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Short Notes On INCOME TAX
Topics Covered:
1. Salary
2. Employee share scheme
3. Income from property
4. Capital Gains
5. Final Tax Regime
6. Tax Credit
7. Income From Business
8. Tax on Tax
9. Losses
10. Minimum Tax
11. AOP
BY : Kashif Nawaz Jakhar
Contact No# 0331-4791167
Tax Year 2012
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 2
PREFACE
Al-Hamd-O-Lillah, the 2nd addition of “Short Notes on Income Tax” has been completed. These notes have been prepared under the senior guidance of my dearest teacher Mr. Imran Shehzad (ACA) sb, who guided me through the way in the preparation of such quality notes for the students of Module-C. In these note, I covered almost all the material areas covering upto 50 to 60 marks in the paper including numerical calculations and fair presentations of the conceptual queries frequently asked by the ICAP-Examiner. These notes include:
a) Salary b) Income from property c) Income from business d) Capital Gain (37 & 37A) e) Income from other sources f) Final Tax Regime
I try to retain the focus of the ICAP-examiner in paper construction relative to the marks allocation as:
Topics Marks
Individual or AOP 20-25
Conceptual queries 30-35
I recommend to study these notes with reference to “ INCOME TAX & SALES TAX ” Khalid Petiwala’s Notes. I hope my efforts will help you to retain maximum marks in your examination. Utmost efforts have been made to make these notes free from errors, yet there is always a room for improvement. Any suggestion from you will highly be appreciated.
Kashif Nawaz
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 3
TABLE OF CONTENTS
Sr. no. Topics Page no. Sr. no. Topics Page no.
1 Basic concepts 5 12 Bad Debts 36
2 Salary 9 13 SPV 37
3 Provident Fund 11 14 Methods of Accounting
39
4 Employee Share Scheme
12 15 Minimum Tax 40
5 Capital Gain 13 16 Losses ( concepts )
43
6 Final Tax Regime
15 17 Losses 45
7 Tax Credit 19 18 Group Taxation & Group Relief
49
8 Income From Business
22 19 AOP 53
9 In-admissible Expenses
25 20 Tax on Tax 57
10 Depreciation 27 21 Share from AOP
59
11 Amortization 35 22
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 4
COMPUTATION OF TAX LIABILITY (Under NTR)
Part A Part B Part C
Profile of Assessee Computation of Income Rs. Computation of Tax Liability Rs.
Name: NTN :
(1) Personal Status
I. Salaried
II. Non-Salaried
III. AOP
IV. Company
(2) Residential Status
I. Resident
II. Non-Resident
III. Pakistan source
IV. Foreign Source
(3) Tax Year
I. Normal tax Year
II. Special Tax Year
III. Transitional Tax Year
Salary ( U/S 12 ) Income From Business
a) Speculative
b) Non-Speculative
Capital Gain ( U/S 37 ) Income From Other Sources Less: WWF WWPF Zakat Donations U/S 61 Add: Income from property Capital gain ( U/S ) 37 A Total Income ( excluding share from AOP ) Add: Share from AOP Total Taxable Income
xxx Xxx xxx xxx xxx (xxx) (xxx) (xxx) (xxx) xxx xxx xxx xxx XXX
Tax on Tax Able Income Tax on person Add : Income Prom Property Capital Gain ( U/S ) 37A Tax Credits: Less: Allowances Senior Citizen Allowances Full time Teacher Allowances Foreign Tax credit Less : Average Relief Investment in shares Contribution to PF Donation Profit On debt Less; Advance Tax Collection of Tax Deduction of Tax Advance Tax ( u/s 147 ) Tax Payable /Refundable
xxx xxx xxx (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) (xxx) XXX
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 5
INCOME TAX ( Tax year 2012)
TAX LAWS
STATUS
Salaried Person : Total Salary Income . Total Taxable Income
AOP ( Association of person ) 25%
Resident when control and management of affairs is situated wholly or partially in Pakistan.
AOP may be a * firm * joint venture * Hindu undivided family * but does not include a company.
Income Tax Ordinance
Schedule Ordinance
Income Tax rules
AOP ( 25%) Company ( 35%)
Residential Status Personal Status
Explanation
Resident Non Resident Individual
X 100=If answer is >50%,then salaried person.
Non Salaried Salaried
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 6
Company : 35%
(1) private (2) Public (3) Banking
Company incorporated in Pakistan , provincial govt. , and local govt. are resident
Other companies are resident if control and management affairs are situated wholly in Pakistan.
Resident :
183 or more days
Half day consider full day
NOTE: Only transit days are excluded.
Computation of Taxable income Income is classified as by law
Geographical Source of Income 1) Pakistan source Income 2) Foreign source income
Heads of income
Regimes 1) Normal 2) Final
SCOPE OF TAXABLE INCOME
1. Resident
Both incomes are taxable
2. Non resident
Only Pakistan source income is taxable
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 7
3. Foreign source income of a short term resident
Pakistan source income is taxable
Foreign source income exempt which is not brought / received in Pakistan
He is in Pakistan only for employment not for business
Present in Pakistan for not exceeding 3 years
4. Foreign source income of a Returning Expatriate
non resident for last 4 years
National of Pakistan
An individual
Income ( current & next year exempt )
TAX YEAR
Transitional Tax Year
1-10-2008-to 30-09-2009
A period of 12 months ending on any date
other than 30th June
Special Tax Year Normal Tax Year
1july 02------30june 03 A period of 12 months
ending on 30th June
Whenever there is a change in tax year the period in between the normal tax year and special tax year is treat as transitional
tax year
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 8
HEADS OF INCOME
1. Salary 2. Income from property 3. income from Business 4. capital gain 5. income from other sources
SALARY : ( taxed on receipt basis )
relationship of employee and employer
Cash basis
Income From property : ( taxed on accrual basis ) Rent from immoveable property ( Land & building )
Forfeited deposit against sale of immovable Property Only for that year in which Forfeited
Advance unadjusted Rent {Unadjusted amount X 1/10} in that year
Signing amount Note :
I. Mod of payment is irrelevant II. Any benefit given by tenant to his landlord is rent
Income from business Trade , manufacturing . any profession
Capital Gain ( gain from disposal of capital assets )
Shares , coins , postage stamp, jewelry
Income from other sources If any income does not fall under any other heads . then it
will be under the head of income from other sources. e.g., Dividend
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 9
SALARY Any kind of benefit transfer or given by employer to employee will be taxed and it will be add in the salary income of the employee.
Components of salary
Perquisites 1) ACCOMMODATION : 45% of BS or Actual Expense of employer(rent) ( whichever is higher = add in salary )
2) Conveyance:
Only for office use ( T.E )
Owned ( cost ) I. Personal ( 10% )
II. Personal + Business use ( 5% )
Leased ( FMV ) I. Personal ( 10% )
II. Personal + Business use ( 5% )
3) Medical Facility :
a) Facility Given i. Under the contract ( T.E ) ii. Not Under the Contract (T.T )
b) Re-imbursement c) Insurance
Amount contributed by employer will be added in salary
T.T H.R.Allowance ( T.T )
Conveyance allowance ( T.T )
Medical allowance
(exempt upto 10% of B.S)
Accommodation
Conveyance
Medical facility
Loans
U. bills
Comp. shares
TA / DA
Basic Salary Perquisites Allowances Others benefits Terminal benefits
Gratuity
Provident fund
Pension
Golden hand
Shake
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 10
4) Medical facility & medical Allowance both given
i. Under the contract a. Facility ( T.E ) b. Allowance ( T.T )
ii. Not Under the contract a. Facility ( T.T ) b. Allowance (Exempt upto 10% of BS )
5) Asset is given to employee Permanently
FMV of Asset – payment by employee = add in salary
6) Marginal cost: Nothing will be added in salary, if no additional cost incurred by the employer
Other Benefits :
Loan provided by employer Loan X 14% X time = XXX add in salary Note : if any interest paid by employee then that amount
will be deduct from above answer . and the remaining will be added in salary.
Terminal Benefits 1. Pension ( Exempt )
a. In case of 2 or more than 2 pensions ( higher will be exempt)
b. In case of re-employment with same employer or group No amount will be exempt
2. Gratuity a. Approved
I. Government ( T.E )
II. Fund ( T.E )
III. Scheme (exempt upto Rs.200,000 )
b. Unapproved
Rs. 75000 or 50% of gratuity amount ( lower will be exempt)
Note : unapproved conditions or exemptions will be not applied on the following Cases.
i. Non employee ii. Non resident iii. Not received in Pakistan
iv. Re-employment
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 11
3. Provident Fund. = Employer + employee contribution Unrecognized PF Recognized PF
Annual X Note
Withdrawal Employer Contribution + interest = add in salary X
Note: Rs. Rs. Employer contribution (p.a) XXX 10% X ( BS + DA ) Or 100,000 (xxx) XXX add in salary
Interest on Acc. Balance (p.a ) XXX 1/3 X ( BS + DA ) Or 16% X Acc.Balance (XXX) XXX add in salary
Note : Acc. Balance = Employee cont. + Employer Cont. + interest Formula ::: ( For calculate missing figure ) Interest = Acc. Balance X Rate If any figure missing we can calculate with the help of above formula .
Whichever
is lower
Whichever
is lower
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 12
EMPLYEES SHARE SCHEME Example :
Persons 2010 2011 2012 Kashif Option sale = Rs.5000
Rameez Acquisition of shares Sale = Rs. 70
Farhan Option sale of 200 shares @ sale price Rs. 3000
Balance(300) Acquisition Sale Rs.60/ share
On march 2010. FMV = Rs. 50/share Offer value = Rs. 30/share No. of share = 500 shares Advance = 2 per share On march 2011 FMV= Rs.40/ share
SOLUTON: Persons 2010 2011 2012
Kashif Salary 4000 X X
Capital Gain X X X
Rameez Salary X 5000 (500 X 10 )
X
Capital Gain X
X
500 X 30 = 15000 SP-FMV=70-40=30
Farhan Salary 2600 {3000-(200 X 2 )
3000 (300 X 10 )
X
Capital Gain X 6000 {300 X (60-40)}
X
60
Salary Rs.10
Capital Gain Rs.20
Benefit given by Market
Benefit given by employer or company
40
30
Here Rs. 10 = FMV – Offer Value
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 13
CAPITAL GAINS
Definition : The Gain from Disposal of Capital Assets. Explanation:
a) Gain
b) Disposal
c) Capital Assets
Sale price/FMV --- cost of disposal
I. Sale with in one year ,100%
add in taxable income II. Disposal after one year ,75%
add in salary
Disposal Means
Sale
Transfer
Destroyed
Gift
Relinquished
Capital Assets :
These are not capital assets o Immovable o Intangible o Depreciable o Stock-in-trade o Other movables ( cars )
These are Capital Assets o Shares o Debentures o Shares of Private company o Shares of AOP o Membership cards of stock
exchange
Capital Gains
A B C
37 37 A
Gain/Loss Gain
Taxable income in case of Gain
I. Disposal within year, 100% add
in taxable income. II. Disposal after one year , 75%
add in taxable income.
Shares of public limited company
Redeemable debentures
Modaraba certificates
PTC vouchers
Derivatives
If these assets sold
With in 6 months = 10% of gain is taxable
With in one year = 7.5% of gain is taxable
After one year = No tax
So, After one year 25% of gain is Exempt. & 75% of gain is
taxable
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 14
Non recognition rule: under the following conditions income is not taxed.
1) Inheritance 2) Gift 3) To transfer to a spouse 4) In case of dissolution of a company
1) Jewelry 2) Coins 3) Medallions 4) Postage stamp 5) Sculpture etc
ASSETS whose Gain is Taxable But no treatment of loss
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 15
Final Tax Regimes
Regime: Traditions 1. NTR ( normal Tax Regime ) 2. FTR ( Final Tax Regime )
1. NTR : Just add the income on the basis of persons and applied tax.
PERSONS
I. Individual
Salaried
Non Salaried
II. AOP 25%
III. Company 35%
Incomes should be under there related head of incomes
Revenue – Expense = Income
Sale price – purchase price = income
Return file in case of NTR.
2. FTR : No expenses are allowed
e.g. Revenue = income
No heads of incomes
Tax rates are independents for persons
No loss
Income is Tax on gross basis
Statement file in case of FTR.
i. Dividend for o Individual o AOP
Shall be considered under FTR
ii. Dividend for o Company Shall be considered under NTR. So for companies the dividend shall be recorded under the head of “Income from business “ in case of banking business.
Note
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 16
Dividend Income : Dividend income shall be deducted @10% of gross dividend which shall be considered full and final tax for the other than a corporate shareholder . e.g. Net dividend after deducting Tax and Zakat is Rs. 875 Calculate gross dividend . Solution : Formula : 875 . 87.5
X 100 = 1000
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 17
Deduction Of Tax Collection Of Tax Advance Tax Final Tax
1. Deduction Of Tax: Deduct from Income Payer will deduct the Tax in case of deducting authority Income over which Deduction of Tax Applied Supply of Goods , Dividend , Services , Price winning , Salary , Export
2. Collection Of Tax : Collect from expense Services provider will collect the tax Expenses over which Collection of tax applied Cell phone payment , imports
3. Advance Tax : ( NTR ) The items which fall under NTR ( according to law ). So the tax deduct or collect on such items is Advance tax
4. Final Tax : ( FTR ) The items which fall under FTR ( according to law ). So the tax deduct or collect on such items is Final tax.
Aisa tax jo kisi bhi source say collect ya deduct hova hoo.
Important Terms
D = Deduction from I = Income C = Collection from
E = Expense
Formula to Remember
Withholding TAX
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 18
Table For understanding
Persons Individual/ AOP Unlisted companies listed companies
Supply Trading FTR FTR NTR
Manufacturing FTR NTR NTR
Contracts FTR FTR NTR
Retailers ( sale goods for final consumptions )
Condition Rate of Tax
Turnover > 5 m but < 10 m Rs.25000 + 0.5% of Turnover > 5 m
Turnover > 10 m Rs.25000 + 0.75% of Turnover > 10 m
Individual / AOP
Turnover < 5 million Turnover > 5 millions
Option to pay tax @ 1% of Sale
as Final Tax.
Compulsory to pay as
final tax
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 19
TAX CREDIT Rs. Tax liability XXXX Less: Senior citizen allowance (xxx) Less: Full time teacher allowance (xxx) Less: Foreign Tax Credit (xxx) . A . Less: Investment in shares (xxx) Less: Pension fund (xxx) Less: Donation (xxx) Less: Profit on debt (xxx) XXXX Less: Advance Tax (xxx) Tax Payable XXXX or Tax Refundable (f negative figure) (XXXX)
Invest. In shares Pension Fund Donation Profit on debt
Actual Amount Actual Amount Actual Amount Actual Amount
15 % 20 % 30 % 50 %
500,000 ------ ------ 750,000
FORMULA : . A . Taxable Income
Note( Related to Tax Credit )
Lower
% of taxable income
X Lower = Tax credit
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 20
Rules Of Tax Credit : Conditions Eligibility amount
Senior citizen allowance Age 60 years or more
Taxable income does not exceed Rs. 10,00,000
Then his tax liability shall be reduced by 50%.
Full time teacher allowance A full time teacher ; or
A researcher of a recognized non-profit educational or research institution including government training and research institution .
Then his tax payable shall be reduce by 75%.
Foreign tax credit If the foreign source income of a resident person is taxable in Pakistan
then the taxpayer shall be allowed tax credit in respect of foreign income tax paid by him as lower of:
Foreign income tax paid; and
Pakistan tax payable in respect of foreign source income at average rate of tax.
Investment in shares o Shares must be of listed Comp.
o Must be original allottee o Did not dispose in one year
o actual o 15 % of T.I o Rs.500,000
Contribution to pension fund
Approves Institution
Govt. hospital
Not trough CASH
May be direct or by cheque.
actual
20% of T.I
Donation Eligible person (u/s 19A )
PF must be approved
Actual
30% of T.I
Profit on debt Loan for house build.
Loan from bank or financial institution
Actual
50% of T.I
Rs.750,000
Lower
Lower
Lower
Lower
See illustration no. 2.9 & 2.10 of K.petiwala
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 21
Full Time Teacher Allowance : Formula : Taxable salary(as F.T.T) Taxable Income Where : F.T.T means = Full time Teacher
Foreign Tax Credit :
Formula : Tax payable(Note 1) xxxx Taxable Income Tax paid in foreign Country = xxxx
Note 1 : Tax Payable xxxxx Less: Senior citizen allowance (xxxxx) Less: Full time Teacher allowance (xxxxx) Tax Payable ( Note 1 ) xxxxxx
X Tax payable
After deducting senior citizen allowance
X 75% = XXX
X Foreign source income =
Lower will be deducted
from tax payable
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 22
INCOME FROM BUSINESS
Income ( 5 % discussion) Deduction ( 95 % Discussion ) Taxable
Exempt
Non speculative Speculative
WE discuss about it: 1: Definition
2: Losses
(Income – Deduction = T.Income)
Special (Separate Calculation)
Amortization Depreciation
Allowed (20% discussion)
Or ( Admissible )
Pre-commencement Research & Development
Dis-Allowed (80% discussion)
Or ( inadmissible )
Conditionally e.g. * salary in certain condition paid through cash * Tax is deducted
Without any condition e.g. * Tax
* Personal expenditure
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 23
Example : ( of allowed and disallowed expenses ) !!!!!!!! Income statement according to IAS !!!!!!
!! Income statement according to Income Tax Ordinance 2001 !!
Solution : Computation OF Taxable Income :
Particulars Rs. Particulars Rs. Purchase Opening Stock Factory Salary (10) Depreciation (70) Income Tax Admin salary Profit
300 100 50 50 40 30 500
Sales Closing Stock Dividend
1000 50 20
1070 1070
Particulars Rs. Particulars Rs. Purchase Opening Stock Factory Salary Depreciation Admin salary Profit
300 100 40 70 30 510
Sales Closing Stock
1000 50
1050 1050
Rs. Rs. Accounting Profit Add: Disallowed Expenses Salary Depreciation Income tax Less: Allowed Expenses: Dividend Income Depreciation
10 50 40 20 70
500 100 (90)
Taxable Income 510
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 24
SECTION. 20. ALLOWED EXPENSES All expenses incurred for business. Apportionment of Expenses : e.g. Common Expenses Income under FTR ( no expenses allowed ) = Rs. 500,000 Income under NTR ( expenses are allowed ) = Rs. 337,778 Formula for calculate Expense: Sale(under NTR) Total Turnover
500,000 400,000
FTR NTR
=900,000 (turnover) Expenses 600,000 purchases 50,000 salary
30,000 depreciation
Expenses Expenses
266667 22222 13333
333333 27778
16667
X Expense = xxxx
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 25
Section . 21:
In-Admissible Expenses
Not Allowed Expenses: Following expenses are not allowed
TAX :
Income Tax
Sales Tax
Advance Tax
Violation Of Law ( Penalty )
AOP Salary or other benefit by AOP to its members are not allowed.
Salary Paid Notes :
o Salary , commission o Deducting the authority but did not deduct tax o Then the tax expense not allowed.
Those liabilities which effect the P & L A/C e.g.
a. Cash XXX To Loan XXX ( Capital Liability ) . b. Salary XXX To Salary Payable XXX ( Trading Liability ) . c. Purchases XXX To Mr. Z XXX ( Trading Liability ) .
Allowed (For Business)
Disallowed (Against Law)
TRADING LIABILITY
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 26
DONATION
INCOME TAX
U/S 61 of 2nd Schedule Less: ( as Zakat ) Rate: 30 % Conditions:
o Pay in cash o By cheque o In any kind
Donation to approved institution. e.g. Govt. hospital ( Chapter #2) Rate: 30 % Conditions:
o Do not pay in cash o By cheque o In any kind
Preliminary Expenses: are disallowed upto commercial production ( pre-commencement expense )
Trading Liability: Not paid with in 3 years.
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 27
Chapter # 12
DEPRECIATION
The Rules and Regulation For Depreciation Rules:
Depreciation shall be charged on depreciable assets.
Depreciation shall be charged after deducting initial allowance .
FORMULA : ( cost – initial allowance ) X Rate of depreciation e.g. ( 100 – 50 ) X 10% = 5
( Rate 50% ) All depreciable assets are also eligible depreciable assets except the following :
1. Furniture and Fixture 2. Transport vehicle not plying(use) for hire e.g. business or rent a car 3. Second time used plant and machinery
Note: In Pakistan one asset is :
Depreciable + eligible depreciable asset
Only for 1st user . For all other users that asset will be only a depreciable asset.
INITIAL ALLOWANCE ON VEHICLE CASES
INITIAL ALLOWANCE
Rent a car + Daewoo ( eligible depreciable asset )
Director’s car + company car
( not plying for hire )
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 28
Eligible depreciable Assets:
Life more than one year Subject to wear and tear For business use
Initial allowance @ 50% shall be charged on the eligible depreciable assets in the 1st year only.
Depreciation shall be charged on reducing balance method.
Depreciation rates are as follows.
Rates Assets
10 % 30 % 15 %
Building Computer and related equipment All other assets
IMPORTANT NOTES
Depreciation Rates
HINT
Try to compute depreciation in the examination / prepare the depreciation schedule on written down
value bases.
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 29
Assets use partially for Business: If an asset , use partially for business and partially for other objectives , we will charge
deprecation proportionally BUT initial allowance fully
Example: Business use ( 60 % ) & for other objectives ( 40 % )
Full yearly 60 % Cost Initial allowance Depreciation
10,00,000 (5,00,000) 5,00,000 (50,000) 4,50,000
5,00,000 50,000 (60%)
5,00,000 . 30,000. 5,30,000
Full year depreciation charge in the year of purchase.
No depreciation is charged in the year of disposal.
NOTE
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 30
GAIN or LOSS in disposal of Depreciable Asset: The gain or loss on disposal of depreciable assets charged to income from business.
Gain or Loss = Sale price/FMV ( higher) –- Tax WDV
WHERE: Tax written down value = Cost – Tax depreciation WHERE: Tax Depreciation = Depreciation + Initial allowance
Full year depreciation charge in the year of purchase.
No depreciation is charged in the year of disposal.
COMPUTATION OF GAIN or LOSS
NOTE
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 31
Examples :
a(I)
Computation of Depreciation e.g. numerical example
Year Furniture & Fixture
Plant Tax allowance
2007 cost 500,000 10,00,000
Initial allowance(50%)
(500,000)
500,000
500,000 500,000
Depreciation(15%) (75000) (75000) 150,000
425,000 425,000 650,000
2008 Depreciation(15%) (63750) (63750) 127500
361250 361250
2009 Depreciation(15%) (54188) (54188) 108376
307062 307062
b(II)
Computation of Gain or Loss
Assume the plant sold for Rs.500,000 in 2009. now compute the gain or loss. = sale price – tax WDV = 500,000 – 361250 Gain = 138750
it’s the income from business in 2009. now less depreciation Rs. 54188 of this year from
this income .
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 32
a(II)
Asset Partially Used For Business (assume 60% for business use )
Year Plant Tax Allowance/ dep. allowance
2007 Cost 10,00,000
Initial allowance (500,000) 500,000
500,000
Depreciation(15%) (75000) 45000
425,000 545,000
2008 Depreciation(15%) (63750) 38250
361,250 583,250
2009 Depreciation(15%) (54188)
307,062
NOTE: the depreciation column must be draw and calculate depreciation.
b(II)
!!!! Calculation of Profit or Loss !!!!!!!!! when !!!!!Asset partially used for business !!!!! Assume the plant sold for Rs.500,000 . = sale price – Tax WDV = Sale price - ( cost – depreciation allowances )
= Sale price – [ cost – ( initial allowance + depreciation)] = 500,000 – [ 10,00,000 – 583250 ] = 83250 income from business
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 33
Cases for Gain or Loss ( three cases )
Exceptions:
Building ( Case 1 )
Export of use asset ( Case 2 )
= sale price – Tax WDV = Sale Price – ( cost – tax Depreciation )
NOTE: If sale price is above the cost price then the cost shall be consider as sale price So, =Sale Price – ( sale price – tax Depreciation ) =Sale Price - sale price + tax Depreciation = Tax depreciation “”It means that the INCOME will be equal to the TAX DEPRECIATION “”. e.g. Tax depreciation = Gain 500,000 = 500,000
= sale price – Tax WDV = Sale Price – ( cost – tax Depreciation )
NOTE: If a used asset sold, out of Pakistan , sale price will be consider as cost. So, = cost – ( cost – tax Depreciation ) = cost – cost + tax Depreciation = Tax depreciation
NOTE: It is assume that the asset , sold at price , at which that was purchased.
Case 3: “” CAR “” its not about vehicle . because all cars are vehicle but all vehicles are not cars. Even it is purchased above the Rs. 1500,000 , we will consider Rs. 1500,000 and the depreciation will be calculated on this amount. e.g.
Year “ X “ car “ Y “ car 2010 Cost 20,00,000 1200,000
Depreciation ( 15 % ) ( 225,000 ) 1500,000 X 15 %
( 180,000 ) 1200,000 X 15 %
Written Down Value *1275,000 1020,000
*Where 1500,000 – 225,000 = 1275,000
Maximum cost of car is Rs. 1500,000
NOTE
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 34
Both cars were sold for Rs. 1500,000 each NOTE: sale price ki amount utni laini hai , jitni cost ki %age allow ki gai thi FORMULA : 1500,000 cost So, = sale price – Tax WDV and , sale price = 1500,000 X 75% = 1125,000 1500,000 . 20,00,000
“ X “ car “ Y “ car = ( sale price x n ) – Tax WDV = 1125,000 – 1275,000 Loss = ( 150,000 )
= sale price – Tax WDV = 1500,000 – 10,20,000 Gain = 480,000
ASSUME
n = X 100
only for those assets whose cost id above Rs.1500,000
X 100
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 35
AMORTIZATION
amortization is allowed on intangible assets. intangible asset--------definition . amortization shall be charged on per day used method. no amortization in the year of disposal the maximum life of a intangible asset is 10 years.
e.g.
NOTE: use full life in days
Year Copy Right Patent
2011 2012
Purchase price= Rs. 200,000 Life = 7 years Date of purchase . 1-1-2011 Year end = 30 June, 2011 Solution, = = = 14168 = = 28571
Purchase price= Rs. 300,000 Life = 15 years Date of purchase . 1-1-2011 Year end = 30 June, 2011 Solution, = = = 14876 = = 30,000
NOTE if life exceeds 10 years or unknown , in this case, 10 years will be consider as the life of intangible
asset.
cost .
useful life x days used
200,000 .
7 X 365 x 181
x days used
200,000 .
7 X 365
300,000 .
10 X 365 x 181
x 365 x 365 300,000 .
10 X 365
cost .
useful life
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 36
BAD DEBTS Sale to Mr. A for Rs. 100,000 on credit in 2009. it will the income for 2009 under NTR. 2010 : Mr. A didn’t pay back. we claim Rs. 100,000 in Tax` Department for allowing us expense.( bad debts ). but tax department allow expense to us Rs. 50,000.
2011: No. Situations. (Receipts) Actual Bad Debts Tax Treatment
A 100,000 nil 50,000 ---Income
B 50,000 50,000 No treatment
C Nothing 100,000 50,000 --- expense allowed
D 80,0000 20,000 30,000 ---income
Ways of asking question about Bad Debts in exam.
1) Conditions of Bad Debts : how to claim bad debts in the department.
2) Recovery of Bad Debts : Tax treatment .
Formula : Allowed – Actual = + or –
NOTE
If answer is + then = add in income from business If answer is - then = less from income from business
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 37
!!!!!!! Perquisites for claiming Bad Debts !!!!
The amount must be declared as income before.(pahly)
Entry of bad debts has been passed in the books of accounts.
NOTE : it is not necessary that the department will allow the whole amount as expanse which we claimed in the department.
!!!!!!! ACCOUNTING TREATMENT OF LEASE !!!!
amount paid for lease. Amount of Lease ( Rs.50,000 ) Expense claim in accounting :
depreciation 10,000 Interest 1,000 Insurance 500 11,500 Expense claim in Tax : The amount which paid against lease that amount will be allowed. ( Rs. 50,000 )
Depreciation ( 10,000 )
Insurance
( 500 ) Capital Interest
( 1000 )
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 38
!!!!!!!!! PROFIT ON DEBT !!!!!!!!
( Interest )
We borrow the amount . So interest is our expense ALLOWED EXPENSE debt is utilized for business .its not the part of cost.
SPV Special purpose vehicle A person or Organization which used for special purpose. e.g. SPV: Originator SPV
single company = loan 5 million Group = loan 20 million
SALE OF DEBTOR
loan from subsidiary is not allowed .
.5 interest
.5 interest
5 m loan
BANK
Itefaq ( IT )
Investment
Itefaq
(Sugar)
NOTE
Loan & lease are both allowed to SPV.
NOTE
NOTE If any Income earned by SPV . That income will be exempt
because income earning is not its objective.
Originator
6 million
SPV 1 m --income(exempt) 5 m – loan return Bank
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 39
METHODS OF ACCOUNTING
Closing Stock Valuation
e.g.
Factor of Production
Absorptional Costing
Factor of Production
Marginal Costing
Material 50 Material 50
Labour 10 Labour 10
FOH Variable Fixed
20 10
FOH Variable
20
90 80
Define Small company . Rate : 25 %
Accrual Basis ( Absorptional Costing ) Cash basis ( Marginal Costing )
Company Individual / AOP Option
Absorptional Costing
( Add all kinds of Costs )
Marginal Costing
( Fixed FOH will be excluded )
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 40
MINIMUM TAX Rate :
1 % of Turnover Or Actual Tax Liability
income is exempt .
Who will pay Tax :
Resident Company Individual having Turnover 50 million or Above. AOP having 50 million or Above.
Turnover : means,
Sale Excludes sales tax , excise duty Services Share from AOP
Provisions : Excess of actual Tax Liability shall be carry forward for subsequent 3 years.
Higher
Advance Tax = Actual Tax Liability – 1 % of Turn Over
1st Year
Advance Tax =Remaining Actual Tax Liability – 1 % of Turn Over
2nd Year
HINT
Excess of 1 % of T.O from Actual Tax Liability will be advance tax and that excess amount will be deduct in the next year from actual tax liability. And then the remaining of actual tax liability will be compare with 1 % of turn over. Higher of :
Actual Tax liability &
1 % of Turnover will be payable.
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 41
EXCEPTIONS: Minimum tax not apply , if business entity declare
gross loss before depreciation and other inadmissible expenses.
Commissioner has the power to re-asses the income.
Minimum tax not apply on certain cases. e.g. Modaraba , non-profit organization.
Employee Training and Facilities :
allowed expenditures other than capital expenditures .
o Hospital or educational institution for the benefit of employees.
o For the training of industrial workers run by federal or Provincial Government
o Training of citizen of Pakistan . e.g. PHD
TAX paid on import Stage : Tax collected by collector of custom on import of,
edible oil &
packing material
TAX deduct from services as minimum Tax :
6 % at source from gross income.
no adjustment or refund shall be allowed.
NOTE : Services provided to a person , who is not Tax deducting authority then the said services income is not subject to minimum Tax.
This provision of minimum tax is not applicable for a company , receiving income
from services.
HINT
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 42
Advance Tax on Electricity Bill As minimum Tax : advance tax is payable on
1. Commercial &
2. Industrial Bills RANGE :
TAX Amount From Rs.80 to Rs. 1500 Monthly bill exceeds Rs.400 but does not exceeds Rs.
2000
If monthly bill exceeds Rs. 20,000
Electricity bill for person other than Company :
Bill upto Rs. 30,000 per month shall be treated as minimum tax.
No refund or adjustment shall be allowed.
Scientific Research Expenditure :
Deduction allowed , if expenditure incurred in Pakistan
For business purpose
!!!!!! Scientific Research !!!!! Any activity in the field of natural (mining, oil refinery) or Applied Science (new technology) for the development of human knowledge.
Users Rate Commercial 10 %
Industrial 5 %
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 43
CH # 15 : LOSSES General concepts : in urdu
Categories of tickets :
A type ticket
B type ticket
C type ticket
Usage of tickets : explanation in Urdu.
A type ticket: A type ticket say ap train k box 1 & 2 main baith sakty hain. ager in boxes main jaga na hoo tu ap next any wali 6 ( six ) trains main bhe ap un k box no. 1 & 2 main baith sakty hain. laiken in boxes k elawa ap kisi bhi aor box main nai baith sakty.
B type ticket: B type ticket say ap mojoda train k kisi bhi box main baith sakty hain. aor ager is train main jaga nai hai tu ap any wali kisi bhi train main nai baith sakty.
ENGINE 1 2 3 4
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 44
C type ticket: C type ticket ki madad say ap mojoda train k to kisi bhi box main baith sakty hain laiken ager mojoda train main jaga na hoo to ap next any wali 6 ( six ) trains main un k box no. 3 main hii baith sakain gay.
mojoda train main bathny say morad hai ==== set off next train main bathny say morad hai ==== carry forward.
HINT
for understanding
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 45
Ch # 15.
LOSSES
under NTR. because under FTR losses and expenses are not allowed. HEADS OF INCOMES UNDER NTR
salary NO Loss
income from property
separate block of income No Loss
income from business non-speculative C type speculative A type
capital gain 37 A type 37-A
other losses. B type
EXPLANATION: A type: can be carry forward but they can by set off only against the incomes of their heads. B type: can be set off only C type: can be carry forward and set off. but they can be set off only in 1st year.
Set off : adjustment of one income or loss in other head .
Inter head adjustment: adjustment in the same head.
Carry forward: Transfer to next year.
Losses can be set off only against the incomes from other items U/S 37 A.
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 46
Example : 1
Case 1 Rs.(000)
Case 2 Rs.(000)
Salary Non-speculative business Speculative Capital gain Other Losses
500 (800) (400) 700 (300)
500 (900) (400) 700 (300)
Total Income 1200 1200
Requirement : I. Compute taxable income II. amount of loss to be carry forward
Solution: I.
Case 1 Rs.(000)
Case 2 Rs.(000)
Total Income Other losses Non-speculative business
1200 (300) 900 (800)
1200 (300) 900 (900)
Total Income 100 ------
II. Losses to be c/f. non-speculative ( 400 ) ( 400 )
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 47
Example : 2
Case 1 Rs.(000)
Case 2 Rs.(000)
Salary Non-speculative business Speculative Capital gain Other Losses or Gain
500 (1000) (400) 700 (300)
500 (1000) (400) 700 300
Total Income 1200 1500
Requirement : III. Compute taxable income IV. amount of loss to be carry forward
Solution: I.
Case 1 Rs.(000)
Case 2 Rs.(000)
Total Income Other losses Non-speculative business
1200 (300) 900 (900)
1500 (1000)
Total Income ------- 500 .
II. Losses to be c/f. non-speculative (1000-900) ( 100 ) ------- Speculative ( 400 ) ( 400 )
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 48
A: In case set off losses. 1st set off other losses 2nd set off non-speculative business losses.
B: In case of carry forward losses. year wise.
2009 ( 100 ) 2010 ( 200 ) 2011 ( 500 )
If there is gain in 2012 , then use FIFO method of adjustment of losses.
2012 10000 2009 ( 100 ) 2010 ( 200 ) 2011 ( 500 ) 200 .
HINT
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 49
GROUP TAXATION as a single fiscal unit. Features of group taxation:
100% owned group of companies locally incorporated under companies ordinance 1984.
Loss of any group will be set-off against income of any other group.
consolidated group accounts as required under companies ordinance , 1984 will form.
I. Basis of computation of income II. tax payable by the person
GT relief will not be available to losses prior to the formation of the group.
Inter corporate dividend income with in the group companies entitled to group taxation shall be exempt .
GROUP RELIEF { surrender of tax loss by a subsidiary company } a subsidiary company may surrender its assessed loss
( excluding b/f loss and capital loss ) for the tax year in favor of its holding company or any subsidiary of the holding company.
The holding company shall directly hold , share capital of the subsidiary company as under,
55% or more in case of listed companies.
75% or more in case of non-listed companies.
Note
Note
The loss surrender by 1 subsidiary company may be adjusted by the holding company or subsidiary company against its business income in the tax year and the following
two tax year.
NOTE
Any un-adjusted loss shall be revert back to the subsidiary company and shall be carry forward in the normal manner.
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 50
Example : S stands for subsidiary company H stands for holding company Assume : loss incurred in 2006 (adjusted in next 6 tax years) 2012. the losses were surrender for two years.
So, 2007----- 2008 2009, 2010, 2011, 2012 S-2 S-1 losses = 30+40= 70 Remaining 30 were adjusted by original subsidiary company.
S-1
S-2
H
Listed Company
LOSS = 100 (surrender)
1st year = 30 2nd year = 40
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 51
Conditions of Group Relief
1. Ownership of share capital shall be continued for 5 years to the extent of 75% or 55%.
2. Trading company with in the group shall be entitled to avail group relief.
3. If the holding company is a private company, it is required to be listed with in 3 years from the year in which loss is claimed.
4. group companies are locally incorporated companies under companies ordinance 1984.
5. board of directors approval of both the companies is required. 6. Subsidiary company , continuous the same business during the
said period of 3 years. 7. all the companies in the group shall comply with specific
corporate governance requirement. 8. Inter corporate dividend with in the group companies entitled
to group taxation shall be exempt. 9. The subsidiary company cannot surrender its assessed losses for
more than the 3 tax years. 10. The tax relief availed would be reversed if holding company’s
equity interest falls below 75% or 55%. As a consequences of disposal of shares during the stipulated period of 5 years .
11. Loss claiming company , may , with the approval of Board of directors , transfer cash to loss surrendering company , equal to the amount of tax saving in this respect.
This transfer shall would not be allowed tax expense for the loss claiming company or taxable income for the loss surrendering company.
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 52
S stands for subsidiary company H stands for holding company This Cash of RS.10 received by Loss surrendering company will be not treated as income of this company.
Transfer of shares between the companies and the shareholder , in one direction , would not be taxable capital gain provided the transfer is , to acquire share capital for the formation of the SECP or STATE BANK has been obtained in this effect.
S-1
S-2
H
LOSS = 100 (surrender)
Some Important Concepts
1st year = 30 2nd year = 40 Benefit = Rs15
Cash Rs.10
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 53
CH # 6
ASSOCIATION OF PERSONS ( AOP )
1. In Case of Loss ( Loss of AOP ): Loss shall not be distributed among the partners .
2. In case of income: Income shall be distributed among the partners .
3. If any partner have no income other than the share from AOP ( income from AOP ) then his , this income ( share from AOP ) shall be exempt.
4. if any partner have income other than the share from AOP ( income from AOP ) then his , this income ( share from AOP ) shall be included only for tax purpose.
5. For checking individual status “ share from AOP “ shall be excluded.
6. For calculating full time teacher allowance “share from AOP” shall be excluded.
7. For average relief “share from AOP “ shall be included.
1. Investment in shares 2. Donations 3. Contribution in
pension fund 4. profit on debt
Assume for “ Investment in shares “ : 10% of Taxable income 300,0000 Lower Actual And : Tax liability . Taxable income (Including share from AOP )
Important Notes
Rules For
Excluding Share from AOP
X Lower
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 54
Example : Total taxable business income = Rs. 10,00,000 Tax ( 25% ) = Rs ( 2,50,000 ) Distributable Income 7,50,000 . Assume there are 3 partners of AOP.
Partners Rate of share Share from AOP Business Income
A ( Individual ) 20% 150,000 500,000
B ( Individual ) 30% 225,000 -------------
C ( Ltd Company ) 50% 375,000 500,000
Requirement : compute taxable income of AOP and its members. Also compute tax payable .
Solution : (i) Mr. A
Rs.
business income 500,000 Add: share from AOP 150,000 Total Taxable Income 650,000 Tax Liability Tax on Rs. 650,000 @ 10% 65000 Less: Tax ( individual) . Taxable Income ( individual ) 65000 . 650,000 ( 15000 ) Tax Payable 50,000 .
Not Distributable Income
Income After Tax
X share form AOP
X 150,000
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 55
(ii) Mr. B; Mr. B’s income shall be exempt because he has no income other than share from AOP.
(iii) C ltd Company : Rs. Business income 500,000 Add: share from AOP 375,000 Total Taxable Income 875,000 Tax Liability Tax on Rs. 875,000@ 35% 306250 Less: Tax ( of AOP) . Taxable Income ( AOP ) 250,000 . 10,00,000 ( 93750) Tax payable 212500 .
X share form AOP
X 375,000
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 56
General Format of ( Income tax numerical ): Compute Taxable Income RS Salary Income XXXX Capital Gain XXXX Business Income XXXX Other source income XXXX XXXX Zakat ( XXX )
Donation ( XXX ) XXXXX Add : share from AOP ( XXXX )
Taxable Income XXXX .
Computation of tax liability . RS
Tax liability XXXXX Property XXXXX 37-A XXXXX Tax Liability XXXXX
Less : Senior citizen Allowance (XXXX) Less : Full time Teacher Allowance (XXXX) Less : Foreign Tax Credit (XXXX) XXXXX Less : Investment in shares (XXXX) Less : Donation (XXXX) Less : Contribution (XXXX) Less : Profit on debt (XXXX) XXXXX
Less : Advance Tax (XXXX) Tax Payable XXXXX
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 57
TAX ON TAX Tax of employee paid by the employer.
Impacts:
1. Income Tax in Salary.
2. Advance Tax Less from tax liability.
How to Compute:
Mostly in exam this amount will be given.
Compute: Cases
1. Fully paid by employer
2. Partially paid by employer and partially paid by employee
Example Case 1: Total salary = 500,000 Tax employee paid by employer = 10,000 Explanation : According to Tax department the tax paid by the employer , will be income of the employee because , it was basically the expense of employee . So now the Total salary of the employee will be Rs.510,000 instead of Rs.500,000. Assume Tax on Rs. 510,000 is Rs. 12,000. and paid by the employer. so now Total salary = 500,000 Tax employee paid by employer = 12,000 According to Tax department the tax paid by the employer , will be income of the employee because , it was basically the expense of employee . So now the Total salary of the employee will be Rs.512,000 instead of Rs.500,000.
Tax Born by Employer
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 58
The Tax calculation will be same as we calculte in other questions. Means :
Tax on Rs. XXX @XXX % is = XXX
Marginal Relief Rs. XXXX @ XXX % = XXX Marginal amount {difference between total taxable income and Marginal relief @ XXX% } = XXX = XXX
Lower of 1 & 2 will be Tax liability = XXXX
the same calculation should be repeated for minimum 3 times Maximum 5 times
After the repeated calculations now the individual will calculate tax as below. The following figures are assumed figures. Taxable Income = 500,000 Tax paid by employer = 13050 Total taxable Income 513050 Tax on Rs. 513050 @ 2.544% 13050 Advance Tax ( paid by employer ) 13050 ------
NOTE
1
2
NOTE
INCOME TAX (Tax Year 2012)
By : Kashif Nawaz Jakhar Page 59
SHARE FROM AOP
Computation of taxable income Taxation of members
Computation of taxable income : Assume share fro AOP is equally distributed among the members of AOP. EXAPMLE :
Mr. X ( 50% ) Mr. Y ( 50% ) Total
Salary 50 10 60
Electricity Bills ------- 40 40
Share from AOP 200 200 400
250 250 500
Calculation of distributable income taxable Income ( AOP ) 1200 Less: Tax liability (700) Distributable income 500
THE END
Rs.400 is balancing figure
Distributable Income This amount will be added in the income from other sources of the Mr. X only for
Rate purpose
If we assume that Mr. Y have no any source of income other than share from AOP. So in this condition the share from AOP for Mr. Y will be
exempt