargeable to income tax ; and

• Salary chargeable to fixed income tax as a separate

block of income .

The rules for computation of salary chargeable to income tax
are discussed in the following slides.

The rules for computation of salary chargeable to fixed
income tax as a separate block of income are discussed
under the respective headings.
EDITED BY
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SALARY – Sections 12 to 14

“Salary ” received by an employee in a tax year , other
than salary exempt from tax is chargeable to tax under the
head ‘salary’.

Note: Chargeable income from salary does not permit any
deduction of ‘admissible deductions/expenditure ’.
This is an exception to the general rule of admissible
deductions / expenditures. In fact sub- section (4) of section
12 specifically states that no deduction is allowed for any
expenditure incurred by an employee in deriving amounts
chargeable to tax under the head “Salary”.
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SALARY – Sub-Section (2) of Section 12
“ Salary” means any amount received by an employee from
any employment , whether of a revenue or capital nature,
including -
 Pay, wages or other remuneration, including leave pay, payment
in lieu of leave, overtime payment, bonus, commission, fees, gratuity or
work condition supplements (such as for unpleasant or dangerous
working conditions);
 Perquisites , whether convertible to money or not;
 Allowances including cost of living, subsistence, rent, utilities,
education, entertainment or travel allowance, but excluding any
allowance solely expended in the performance of the duties of
employment;
 Expenditure incurred by an employee that is paid or
reimbursed by the employer, other than expenditure incurred
on behalf of the performance of the duties of employment;
 EDITED BY
Benefit under ‘Employee Share Scheme ’ (Section 14).
HASSAM UL HAQ
HASSAM_RAJPOO

SALARY – Sub-Section (2) of Section 12
 Profits in lieu of, or in addition to, salary or wages, including:
Consideration for an agreement to enter into an employment

Consideration for an agreement to any conditions or changes to the

Retirement or termination benefits , whether paid voluntarily or

Any amount from a provident or other fund, to the extent to which it is

Consideration for an employee’s agreement to a restrictive covenant in

 Pension or annuity, or any supplement to a pension or
annuity; and
 Income tax payable on salary where the employer agrees
EDITED BY
to pay the IncomeHASSAM UL HAQ
tax payable .
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PERQUISITE – Sub-Section (5) of Section 12

A perquisite is treated as received by an employee from any
employment regardless of whether the amount or
perquisite is paid or provided –
 by the employee’s employer , an associate of the

employer , or by a third party under an arrangement with
the employer or an associate of the employer ;
 by a past employer or a prospective employer ; or

 to the employee or to an associate of the employee or

to a third party under and agreement with the employee or
an associate of the employee .

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EMPLOYEE SHARE SCHEME – Sub-Section (6) of
Section 14

“ Employee share scheme” means any agreement or
arrangement under which a company issues shares in the
company to –
• An employee of the company or an employee of an

associated company ; or
• The trustee of a trust and under the trust deed the trustee

transferring the shares to an employee of the company
or an employee of an associated company .

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SALARY – Exempt from tax

Salary of certain persons or class of persons are
exempt from tax under the Ordinance , subject to the
certain conditions, restrictions and limitations.

Details of such exemptions arranged in alphabetical ord
.

Details of such exemptions arranged in alphabetical ord
.
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SALARY – Valuation of perquisites – Section 13

As a general rule the value of perquisites included in salary is
the fair market value determined at the time the perquisite is
provided as reduced by any payment made to the employer
for such perquisite or benefit by the employee .

However, the valuation of certain perquisites for which specific
provisions are made in the Ordinance and Rules is determined
otherwise.
List of such perquisites and their respective methods of
.
EDITED BY
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T@YAHOO.COM 97

SALARY – Taxation of retirement or termination
benefits – Sub-Section (6) of Section 12
Salary is chargeable to tax on the basis of actually received
in a tax year . Accordingly the retirement or termination
benefits received in lump sum are current year’s income. As a
result the income tax payable substantially increases, since
the taxable income falls in a higher tax slab .
Retirement or termination benefits are compensation for the
past services received in lump sum at the time of retirement or
termination and it is unfair to include such amount in the current
year’s salary chargeable to tax.
To overcome this problem, the taxpayer has an
option to notify the concerned Commissioner of
Income Tax by the due date for furnishing the return,
that he/she hasEDITED BY for the retirement or
elected
termination benefits
HASSAMto HAQ
UL be taxed as a
separate block of income at the average rate of
HASSAM_RAJPOO
income tax of the three preceding 98
T@YAHOO.COM years (fixed
Continued

SALARY – Taxation of retirement or termination
benefits – Sub-Section (6) of Section 12
Following example will illustrate the effects and calculations:
Salary for the year:
Excluding retirement or termination benefits (RTB) Rs. 1,000,000
Retirement or termination benefits (RTB) Rs. 5,000,000

Calculation of Excludin Including Calculation separate Taxable Income
income tax, if not g RTB RTB tax at the average income tax
electing rate of income tax of payable
Chargeable / total 1,000,00 6,000,00 preceding three
/taxable income 0 0 years
Income tax rate 9% 19% Preceding Year 1 950,000 85,500

Income tax on above 90,000 1,140,00 Preceding Year 2 900,000 67,500
Calculation of income tax, if 0 Preceding Year 3 850,000 63,750
electing Total 2,700,000 216,750
Income tax on chargeable / total / 90,000 Average rate of income tax (Total
taxable income excluding RTB income tax payable divided by Total
Fixed income tax on RTB calculated
EDITED BY taxable income)
.080277

at the average rate of income tax of HASSAM UL HAQ RTB 5,000,000
preceding three years
HASSAM_RAJPOO on RTB (RTB
401,389 Fixed income tax 401,389
Total income tax liability 491,389 multiply by average rate)
T@YAHOO.COM 99

SALARY – Taxation of arrears of salary – Sub-
Section (7) of Section 12
Salary is chargeable to tax on the basis of actually received in a
tax year . Accordingly the arrears of salary received in lump sum are
current year’s income. As a result the income tax payable substantially
increases, since the taxable income falls in a higher tax slab .
Arrears of salary are compensation for the past employment received in
lump sum in the current year and it is unfair to include the such amount in
the current year’s salary chargeable to tax.
To overcome this problem, the taxpayer has an option to
notify the concerned Commissioner of Income Tax by the
due date of furnishing the return, that he/she has elected for
the arrears of salary to be taxed as a
separate block of income at the rates of income tax that
would have been applicable if such arrears were received in
the tax year in which the BY
EDITED services were rendered (fixed
income tax ). HASSAM UL HAQ
HASSAM_RAJPOO

SALARY – Taxation of arrears of salary – Sub-
Section (7) of Section 12
Following example will illustrate the effects and calculations:
Salary for the year:
Excluding arrears Rs. 1,000,000
Arrears (of last 2 years) Rs. 200,000 for each year Rs. 400,000
Calculation of Excludin Including Calculation of tax liability, if electing
income tax, if not g Arrears Arrears Income tax on chargeable /total / taxable 90,000
electing income excluding RTB
Chargeable / total / 1,000,00 1,400,00
Fixed income tax on arrears calculated at the
taxable income 0 0 rates of income tax that would have been
applicable if such arrears were received in the
Income tax rate 9% 11% 58,500
tax year in which the services were rendered
Income tax on above 90,000 154,000 Total income tax liability 148,500

Calculation of separate tax at the Taxable income Income tax payable
rates of income tax that would have Excluding Including Excluding Including Difference
been applicable if such arrears were arrears arrears arrears arrears
received in the tax year in which the
services were rendered EDITED BY
HASSAM UL HAQ
Preceding year 1 700,000 900,000 42,000 67,500 25,500
Preceding year 2
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600,000 800,000 27,000 60,000 33,000
Total T@YAHOO.COM 101 58,500

FLYING AND SUBMARINE ALLOWANCE – Clause
(1) of Part III of 2nd Schedule

• “Flying allowance ” of pilots, flight engineers, navigators
of Pakistan Armed Forces, Pakistani Airlines or Civil
Aviation Authority, Junior Commissioned Officers or other
ranks of Pakistan Armed Forces; and
• “Submarine allowance ” of the officers of the Pakistan

Navy,
is subject to fixed income tax as a separate block of
income at the rate of 2.5% of such allowance.

EDITED BY
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CHAPTER III
PART III
HEADS OF INCOME
“INCOME FROM PROPERTY”

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INCOME FROM PROPERTY – Section 15 and 16

“ Rent ” received or receivable for a tax year , other than
rent exempt from tax , is subject to a fixed income tax as
a separate block of income .

The rates of fixed income tax on rent are as under:-

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RATES OF FIXED INCOME TAX ON INCOME
FROM PROPERTY
In case of an individual or AOP In case of a company
Gross amount of Rate of fixed Gross amount of Rate of fixed
rent income tax rent income tax
Where the amount Nil. Where the amount 5 per cent of the
does not exceed does not exceed gross amount of
Rs.150,000 Rs.400,000 rent
Where the amount 5 per cent of the Where the amount Rs.20,000 plus
exceeds Rs.150,000 gross amount of exceeds Rs.400,000 7.5 per cent of the
but does not exceed rent exceeding but does not exceed gross amount of
Rs.400,000 Rs.150,000 Rs.1,000,000 rent exceeding
Where the amount Rs.12,500 plus Rs.400,000
exceeds Rs.400,000 7.5 per cent of the Where the amount Rs.65,000 plus 10
but does not exceed gross amount of exceeds Rs.1,000,000 per cent of the
Rs.1,000,000 rent exceeding gross amount of
Rs.400,000 rent exceeding
Where the amount Rs.57,500 plus 10 BY
EDITED Rs.1,000,000
exceeds Rs.1,000,000 per cent of the
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gross amount of
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rent exceeding
Rs.1,000,000
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RENT – Section 15 and 16
“ Rent ” means any amount (not less than the fair market
rent ) received or receivable by the owner/co-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; and
• Non-adjustable amounts received in relation to a
building (amount received by the owner of a building from
a tenant or a succeeding tenant which is not adjustable
against the rent payable by the tenant) to the extent
specified.
But does not include rent in respect of:
• Lease of a building together with plant and machinery; and
• Provision of amenities, utilities or any other service
EDITED BY
connected with the renting of the building.
HASSAM UL HAQ
(such rent is chargeable to tax under the head “Income from
Other Sources”) HASSAM_RAJPOO
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NON-ADJUSTABLE AMOUNTS RECEIVED IN
RELATION TO A BUILDING – Section 16
The extent to which such ‘non-adjustable amounts’ are treated
as rent is as under:
Where the amount is received from a tenant – One-
tenth of the amount in the tax year in which received and the
following nine tax years .
Where the amount is received from a succeeding
tenant – One-tenth of the, amount received from the
succeeding tenant as reduced by the amount earlier included in
the rent, in the tax year in which received and the following
nine tax years .
“ Tenant ” means a person taking on rent a building or the
following person taking on rent a building on termination of
tenancy by the previous person after the expiry of ten years.
“ Succeeding tenant ” means a person taking on rent a
EDITED BY
HASSAM UL by the first person before
building on termination of tenancyHAQ
the expiry of ten years.
HASSAM_RAJPOO

NON-ADJUSTABLE AMOUNTS RECEIVED IN
RELATION TO A BUILDING – Section 16
The following examples will illustrate the extent to which such
‘non-adjustable amounts’ are treated as rent:
Example-I (First Tenant) – Building ‘1’ for the first time let-out to Tenant ‘A’ and
the Owner ‘X’ receives ‘non-adjustable amount’ of Rs.500,000 in tax year 2005 –
Rs.50,000 (1/10th of Rs.500,000) will be treated as rent in the tax year 2005 to 2014.
Example-II (First Tenant) – Building ‘1’ for the first time let-out to Tenant ‘A’ and
the Owner ‘X’ receives ‘non-adjustable amount’ of Rs.500,000 in tax year 2005. The
tenancy is terminated in tax year 2009 and the ‘non-adjustable amount’ of
Rs.500,000 is refunded by the Owner to the Tenant – Rs.50,000 (1/10th of
Rs.500,000) will be treated as rent in the tax year 2005 to 2008.
Example-III (Succeeding Tenant) – Building ‘1’ on termination of tenancy,
before expiry of ten years, by Tenant ‘A’ is let-out to the Tenant ‘B’ and the Owner ‘X’
receives ‘non-adjustable amount’ of Rs.800,000 in tax year 2009 – Rs.60,000 (1/10th
of (Rs.800,000 minus Rs.200,000) will be treated as rent in the tax year 2009 to
2018.
Example-IV (Following Tenant) – Building ‘1’ on termination of tenancy, after
expiry of ten years, by Tenant ‘A’ is let-out to the Tenant ‘B’ and the Owner ‘X’
receives ‘non-adjustable amount’ of Rs.800,000 in tax year 2016 – Rs.80,000 (1/10th
EDITED BY
of Rs.800,000) will be treated as rent in the tax year 2016 to 2025.
HASSAM UL HAQ
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CHAPTER III
PART IV
HEADS OF INCOME
“INCOME FROM BUSINESS”

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INCOME FROM BUSINESS – Section 18 and 19
This head of income (‘income from business’) is further
classified as under:
• Non- speculation business :
– Income chargeable to income tax ;
– Income chargeable to fixed income tax as a
separate block of income ; and
– Income chargeable to final tax as
income subject to final taxation ; and
• Speculation business income chargeable to income
tax .
Each of the above classification is treated as distinct and
separate from each other, forBY purposes of computation of
EDITED the
income , admissibleUL HAQ
HASSAM
deductions / expenditures ,
apportionment of deductions , set off of losses and
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carry forward of business losses .
T@YAHOO.COM 110

The rules for computation of:
• Non-speculation business income chargeable to
income tax ; and
• Speculation business income chargeable to income

tax ;
are same and these are discussed in the following slides.

The rules for computation of:
• Non-speculation business income chargeable to fixed

income tax as a separate block of income ; and
• Non-speculation business income chargeable to final

tax as income subject to final taxation ;
EDITED BY
are discussed separately under UL HAQ
HASSAM the respective headings.
HASSAM_RAJPOO
T@YAHOO.COM 111

Following incomes of a person for a tax year , other than
income exempt from tax , computed according to the
method of accounting regularly employed, is chargeable to
tax under the head ‘income from business’:
• The profits and gains of any business carried on at any

time in the year;
• Any income derived by any trade, professional or similar

association from the sale of goods or provision of services
to its members ;
• The fair market value of any benefit or perquisite,

whether convertible into money or not, derived in the course
of, or by virtue of,EDITED BY
a past, present, or prospective business
relationship; HASSAM UL HAQ
• Any income from the hire or lease of tangible movable
HASSAM_RAJPOO
property; T@YAHOO.COM 112 Continued

• Any management fee derived by a management
company (including a modaraba management
company).
• Any profit on debt derived by a person where the
person’s business is to derive such income;
• Any amount received or receivable by a scheduled bank
or an investment bank or a development finance
institution or a modaraba or a leasing company in
connection with lease of any asset, whether owned by it
or not; and
• Any amount received by a banking company or a
non-banking finance company , where such amount
EDITED BY
represents distribution by a mutual fund or a Private
HASSAM UL HAQ
Equity and Venture Capital Fund out of its income
HASSAM_RAJPOO
from profit on debt .
T@YAHOO.COM 113

OTHER INCLUSIONS IN INCOME FROM
BUSINESS UNDER VARIOUS PROVISIONS
In addition following are also included in income chargeable to tax under
the head ‘income from business’ under other provisions of the Ordinance
stated against each:
• Gain on disposal of depreciable assets or specified intangibles
(sub-section (8) of section 22 and (sub-section (8) of section 24);
• Subsequent recovery of bad debts (Sub-Section (3) of section 29);
• Subsequent recovery of profit accruing on non-performing de
(Sub-Section (2) of section 30);
• Non-permitted application out of participatory reserve (Sub-
Section (5) of section 34);
• Un-paid trading liabilities (Sub-Section (5) of section 34);
• Benefit derived against trading liability (Sub-Section (5A) of section
34); EDITED BY
• Recouped expenditure (Section 70); and
HASSAM UL HAQ
• Business income HASSAM_RAJPOO 91)
of minor child (Section
T@YAHOO.COM 114

SPECULATION BUSINESS – Sub-Section (2) of
Section 19
“ Speculation business” means any business in which a
contract for the purchase and sale of any commodity (including
stocks and shares) is periodically or ultimately settled otherwise
than by the actual delivery or transfer of the commodity, but
does not include a business in which –
• A contract in respect of raw materials or merchandise is entered into by
a person in the course of a manufacturing or mercantile business to
guard against loss through future price fluctuations for the purpose of
fulfilling the person’s other contracts for the actual delivery of the
goods to be manufactured or merchandise to be sold;
• A contract in respect of stocks and shares is entered into by a dealer or
investor therein to guard against loss in the person’s holding of stocks
and shares through price fluctuations; or
• A contract is enteredEDITED BY
into by a member of a forward market or stock
exchange in the course of any UL HAQ in the nature of jobbing
HASSAM transaction
arbitrage to guard against any loss which may arise in the ordinary
HASSAM_RAJPOO
course of the person’s business as such member.
T@YAHOO.COM 115

DEDUCTIONS IN COMPUTING INCOME FROM
BUSINESS – Section 20
In computing the income chargeable to tax under the head
‘income from business’ deduction is allowed for any
expenditure incurred wholly and exclusively for the
purposes of business , computed according to the
method of accounting regularly employed, including the
following :
• Cost of animals used for the purposes of business (other
than stock-in-trade) which die or become permanently
useless for business purposes as reduced by the amount, if
any, realized in respect of the carcasses or animals;
• Legal and financial advisory services and other
administrative cost relating to planning and implementation
of amalgamation BY incurred
EDITED by an
amalgamated company on amalgamation ; and
HASSAM UL HAQ
• Expenditures HASSAM_RAJPOO for which
T@YAHOO.COM
special provisions apply for the purposes of deductio
116

DEDUCTIONS IN COMPUTING INCOME FROM
BUSINESS – Section 20

“ Any expenditure ” does not include:
• Expenditures for which deductions are not allowed ;

• Expenditures for which
special provisions apply for the purposes of deductio
;
• Expenditures attributable to:

– Exempt income ;

– Income subject to final taxation ; and

– Separate block of income .
EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO
T@YAHOO.COM 117

DEDUCTIONS NOT ALLOWED IN COMPUTING
INCOME FROM BUSINESS – Section 20
Deduction for the following expenditures incurred is not
allowed in computing the income chargeable to tax under the
head ‘income from business’:
• Cess, rate or tax that is levied on the profits or gains of the

business or assessed as a percentage or otherwise on
the basis of such profits or gains;
• Amount of tax collected or deducted at source from

an amount derived;
• Salary, rent, brokerage or commission, profit on debt

, unless such tax is paid or deducted and paid;
EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

INCOME FROM BUSINESS – Section 20 and Rule 10
• “Entertainment expenditure ”, which does not full fill the
following conditions:
– Incurred on persons directly related with the business;
– Incurred outside Pakistan:
o In connection with business transactions; or
o Allocated as head office expenditure;
– Incurred in Pakistan on entertainment of foreign customers and suppliers;
– Incurred on entertainment of customers and clients at the person’s business
premises;
– Incurred on entertainment at a meeting of shareholders, agents, directors or
employees;
– Incurred on entertainment at the opening of branches; or
– Incurred on employees for free of cost tea, coffee and other similar
refreshments provided at the business premises during the course of work.

“Entertainment EDITED BY ” means the provisions of
expenditure
meals, refreshments, and reasonable leisure facilities in
accordance with the HASSAMof business and subject to
tradition UL HAQ
HASSAM_RAJPOO
overall norms and customs of business in Pakistan.

• Contribution made to a fund that is not a
recognized provident fund ,
approved pension fund ,
approved superannuation fund , or
approved gratuity fund ;
• Contribution made to any provident or other fund
established for the benefit of employees , unless
effective arrangements are made to secure that
tax is deducted as required from any payments made
by the fund in respect of which the recipient is
chargeable to tax under the head "Salary" ;
EDITED BY
• Fine or penalty for the violation of any law, rule or
HASSAM UL HAQ
regulation;
HASSAM_RAJPOO
• Personal expenditures;
T@YAHOO.COM
• 120
Amount carried to a reserve fund or capitalizedContinued
in any

• Profit on debt , brokerage, commission, salary or other
remuneration paid by an association of persons to a
member of the association ;
• Salary exceeding Rs. 15,000 per month other than by a
crossed cheque or direct transfer of funds to the
employee’s bank account;
• Expenditure of a capital nature (normal useful life of more
than one year) except as otherwise allowed;

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

• Expenditure exceeding Rs. 10,000 incurred and paid
otherwise than by a crossed cheque drawn on a bank or by
crossed bank draft or crossed pay order or any other
crossed banking instrument showing transfer of
amount from the business bank account of the taxpayer ,
excluding the following:
– Where expenditures under a single account head in aggregate
does not exceed Rs.50,000;
– Expenditures on account of –
 Utility bills;
 Freight charges;
 Travel fare;
 Postage; and
 Payment of taxes, duties, fee, fines or any other statutory
obligation. EDITED BY
Crossed banking instrument includesHAQ transfer of payment from the
HASSAM UL online account of payee as well as
business account of the payer to the business
HASSAM_RAJPOO
payments through credit card, subject to the condition that such transactions
are verifiable from the bank statements of the respective payer and the payee.

SPECIAL PROVISIONS – Sections 22 to 31
(DEDUCTIONS IN COMPUTING INCOME FROM BUSINESS)

Following are the expenditures* for which special provisions
apply for the purposes of deduction in computing income
chargeable to tax under the head ‘income from business’:
• Depreciation, initial allowance and first year allowanc

;
• Amortization of specified intangibles ;

• First year allowance ;

• Amortization of pre-commencement expenditure ;
• Scientific research expenditure incurred in Pakistan
wholly and exclusively for the purpose of deriving income
EDITED BY
from chargeable to tax;
HASSAM UL HAQ
• Employee training and facilities expenditure ;
HASSAM_RAJPOO
• Profit on debt, financial costs and lease payments ;

SPECIAL PROVISIONS – Sections 22 to 31

• Bad debts ;
• Reserve to off-set bad debts arising out of consumer
;
• Profit accruing on non-performing debts of certain ins
in
;
• Transfer to participatory reserve ; and
• Agricultural produce used as raw material .

*However, this does not include:
• Expenditures for which deductions are not allowed ;
• Expenditures attributable to:
EDITED BY
– Exempt income ;
– Income subject to final taxation ;HAQ
HASSAM UL and
– HASSAM_RAJPOO
Separate block of income .
T@YAHOO.COM 124

DEDUCTIONS – UNDER OTHER PROVISIONS

In addition following are also allowed as deduction for
computing income chargeable to tax under the head
‘income from business’ under other provisions of the
Ordinance, stated against each:
• Subsequent payment of an
un-paid trading liability (in full or in part), which
was earlier included in the income chargeable to
tax under the head ‘income from business’, in the
tax year in which the payment is made (Sub-Section
(6) of Section 34);
• Loss on disposal of depreciable assets or spe
(sub-section (8) of EDITED BY (sub-section (8) of section 24) ;
section 22 and
and HASSAM UL HAQ
• Un-absorbed HASSAM_RAJPOO initial allowance, f
depreciation,
(sub-section (4) of section 57).
T@YAHOO.COM 125

DEPRECIATION – Section 22
“Deduction for deductible depreciation ” of depreciable
assets used in a business by a person in the tax year is
allowed against the income chargeable to tax under the head
‘income from business’.
However, in case a leasing company or an investment
bank or a modaraba or a scheduled bank or a development
finance institution in respect of assets leased to another
person it is deductible only against the lease rental income
derived in respect of such assets.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

“Deductible depreciation ” is arrived at as under:
• Where the depreciable assets is used in a tax year

wholly and exclusively in deriving income from business
chargeable to tax – Full amount of depreciation of that
depreciable assets ; or
• Where the depreciable assets is used in a tax year

partly in deriving income from business chargeable to tax
and partly for another use. – Fair proportional amount of
depreciation of that depreciable assets attributable to
use in deriving income from business chargeable to tax.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

Example - Motor vehicle used partly for business chargeable to
tax and partly for private use
Amount
Written down value brought forward 800,000
Used for business purposes 70%
Used for private purposes 30%
Annual depreciation @ 15% 120,000
Fair proportional depreciation deduction for
business purposes (70% of Rs.120,000) 84,000
Written down value carried forward
(Written down value brought forward minus full amount
of depreciation) i.e. Rs.800,000 minus Rs.120,000)
EDITED BY 680,000
HASSAM UL HAQ
HASSAM_RAJPOO

“Depreciable asset ” means any tangible movable property,
immovable property (other than unimproved land), or
structural improvement to immovable property:
• Owned by the person ;
• Has a normal useful life of more than one year;
• Is likely to lose value as a result of normal wear and tear, or
obsolescence; and
• Is used* wholly or partly by the person in deriving income chargeable
to tax under the head ‘income from business’,
but does not include any tangible movable property, immovable
property, or structural improvement to immovable property
in relation to which a deduction is allowed under another
provision of the Ordinance for the entire cost .
* Any asset owned by a leasing company or an investment bank or a
EDITED BY
modaraba or a scheduled bank or a development finance institution and
leased to another person is treated asUL HAQ business of the lessor.
HASSAM used in the
HASSAM_RAJPOO

“Structural improvement ” in relation to immovable property,
includes any building, road, driveway, car park, railway line,
pipeline, bridge, tunnel, airport runway, canal, dock, wharf,
retaining wall, fence, power lines, water or sewerage pipes,
drainage, landscaping or dam.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

“Depreciation ” for each depreciable asset is computed as
under:
• Written down value of the depreciable asset brought

forward from the preceding tax year , if any; plus
• Cost of depreciable asset acquired during the tax

year ; minus
• Written down value of the depreciable asset disposed

of during the tax year ; minus
• Initial allowance or first year allowance , if any, on the

depreciable asset acquired during the tax year ; multiplied
by
• Applicable rate of depreciation .
EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

“Written down value ” means:
• Cost of depreciable asset acquired ; minus

• Depreciation* , initial allowance , if any, and first year

allowance , if any, of that depreciable asset relating to
previous tax years.
* Full amount of the depreciation and not deductible
depreciation .

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

“Cost of depreciable asset acquired ”:
• In case of a passenger transport vehicle not plying for hire

acquired:
– On or before 30th June, 2005 is the cost or
Rs.1,000,000, whichever is less;
– Between 01st July, 2005 and 30th June 2009 is the

cost ; or
– On or after 01st July 2009 is the cost or Rs.1,500,000,

whichever is less;
• In case of immovable property or a structural improvement

thereon is the cost excluding the cost of land; and
• In case of other depreciable assets is the cost .
EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

“Rates of depreciation ” – The annual rates of depreciation are:
• Buildings – All types 10%
• Furniture (including fittings) 15%
• Machinery and Plant (not otherwise specified) 15%
• Technical or professional books 15%
• Ships 15%
• Motor vehicles (all types) 15%
• Computer hardware, including printer,
monitor & allied items 30%
• Machinery and equipment used in
manufacture of I.T. products 30%
• Aircraft, aero-engines 30%
• Below ground installations in mineral oil concerns* 100%
• Offshore platforms and production installation in mineral
EDITED BY
oil concerns* HASSAM UL HAQ 20%
* the income of which HASSAM_RAJPOO in accordance with the rules
is liable to be computed
in Part I of the Fifth Schedule
T@YAHOO.COM 134

GAIN OR LOSS ON DISPOSAL OF DEPRECIABLE
ASSET – Section 22
“Gain or loss on disposal of depreciable asset ” is,
included in or allowed as a deduction from, the income
chargeable to tax under the head ‘income from business’ in the
tax year in which the disposal of depreciable asset
takes place.
“Gain or loss on disposal of depreciable asset ” is
arrived at as under:
• If the consideration received on disposal of depreciable asset
exceeds the written down value , the excess is the gain on disposal
of such depreciable asset ; or
• If the consideration received on disposal of depreciable asset
is less than the written down value , the difference is the loss on
EDITED BY
disposal of such depreciable asset .
HASSAM UL HAQ
“Disposal of depreciable asset ” means disposal of an
HASSAM_RAJPOO
depreciable asset T@YAHOO.COM export or transfer out of
and includes the 135 Continued

“Written down value ” for the purposes of calculating the gain
or loss on disposal of depreciable asset is different from
the written down value for the purposes of calculating
deductible depreciation and means:
• Cost of depreciable asset ; minus
• Deductible depreciation , initial allowance , if any, and
first year allowance , if any, of that depreciable asset
relating to previous tax years.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO
T@YAHOO.COM 136

“Consideration received on disposal of depreciable
asset ”:
• In case of a passenger transport vehicle, the cost of

which had been restricted , is:
– Consideration received on disposal ; multiplied by

– Restricted cost adopted at the time of
acquisition ; divided by
– Cost of acquiring.

• In case of an immovable property is the consideration

received or cost , whichever is less; and
• In any other case, the consideration received .
EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO
T@YAHOO.COM 137

INITIAL ALLOWANCE – Section 23
“Deduction for initial allowance ” at the rate of
50% of the cost of an eligible depreciable asset
for initial allowance is allowed to a person
against the income chargeable to tax under the head
‘income from business’ in the tax year in which an
eligible depreciable asset for initial allowance
is used for the purposes of business for the first time
in Pakistan or commercial production is commenced,
whichever is latter.
However, in case a leasing company or an
investment bank or a modaraba or a scheduled
bank or a development finance institution in respect of
EDITED person it is deductible only
assets leased to another BY
against the lease HASSAM UL HAQ
rental income derived in respect of
such assets. HASSAM_RAJPOO

INITIAL ALLOWANCE – Section 23
“Eligible depreciable asset for initial allowance ” means
a depreciable asset excluding the following:
• Road transport vehicle other than a vehicle plying for hire;

• Furniture and fittings;

• Plant or machinery previously used in Pakistan; or

• Plant or machinery in relation to which a deduction has is

allowed under another provision of the Ordinance for the
entire cost of the asset in the tax year in which the asset
is acquired.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

FIRST YEAR ALLOWANCE – Section 23A and 23B
“Deduction for first year allowance ”, in lieu of
initial allowance , at the rate of 90% of the cost of
an eligible depreciable asset for first year
allowance is allowed to an industrial undertaking
set up:
• In specified rural and under developed
areas notified by the Federal Government and
owned and managed by a company ; or
• Anywhere in Pakistan for generation of alternate
energy, owned and managed by a company ,
against the income chargeable to tax under the head
‘income from business’ in the tax year in which an
eligible depreciable asset for first year
EDITED BY
allowance is used for the purposes of business for
HASSAM UL HAQ
the first time in Pakistan or commercial production is
commenced, whichever is latter.
HASSAM_RAJPOO
T@YAHOO.COM 140

FIRST YEAR ALLOWANCE – Section 23A and 23B
“Eligible depreciable asset for first year allowance ”
means plant, machinery and equipment which is not previously
used in Pakistan.
Specified rural and under developed areas have not yet
been notified by the Federal Government.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO
T@YAHOO.COM 141

INTANGIBLES – Section 24
“Deduction for deductible amortization ” of intangible
assets used in a business in the tax year is allowed against
the income chargeable to tax under the head ‘income from
business’.

EDITED BY
HASSAM UL HAQ
HASSAM_RAJPOO

INTANGIBLES – Section 24
“Intangible assets ” means any patent, invention, design or
model, secret formula or process, copyright, trade mark,
scientific or technical knowledge, computer software, motion
picture film, export quotas, franchise, license, intellectual
property, or other like property or right, contractual rights and
any expenditure that provides an advantage or benefit for a
period of more than one year:
• Owned by the person ;
• Has a normal useful life of more than one year; and
• Is used wholly or partly by the person in deriving income chargeable to
tax under the head ‘income from business’;
but does not include:
• Any expenditure incurred to acquire a depreciable asset ;
• Any expenditure incurred to acquire an unimproved land;
• EDITED BY
Any intangible in relation to which a deduction is allowed under another
HASSAM entire cost
provision of the Ordinance for the UL HAQ .
HASSAM_RAJPOO

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