Advanced Taxation Refresher Course

1. Advanced Taxation Refresher Course By Mirza Munawar Hussain LLB, FPA, FCIS, FCMA President - PIPFA Member National Council - ICMAP

2. Success in Examinations1. Planning • Course Material • Select the book which adequately covers the topic you are studying. You may also select different books for different topics • The key to selecting the right text book is consulting your teachers / senior students. You may also refer the list of recommended reading available on the website • The All Essential Plan • Panic makes you think less clearly, so avoid it by starting work early. • Lecturers/tutors assume that you will decide for yourself what and when to revise and may give little direction. • A Good Plan Helps You: • Identify if you are spending too much time on a topic • Know what you have already done. • Know what still needs to be done • Prioritize things for effective studying.

3. 1. Planning • Factors be Considered When Planning • Study Sessions should be from one to three hours • Have a definite break every hour • Avoid late hours • Revision for other papers at the same time • Family commitments, relationships, friendships • Contingencies such as illness • How much sleep you need • Plan recreation and relaxation into your time table • Monitoring Your Plan • Check your plan regularly to see how well you are doing. You may need to amend your plan, e.g. if something unexpected happens or if some revision takes longer than expected.

4. 2. Preparation • Where to Study • Always in the same place • Choose a warm, light, well ventilated room • Away from other distractions • Properly furnished • Summarizing Key Points • Don’t make long notes in the form of paragraphs, which you may find difficult to learn and retain • Your notes should ideally be in the form of pointers which are easier to remember and quicker to revise • Underline important points • Even if a paper involves mathematical calculation it is still very important that you study the theory also to learn the concepts and logic behind the mathematical workings and formulae. • Principles of Understanding • Always aim for understanding • Look for examples to illustrate the topic • Promote understanding by rearranging material, questioning the ideas and looking for links with old ideas • Consider your topic from all possible angles

5. 2. Preparation • Principles of Memorizing • Never memorize something that you don’t understand • Always try to link new material with what you have previously learnt • Select the important items to remember • Organize the material into a meaningful system • The sequence of memorizing should be the same as the logical sequence of the material • Long pieces should be memorized in shorter chunks • Go over notes, reading etc. within 12 hours of writing, reading etc. • Try to master each topic before leaving it but do not spend so much time that other areas or subjects are ignored • Over learn. Don’t stop when you have only just learnt something •  Start each session with a review of the previous session • Mock Examinations • At least 10-15 days before the end of the leave conduct real time mock examinations • Self assessment • Identify weak areas • Work on weak areas • Go through the examiner comments • Actually attempt the questions and do not just go through the solutions

6. 3. Attempting the Paper • Examination Techniques • Controlling the anxiety is the key • Arrive early at the exam to avoid panic. Be on your seat at least 10 minutes before the examinations. This will reduce your anxiety and allow you to sort out issues which may consume your time during the examinations. • In the exam, spend the first 5 minutes glancing through the paper to make sure you understand the instructions and to decide which questions to answer first. • Read the question very carefully until you know exactly what is required • Note any special requirements e.g. list, detail, advise, explain, report, etc. • Budget your time for each question in proportion to the marks given. Stop working on it when that time is up, return to it if you have time to spare. • Spending too much time on favorite topic at the expense of others may cost you the exam • Repetition of the same point using different descriptions does not fool the examiner & only wastes time • The first 50% of the marks of a particular question are the easiest to get; the next 25% are harder; the last 25% are the hardest. If you run out of time: two half answers may get more marks than one full one; jot down the main points to include while they are in your mind and return later. • Write clearly so the examiner can read your work. Number answers correctly.

7. 3. Attempting the Paper • Questions…How to Answer Them • Possibilities for organizing your information in an exam include: • First plan your answer as to how you want to go ahead with your answer • Give a clear opening paragraph, present information in a clear order, a final paragraph drawing conclusions/summarizing. The opening paragraph should be linked with final conclusions through one of the following ways: • - step by step points where there is a sequence or stage • - a main initial point to make an impact which you then develop • - Putting different sides of an argument • - Grouping theories/concepts through a theme • Present your work well. Headings and a good layout make your work easier to read • Tables and graphs need to be clear with correct labeling • Use practical examples to illustrate the points made subject to the availability of time and requirements of the question. It may not be practical to give examples where only brief answers are required • As far as possible give answers in pointers showing the main heading and then describing it in appropriate details as per the requirements of the question. Just by giving pointers you can at least secure some marks and convey your knowledge to the examiner.

8. 3. Attempting the Paper • Scenario Type Questions … How to Answer Them • It has been noted that most students only give the conclusions in such type of questions • The most important aspect of giving such questions is to test if you have understood the concepts • Therefore the key to such questions is the reasoning and not the conclusion • The examiner is interested in the thought process that went into the conclusion. • You can conclude correctly without any reasoning, by sheer guessing you have a fifty percent chance of getting it right. The examiner knows this and therefore no marks are allowed for guessing the conclusion – you must support it. • If you have proper reasoning that forms the basis for your conclusions you can at least get pass marks even if your conclusion does not match with that of the examiner.

9. 3. Attempting the Paper • How to Improve the Presentation of Your Scripts • Marks that you will obtain for your answers depends on two factors: • What you answered • How you answered • Start each new answer on a new page • The arrangement should be pleasing to the eyes • Write a fairly large and legible handwriting. But you should not try to change your style just for the examinations. You will have to practice it before the examinations • Write your headings boldly • Use a dark ink and medium pointed nib • Leave space between subsections of answers • The subject matter should be broken up into small paragraphs • Use Apt sub-headings as it attracts the attention to the main divisions of the chapter • The sentences should be short and crisp • Make cancellations and corrections neatly • Insert new words or sentences legibly and in an orderly way • Watch your spelling and punctuation as it helps quick reading & prevent misunderstanding

10. 3. Attempting the Paper • Most Commonly Made Mistakes • Not resting adequately before the paper • General instructions given on the answer scripts and sent with the admit card are often ignored • Questions are not read carefully • Not planning before attempting the question • Getting stuck over a single question • Not clearly stating the assumptions used • Not being quick enough • Presentation and workings not clearly shown • Students do not complete the paper more due to selective studies and not because of the length of the paper • Students tend to repeat points • Irrelevant points are given

11. 3. Attempting the Paper • Coping with Nerves • Stress can be good - it can make you mentally alert. You will do better if you see stress as positive and the exams as a chance to show what you can do, not as a way of tripping you up. • Work out what to do if you panic…. Take deep breaths • Do good revision/preparation. • Find out in advance as much as possible about the examination centre or the exam room. • Identify what to do in the first 5 minutes of the exam in what order and stick to it. • Make yourself comfortable for the exam (e.g., warm/cool clothes, handkerchiefs, etc) • Calm yourself beforehand (e.g., visualize a pleasant scene, distract yourself) • Avoid being overtired (is it worth staying up late to cram in extras?). • Avoid last minute revision. Trying to remember facts then may block out 'deep learning' (i.e. of concepts and principles).

12. Examiner’s Comments • It was noted that the students suffer from lack of practice and presentation skills. Moreover, a large number of candidates fail to comprehend the exact requirement of the question and do not know how to approach the questions logically. (Summer-2006) • It was noted in majority of the scripts that students lacked knowledge and practice on the subject. Furthermore, effective presentation which is essential for attempting an advanced stage paper was also lacking in most of the scripts. (Winter-2006)

13. Examiner’s Comments • Overall performance of the candidates was poor. It was observed that instead of explaining what the law has prescribed, the students formulated their answers according to their general understanding of the subject. For example, many students believed that since the liability of shareholders of a private limited company is limited, they shall not be required to contribute anything if the company is unable to pay its tax liability. Further, many students tried to stretch the answer by providing irrelevant details and explanations. The students are once again advised that marks are only awarded for the portion of answer which is relevant and it is a waste of time to display knowledge of other irrelevant areas. (Summer-2007)

14. Examiner’s Comments • The overall performance in this paper was again very poor. It was seen that the students tried to answer according to the general understanding of the subject, and not according to the specific requirements of the question and the law. (Winter-2007) • The performance in most cases was far below the level expected in a professional examination. An analysis of this low performance reveals that it was mainly attributed to lack of knowledge, inability to deal with practical situations and the tendency to rush to a conclusion and thereby failing to grasp the exact requirements of the question. • Further, it has also been noticed that the tendency to write the word ‘assumed’ has increased manifold without any reason as factually very few of the questions required an answer based on any assumption. Some of the students make such assumptions which change the meaning of the question altogether. Such assumptions make the question unduly complicated and result in poor performance. The students are advised to make assumptions only when it is necessary. They would also ensure that such assumptions do not contradict the situation given in the question or its requirements. (Summer-2008)

15. Income Tax • Income • Any bonus or bonus shares declared, issued or paid by a company with a view to increase its paid-up share capital shall not be an income in the hands of the shareholder. • Deductible Allowance • WWF • WPPF • Zakat paid under the Zakat and Ushr Ordinance, 1980. • Zakat privately paid shall not be treated as deductible allowance.

16. Income Tax • Employment • ‘Employment’ includes: • A directorship or any other office involved in the management of a company; • A position which entitles its holder to a fixed or ascertainable remuneration; or • The holding or acting in any public office. • Gratuity & commutation of pension is exempt to an employee to the extent provided in clause (13) of Part-I of Second Schedule, but this exemption shall not be available to any payment received from a company by a director of such company who is not a regular employee of such company.

17. Income Tax • Kibor • ‘KIBOR’ means Karachi Inter-Bank Offered Rate prevalent on the first day of each quarter of the financial year. • Minor Child • ‘Minor Child’ means an individual who, at the end of a tax year is under the age of eighteen (18) years. [2(33)] • For the purpose of section 90 (i.e., transfer of property) ‘Minor Child’ shall not include a married daughter. [90(8)]

18. Income Tax Rates • Individuals: • Different tax rates for salaried and non-salaried taxpayers • Marginal Tax Relief for salaried taxpayers only • Association of Persons: • 25% of taxable income • Where turnover is 50M or above provisions of section 113 (i.e., minimum tax @ 1% of turnover ) shall also apply • Companies: • Small companies – 25% of taxable income • Any other companies – 35% of taxable income • Provisions of section 113 (i.e., minimum tax @ 1% of turnover ) shall also apply

19. Schemes of Taxation • Normal Tax Regime (NTR) • Income and tax liability are computed under normal procedure by allowing admissible deductions, deductible allowance, adjustment of losses, tax credits and tax rebates, etc • Separate Taxation • Certain incomes and transactions are not included in total and taxable income; rather, are kept separate and charged to tax at special rates • Final Tax Regime (FTR) • Certain transactions are presumed as income and tax deducted/collected at source is treated as full and final discharge of tax liability in respect of income from such transactions.

20. Overriding Provisions • Section – 3 • The provisions of the Income Tax Ordinance shall apply notwithstanding anything provided in any other law for the time being in force. • Section – 107 • Where there is a contradiction between the provisions of the Income Tax Ordinance and any ‘Tax Treaty’, the provisions of the tax treaty shall apply.

21. Income from Assets • General Rule • Income arising from any asset is the income of the person who is owner of the asset • Exception to the General Rule • Where a persons transfers his asset under a revocable transfer, or to his spouse (other than against consideration or an agreement to live apart), a minor child, or to some other person for their benefits, the income arising from such asset shall be treated as income of the ‘transferor’ and not of the ‘transferee’ • Income from Sale of Land • Taxable only if the person is in the business of buying and selling of land • Under all other cases not taxable under the Income Tax Law

22. Taxation of Retailers (Ind. & AOPs) • Retailers With Turnover Upto Rs. 5,000,000 [113A] • A retailer whose total turnover for any tax year does not exceed Rs. 5,000,000 has two alternatives for determining his tax liability under the Income Tax Ordinance. The alternatives available to him are: • He may opt to pay tax computed on of his turnover during the tax year; and • He may opt to pay income tax under the normal tax regime (NTR). Under this case, the taxable income and the tax liability shall be computed as per normal procedure. • Retailers with Turnover Exceeding Rs. 5,000,000 [113B] • A retailer falling under this category is required to pay income tax on his turnover instead of taxable income. Tax liability of such taxpayer shall be: • Turnover upto Rs. 10 M - @ 0.5% of turnover • Turnover exceeding Rs. 10 M – Rs. 50,000 Plus 0.75% of exceeding amount • AOP with turnover of Rs. 50 M or above – Minimum tax @ 1% u/s 113 • Company as a Retailer – taxable under NTR

23. Permanent Establishment of Non-Resident • The PE shall be treated as a distinct and separate entity from the non-resident of which it is a PE. Its profit shall be computed on the basis of this principle. • Deduction on account of expenses (including executive and administrative expenses) shall be allowed as per normal procedure. • A PE shall not be allowed a deduction for any amount paid or payable by it to its head office or to another PE on account of the following expenses: • Royalties, fees or other similar payments for the use of any tangible or intangible asset. • Compensation for any services (including management services). • Profit on debt on money lent to the PE, except in connection with a banking business. • While determining the income, any amount which is received or receivable by a PE from its head office or from another PE on account of the following incomes shall not be taken into account: • Royalties, fees or other similar payments for the use of any tangible or intangible asset. • Compensation for any services (including management services). • Profit on debt on money lent by the PE except in connection with a banking business. • Head office expenses shall be allowed as deduction equal to an amount which is computed as below: • Total head office expenses of non-resident Turnover of PE • Total world wide turnover of non-resident • Any excess amount allocated to PE shall not be allowed as deduction. • A PE shall not be allowed a deduction on account of the following expenses paid or payable by the non-resident; • Any profit on debt to finance the operations of PE; or • Any insurance premium in respect of the above stated debt.

24. Thin Capitalization • Thin capitalization is a situation wherein a company has a very lesser amount of capital as compared to its debts. A foreign-controlled resident company shall not be allowed a deduction for the profit on debt paid by it on that part of the debt as exceeds the prescribed ratio. The provisions in this regard are as below: • The company has a foreign debtto foreign equityratio in excess of three to one at any time during the tax year. • Profit on debt shall be allowed as deduction if the debt-equity ratio remains up to three to one. As and when it exceeds this ratio, any amount paid as profit on that part of the debt as exceeds three to one ratio shall not be allowed. • The above provisions do not apply to: • (i) A financial institution; • (ii) A banking company; or • (iii) A branch of a foreign company operating in Pakistan.

25. Thin Capitalization • Foreign-Controlled Resident Company [106(2)] • It means a resident company in which fifty percent (50%) or more underlying ownership of the company is held by a non-resident person either alone or together with an associate or associates. • Foreign Debt [106(2)] • Foreign debt has been defined in relation to foreign-controlled resident company and it means the greatest amount of the total of the following amounts: • The balance of any debt owed by the company to a foreign controller or his non-resident associates, the profit on which is either exempt from tax or is taxable at a rate which is lower than the corporate rate; and • The balance of any debt owed by the company to a person other than specified in No. 1 above, if that other person is owing a similar amount of debt to the foreign controller or his associates. • Note: The greatest amount at any time in a tax year shall be taken as foreign-debt. • Foreign Equity [106(2)] • The amount of foreign equity of a foreign-controlled resident company shall be computed as below: • Amounts representing share in the equity of the company of foreign-controller or his non-resident foreign associates: • Paid up value of shares held XXX • Share premium XXX • Accumulated profit XXX • Asset revaluation reserve XXXXXX • Less: • Debt obligation owed to the company by the foreign-controller and his non-resident associates XXX • Share in accumulated losses XXXXXX • Foreign equity XXX • Note: All the above mentioned amounts should be taken at the balance appearing in the books at the beginning of the tax year.

26. Modarabas • Income from Non-Trading Activities • According to clause (100) of Part-I of the Second Schedule the income of a Modaraba from non-trading activities shall be exempt from tax for any assessment year commencing on or after 01-07-1999. In order to avail this exemption, it shall have to fulfill the following conditions: • Minimum 90% of the total profit (after transfer to mandatory reserve) is distributed among the certificate holders; and • For the purpose of determining the distribution of 90% profits, the profits distributed through bonus certificates or shares shall not be taken into account. • Incomes from Trading Activities [Clause (18) of Part-II of Second Schedule] • Currently, a Modaraba is taxable for such incomes, which are generated through trading activities. It shall be taxable at the rate of twenty five percent (25%) of its total trading income excluding the followings: • Dividend incomes; • Incomes to which section 153 applies (i.e., supply of goods, rendering of services or execution of contracts). • Incomes to which section 154 applies (i.e., exports). • Non-application of Minimum Tax u/s 113 [Clause (11A)(xiii) of Part-IV of Second Schedule] • The provisions of sections 113 regarding payment of minimum tax are not applicable to a Modaraba registered under the Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980.

27. Banking Companies • No depreciation allowance or deduction shall be admissible on assets given on finance lease • Provisions for advances and off balance sheet items shall be allowed up to a maximum of 1% of total advances; and • Provisions for advances and off-balance sheet items shall be allowed at 5% of total advances for consumers and small and medium enterprises (SMEs) • Provisioning in excess of 1% would be allowed to be carried over to succeeding years • If provisioning is less than 1% of the advances, then actual provisioning for the year shall be allowed • The amount of “bad debts” classified as “sub-standard” under the Prudential Regulations issued by the State Bank of Pakistan shall not be allowed as expense

28. Banking Companies • Capital Gain/Loss • “capital gains on sale of shares of listed companies” shall be taxed at the rate of ten per cent • Where the shares of listed companies are disposed of within one year of the date of acquisition, the gain shall be taxed at the normal rate • Loss on sale of shares of listed companies, disposed of within one year of the date of acquisition, shall be adjustable against business income of the tax year. Where such loss is not fully set off against business income during the tax year, it shall be carried forward to the following tax year and set off against capital gain only. No loss shall be carried forward for more than six years immediately succeeding the tax year for which the loss was first computed. • Dividend Income • The income under the head “dividend” shall be taxed at the rate of ten per cent • Income from Business – Taxable @ 35%

29. Banking Companies • Advance tax • The banking company shall be required to pay advance tax for the year under section 147 in twelve equal installments payable by 15th of every month. Other provisions of section 147 shall apply as such. • Provisions of withholding tax under this Ordinance shall not apply to a banking company as a recipient of the amount on which tax is deductible. • Minimum Tax • The provisions of section 113 shall apply to banking companies as they apply to any other resident company • Exemptions • Exemptions and tax concessions under the Second Schedule to this Ordinance shall not apply to income of a banking company computed under Seventh Schedule

30. Salary Income • Salary – Which Income: • Employee / employer relation must exist between the recipient and the payer • Definition: • Salary, briefly, is any benefit to a person from his employer • Basis of Taxing Salary: • Primarily salary is taxable on actual receipt basis • Exceptions are: • Salary received in arrears may be taxed on accrual basis at the option of taxpayer • Commissioner may opt to tax salary income of an employee of a private company if he is opinion that payment of salary was deferred to avoid tax • Terminal benefits may, at the option of taxpayer, be taxed at the ART based on immediately preceding three tax years

31. Salary Income • Loan from Employer: • Interest-free: Interest at BMR shall be salary income • Interest-bearing: BMR less interest charged shall be salary income • Interest exceeding BMR: No benefit to employee • BMR for tax year 2011 is 13% per annum • Loan Used in Acquiring Asset Generating Taxable Income: • Interest-free or interest up to BMR: Interest at BMR shall be allowed as deduction against such income • Interest exceeding BMR: Actual interest charged to the employee shall be allowed as deduction against such income

32. Salary Income • Conveyance : • Conveyance allowance – Totally taxable • Conveyance facility: • For official use only – Nothing is salary • For personal use only – 10% of cost is salary income • For official and personal use – 5% of cost is salary income • If vehicle is on lease – Instead of ‘cost’ the ‘FMV’ of the vehicle at the time of its acquisition shall be used. • House Accommodation: • House rent allowance – Totally taxable • Rent-free accommodation: • In big cities – Higher of FMR or 45% of MTS/basic salary shall be salary income • In small towns – Higher of FMR or 30% of MTS/basic salary shall be salary income • Any other Perquisites: • Difference between the FMV of the perquisite and the amount actually paid by the employee shall be included in salary income of employee

33. Salary Income • Medical Facility: • Medical allowance with no other medical facility - Exempt up to 10% of basic salary. Any excess amount shall be taxable • Hospitalization or Reimbursement of Medical Expenses: • Provided as per terms of employment – Exempt • Provided without entitlement as per terms of employment – Fully taxable • Medical allowance as well as Free medical facility: • Medical allowance shall be taxable and facility shall be treated as per general rule

34. Salary Income • Employee Share Option Scheme: • Value of right/option in itself is not taxable • If option exercised – FMV of shares less price paid shall be salary income • If option is renounced – disposal consideration less price paid for the option, if any, shall be salary income • FMV of the shares at the time of acquisition or when free right to transfer those shares is granted shall be the cost of acquisition of such shares. This shall be used for computing ‘capital gain’

35. Income from Property • Rent Chargeable to Tax (RCT) • RCT shall include the following amounts: • Higher of the rent received/receivable or the fair market rent for the period for which the property was actually rented out; • Forfeited deposit received under a contract for the sale of land or a building; • Any obligation of the owner paid by the tenant; • One-tenth • (1/10th) of the advance not adjustable against rent. • Property Income is taxable on actual receipt basis or on accrual basis • It is a separate block of income chargeable to tax at special rates applicable to it only • Certain persons are required to deduct tax at the time of making payment for Rent. This amount shall be adjustable against final tax

36. Income from Business • Incomes may fall under following categories: • Local Supplies made out of: • Own-Manufactured goods - NTR • Locally purchased goods - FTR • Imported goods - FTR • Goods manufactured for exports and its scrap (maximum up to 20% of such production) – May be treated as Export (circular 20/92) • Exports made out of: • Own-Manufactured goods - FTR • Locally purchased goods - FTR • Imported goods – Shall be excluded from exports, as tax u/s 148 shall be final tax in respect of such goods. • Duty Draw-Backs • Shall not be considered as additional receipt. The exports already included it and was subject to tax deduction u/s 154. (circular 14/93)

37. Income from Business • Deductions – Admissible • Any expense incurred wholly and exclusively for the business • Depreciation and amortization • Expense of death of animal being used for business other than as stock-in-trade • Amalgamation expenses by amalgamated company • Financial charges • Lease rentals by the lessee • Apportionment of Common deductions • Common expenditures shall be apportioned among different heads of income on some reasonable basis

38. Income from Business • Deductions Not Admissible [21] • Any tax, cess or rate (including income tax) levied on the profits or gains of the business. • Any amount of tax deducted at source from an amount received by the person. • Any payment made to any person without deducting tax at source (under section 149 to 158 & 232), if applicable. A person is required to deduct tax at source in respect of the following payments: • Salary; • Rent; • Brokerage or commission; • Profit on debt; • Payment to non-resident; • Payment for services; or • Fee. • Any payment on which tax at source was deducted but has not been paid. • Any payment made by an association of persons to its partners or members on account of profit on debt, brokerage, commission, salary or any other remuneration.

39. Income from Business • Expenditure of a non-resident business on account of “Head Office Expenditure” which exceeds the allowable limits. The allowable deduction on account of “head office expenditure” is calculated as follows: • Total Head Office Expenditure Total Turnover in Pakistan • Total World Turnover • Any expenditure incurred on entertainment except those, which are incurred: • Abroad in connection with the business; • In Pakistan on entertainment of foreign or local customers and suppliers; • At the meetings of members, agents, directors and employees; • On refreshment of employees; • At the opening of branches; and • On entertainment of persons related directly to business. [Rule-10] • Notes: • ‘Entertainment’ means the provision of meals, refreshments and reasonable leisure facilities in accordance with the tradition of business and subject to over all norms and customs of business in Pakistan. • The Board may prescribe the conditions for allowing an entertainment expense. The violation of such conditions shall also render the expense as inadmissible.

40. Income from Business • Any expenditure under a single account head exceeding Rs. 50,000 in aggregate shall be inadmissible if the payment is not made through a crossed cheque or a bank draft. However, this provision shall not be applicable to: • Utility bills. • Postage. • Single transactions not exceeding Rs. 10,000. • Payments on account of freight charges. • Any amount credited by direct transfer to an employee’s bank account for reimbursement of expenses incurred on behalf of the taxpayer. • Payments made to discharge any statutory obligation (such as duties, taxes, octroi, export tax, fines, fee, cess, etc.). • Note: Online transfer of payment from the business account of the payer to the business account of the payee as well as payment through credit card shall be treated as transactions through the banking channel, if such transactions are verifiable from the bank statements of the respective payer and the payee. • Any payment on account of salary exceeding Rs. 15,000 per month if not made through a crossed cheque or transfer to the employee’s bank account.

41. Income from Business • Any contribution to such provident fund, pension fund, gratuity fund, superannuation fund or annuity fund which is not recognized or approved under the income tax law. • Any contribution to any provident or other fund, if the person has not made effective arrangements for deduction of tax at source at the time of payments out of such fund. • Any donation to an unapproved institution. • Any provision against the profits of the business, e.g., provision for bad debts. • Any appropriation of profit such as dividends, transfer to reserves or capitalization in any way. • Any expenditure in the nature of fine or penalty for the violation of any law, rule or obligation. • Any expenditure of a capital nature (e.g., purchase of assets). • Any personal expenditure incurred by the person.

42. Income from Business • Bad Debts: • Actual allowed; provision for doubtful debts, inadmissible • Losses: • Normal – admissible • Abnormal – admissible (net-off any claim) • Non-payment of a liability: • Income if not paid within three years. • Expense if paid thereafter • Consumers’ Loan by HBFC/NBFCs: • Provision equal to 3% of income from such loan shall be deduction on account of bad debts • If actual bad debts are more, those shall be carried forwarded to next year for adjustment of provision for that year

43. Income from Business • Assets: • Depreciable asset – Normal depreciation (DBM) • Eligible depreciable asset – Initial allowance plus normal depreciation (DBM) • Intangible – Amortization for lesser of useful life of the asset of 10 years (SLM) • Pre-commencement expenditure – Amortized @ 20% of cost (SLM) • Acquisition of an Asset: • A person shall be treated as having acquired an asset at any of the following times: • When he begins to own an asset; • When he is granted any right to own an asset; or • When a personal asset is applied for business use.

44. Income from Business • Disposal of An Asset • Disposal of an asset means to pass over an asset to some other person. In its general meanings it denotes the change in ownership of an asset. Under the Income Tax Ordinance, 2001 a disposal may take place when an asset is: [75(1)] • Sold; • Exchanged; • Transferred; • Distributed; • Cancelled; • Redeemed; • Relinquished (to abandon, give up or renounce some right or thing); • Destroyed; • Lost; • Expired; • Surrendered; • Transmitted by succession or under a will; • In case of a business asset, applied to personal use; or [75(3)] • In case of a business asset, discarded or ceased to be used in business. [75(3A)]

45. Income from Business • Asset from Foreign Currency • Where an asset is acquired with a loan in foreign currency and exchange rate fluctuation increases or decreases the liability of the person in Pak rupees, then any increase or decrease in the liability, before full and final repayment of the loan shall also be added to or deducted from the cost of the asset. • Asset Acquired From Any Subsidy, Etc. • The amount of any grant, subsidy, rebate, commission or any other assistance received or receivable in respect of acquisition of an asset shall not be included in the cost of such asset. However, where the amount of grant, etc., is chargeable to tax under the Income Tax Ordinance, 2001 then such amount shall also be included in the cost of the asset.

46. Income from Business • Consideration of a Leased Asset • The residual value received by a leasing companyon maturity of a lease agreement shall be taken as consideration for disposal of such asset. • However, it should be noted that the residual value plus total amount received by the leasing company towards the cost of the asset (i.e. the principal part of the lease rentals realized by to the leasing company) should not be less than the original cost of the asset to the leasing company. • Consideration of Assets Sold in Bulk • Where different assets are disposed off through a single transaction and the consideration of each asset is not determined / specified separately, the total consideration received shall be apportioned amongst all assets so disposed off. This apportionment shall be on the basis of fair market value of assets at the time of the transaction. In other words the disposal consideration shall be computed with the help of the following formula: • Total Consideration Received FMV of an asset • FMV of all assets

47. Income from Business • Non-recognition of Gain or Loss on Disposal of an Asset [79] • Normally, the gain or loss on disposal of an asset is taken into account. However, under the following cases no gain or loss shall be taken to arise, if the person acquiring the asset is a resident person: • Where disposal is between spouses under an agreement to live apart; • Where disposal is by reason of the transmission of the asset to an executor or beneficiary on the death of a person; • Where disposal is by reason of a gift of the asset; • Where disposal is by a company to its members on its liquidation; • Where disposal is by an association of persons to its members on its dissolution. However, under this case the assets should be distributed in accordance with the interest of members in the capital of AOP. • Notes: • If the person acquiring the asset is a non-resident person, the gain or loss on disposal of assets shall be computed as per normal procedure. • Under all the above cases it shall be treated that: • The person is acquiring the asset of the same character as the person disposing of the asset; and • The person is acquiring the asset at a cost that is equal to the cost of the asset at the time of disposal to the person disposing it of. • Where the disposal is by reason of the compulsory acquisition of the asset under any law. In order to avail this benefit the consideration received on disposal shall be reinvested (within one year of the disposal) in an asset of similar kind.

48. Income from Business • Exceptions Regarding Cost & Disposal Consideration • Passenger transport vehicle not plying for hire: • The cost of such vehicle shall be lesser of the actual cost of the vehicle or Rs. 1,500,000. In other words the maximum cost for depreciation purpose shall be Rs. 1,500,000 if the vehicle is purchased at a price higher than this amount. • For gain or loss on disposal of a passenger transport vehicle not plying for hire the ‘Consideration Received on Disposal’ shall be computed according to the following formula • A  B • C • A = Amount received on disposal of vehicle • B = Cost determined for depreciation purpose (i.e., lesser of actual cost of the vehicle or Rs. 1,500,000) • C = Actual cost of acquiring the vehicle. • Assets given on lease by leasing company, etc:

49. Income from Business • Disposal of immovable property: • Any consideration received on disposal of an immovable property shall be treated as cost of the property if the consideration exceeds the original cost of the asset. Under such a case the total amount allowed as deduction on account of depreciation allowance (accumulated depreciation) on such asset shall become the gain on disposal of the asset. • Export of depreciable asset: • The cost of the asset shall be treated as the consideration received on disposal of an asset if: • It is a depreciable asset; • It has been used in Pakistan by the person; and • It is exported or transferred by the person out of Pakistan

50. Capital Gains • Capital Asset [2(10) & 37(5)] • Capital asset means property of any kind held by a person excluding the following assets: • Any stock-in-trade, consumable stores or raw materials; • Any depreciable assets; • Any intangible asset on which amortization is allowed u/s 24; • Any immovable property; and • Any movable property held for personal use by the person or his family member dependent upon him. However, the following assets shall be treated as capital assets: • A painting, sculpture, drawing or other work of art; • Jewelry; • A rare manuscript, folio or book; • A postage stamp or first day cover; • A coin or medallion; or • An antique.