Business Taxation (456)
Q. 1 With reference to Income Tax Ordinance 2001 explain the concept of person, resident person and non-resident person.
Under the
Income Tax Ordinance 2001, the concept of person is defined broadly to include individuals,
companies, associations of persons (AOPs), bodies of individuals (BOIs), and
any other entity capable of earning income or incurring expenses. The term
"person" encompasses a wide range of entities and is central to
determining tax liabilities and obligations.
Resident Person:
A resident
person, as per the Income Tax Ordinance 2001, refers to an individual or a
company that meets the residency criteria specified by the tax laws of a
particular country. In the context of Pakistan, a person is considered a
resident if they meet any of the following conditions:
1.
An individual who stays in Pakistan for a total of 183 days or more during the
tax year.
2.
An individual who stays in Pakistan for a period of 120 days or more during the
tax year and has, in the four preceding tax years, stayed in Pakistan for an
average of 120 days or more per year.
3.
An individual who is employed by the federal or provincial government, or any
other authority established by the federal or provincial government in Pakistan.
4.
A company incorporated under the laws of Pakistan or having its central
management and control in Pakistan.
Non-Resident Person:
A
non-resident person, on the other hand, refers to an individual or a company
that does not fulfill the residency criteria specified by the tax laws. In the
case of Pakistan, a person is considered non-resident if they do not meet any
of the conditions mentioned above for a resident person. Non-resident
individuals or companies are typically subject to different tax rules, rates,
and obligations compared to resident persons.
It's
important to note that the determination of residency status is crucial for tax
purposes as it determines the scope of taxable income, allowable deductions,
tax rates, and other tax-related obligations. The specific rules and criteria
for determining residency may vary from country to country, so it's essential
to consult the relevant tax laws and regulations of the jurisdiction in
question.
Q.2 Explain the taxation of prerequisite of
salary income as per the provision of the Income Tax Ordinance 2001.
Under
the Income Tax Ordinance 2001, the taxation of prerequisites of salary income
refers to the treatment of non-monetary benefits or perks provided by an
employer to an employee in addition to their regular salary. These perks are
considered taxable and are subject to specific provisions outlined in the
ordinance. Here's an explanation of the taxation of prerequisites of salary
income as per the provisions of the Income Tax Ordinance 2001:
1. Valuation of Perquisites: The
ordinance provides guidelines for valuing different types of perks. The value
of a perquisite is determined based on its fair market value or the cost to the
employer, whichever is higher. The valuation rules vary depending on the nature
of the perquisite, such as the use of company vehicles, accommodation, club
memberships, utilities, or any other facility provided by the employer.
2. Inclusion in Gross Salary: The value
of the perquisites is included in the employee's gross salary, which forms the
basis for calculating the taxable income. The value of the perquisites is added
to the employee's regular salary and other benefits received.
3. Tax Deduction at Source (TDS): The
employer is responsible for deducting tax at source from the employee's salary,
including the value of perquisites. The tax is deducted based on the employee's
tax slab, and the employer is required to remit the deducted tax to the tax
authorities.
4. Reporting and Documentation: Both
the employer and employee are obligated to maintain accurate records and
documentation related to the perquisites provided. The employer must provide
the employee with a certificate detailing the value of perquisites and the tax
deducted at source. The employee must include the value of perquisites in their
tax return and disclose the details of the perks received.
5. Exemptions and Deductions: The
Income Tax Ordinance 2001 provides certain exemptions and deductions for specific
types of perquisites. For example, accommodation provided by the employer may
be exempt from tax if certain conditions are met. Likewise, certain deductions
or allowances may be available for specific perquisites, subject to prescribed
limits and conditions.
It's
important for both employers and employees to understand and comply with the
provisions of the Income Tax Ordinance 2001 regarding the taxation of
prerequisites of salary income. Failure to comply with the taxation rules may
result in penalties, interest, or other legal consequences. Consulting a tax
professional or referring to the relevant tax laws and regulations is advisable
to ensure accurate compliance with the ordinance.
Q.3 Calculate the tax liability of Mr. Sahir, a
salaried person, from the following record:
|
No. |
Item |
Amount (Rs.) |
|
1 |
Salary |
40,000
per month |
|
2 |
Extra
allowance |
15,000 per month |
|
3 |
Utility
allowance |
30,00 per year |
|
4 |
Medical
allowance |
4,000 per month |
|
5 |
Conveyance
facility is provided to Mr. Sahir for personal and official use. |
Cost
of Vehicle is 500,000. |
|
6 |
Reimbursement
of IT expenses |
8,000 per year |
|
7 |
Contribution
to provident fund |
6,000 per month |
|
8 |
Gift
Received |
2,000
per year |
|
9 |
Shares
of LAK Ltd. Purchased in IPO |
Rs.
3,000 (total) |
|
10 |
Donation
to Edhi |
Rs.
1,000 (annual) |
To
calculate the tax liability of Mr. Sahir, we need to consider the various
components of his income and the applicable tax rules. Here's a breakdown of
the calculations:
1. Salary:
40,000 per month
Annual
Salary = 40,000 * 12 = 480,000
2. Extra allowance: 15,000 per month
Annual
Extra Allowance = 15,000 * 12 = 180,000
3. Utility
allowance: 3,000 per year
This
amount will be added to the income as it is considered a perquisite.
Total
Utility Allowance = 3,000
4. Medical allowance: 4,000 per month
Annual
Medical Allowance = 4,000 * 12 = 48,000
5. Conveyance facility (personal and
official use):
Since
the cost of the vehicle is provided, it will be considered a perquisite and
included in the income. The specific calculation for this perquisite requires
additional information such as the age of the vehicle and the fuel/maintenance
expenses. Without that information, it's not possible to determine the exact
amount to be added to Mr. Sahir's income.
6. Reimbursement
of IT expenses: 8,000 per year
This
amount will be added to the income as it is considered a perquisite.
Total
Reimbursement of IT Expenses = 8,000
7. Contribution
to provident fund: 6,000 per month
Annual
Provident Fund Contribution = 6,000 * 12 = 72,000
8. Gift Received: 2,000 per year
Gifts
are generally taxable as per the provisions of the Income Tax Ordinance. This
amount will be added to the income.
Total
Gift Received = 2,000
9. Shares of LAK Ltd. Purchased in IPO: Rs.
3,000 (total)
This
amount will not be included in the income unless the shares are sold or any
dividends are received from them. For now, we can exclude it from the income.
10. Donation to Edhi: Rs. 1,000
(annual)
Donations
to recognized charitable organizations are eligible for tax deductions. The
exact deduction depends on the specific rules and limits set by the tax laws.
Without knowing the specific deduction rate, we cannot determine the impact on
Mr. Sahir's tax liability.
Once
we have the complete information regarding the perquisites, we can calculate
Mr. Sahir's taxable income by adding up his salary, allowances, and taxable
perquisites. Based on the applicable tax rates and any available deductions, we
can determine his tax liability.
Q.4 Under the Income Tac Ordinance 2001, how
would you estimate your income from capital gains on which the tax will be
payable.
Estimating your income from capital gains and
the corresponding tax liability under the Income Tax Ordinance 2001 involves
considering the sale of assets and the applicable rules for capital gains
taxation. Here's a general outline of the process:
1.
Identify Capital Assets: Determine
the assets you have sold or plan to sell during the tax year that may qualify
as capital assets. Capital assets can include real estate, stocks, bonds,
mutual funds, jewelry, vehicles, etc.
2.
Calculate the Cost of Acquisition:
Determine the original cost of acquiring the asset. This includes the purchase
price, any commissions or fees paid, and other directly attributable costs.
3.
Determine the Cost of Improvement:
If you have made any improvements to the asset, such as renovations or
additions, include those costs as well.
4.
Calculate the Capital Gain: The
capital gain is calculated by subtracting the cost of acquisition and the cost
of improvement from the selling price of the asset. The resulting amount is
your capital gain.
5.
Apply Exemptions or Deductions: The
Income Tax Ordinance 2001 may provide exemptions or deductions for certain
types of capital gains. For example, exemptions may be available for the sale
of a primary residential property or agricultural land. Review the applicable
provisions to determine if any exemptions or deductions apply to your
situation.
6.
Determine the Tax Rate: The tax
rate for capital gains depends on the type of asset and the holding period.
Different rates may apply to short-term capital gains (assets held for less
than one year) and long-term capital gains (assets held for more than one
year). Review the tax laws to identify the applicable rates.
7.
Calculate the Tax Payable: Multiply
the capital gain by the applicable tax rate to determine the tax liability on
the capital gains. Deduct any exemptions or deductions available to arrive at
the final tax payable.
It's important to note that the specifics of
capital gains taxation, including exemptions, deductions, and tax rates, can
vary based on the type of asset and the tax laws of your jurisdiction. Consult
with a tax professional or refer to the relevant tax laws and regulations for
accurate estimation and calculation of your income from capital gains and the
associated tax liability.
Q.5 What is
self-assessment? Explain the provisions of the Income Ordinance 2001dealing
with the concept of assessment.
Self-assessment
is a process in the Income Tax Ordinance 2001 that allows taxpayers to
calculate and declare their own tax liabilities, file tax returns, and pay the
corresponding taxes. It empowers taxpayers to assess their own income,
deductions, exemptions, and tax liability based on their records and the
provisions of the ordinance. Here's an explanation of the provisions in the
Income Tax Ordinance 2001 dealing with the concept of assessment:
1. Filing of Return: Section 114 of the
Income Tax Ordinance 2001 requires every taxpayer to file an annual tax return,
disclosing their income, deductions, exemptions, and other relevant
information. Taxpayers are responsible for accurately calculating their tax
liability and filing the return within the specified due date.
2. Self-Assessment: Section 116 of the
ordinance allows taxpayers to assess their own tax liability based on their
income and the applicable tax rates. Taxpayers are required to calculate their
taxable income, determine the tax payable, and mention these details in their
tax return. This self-assessment should be done in accordance with the
provisions of the ordinance and any relevant rules or regulations.
3. Payment of Tax: Taxpayers are also
responsible for paying the tax liability as per their self-assessment. Section
137 of the ordinance outlines the requirements and due dates for tax payment.
The taxpayer must pay the determined tax amount to the tax authorities through
the specified payment methods and within the prescribed timeframe.
4. Audit and Reassessment: After the
self-assessment and payment of taxes, the tax authorities have the power to
conduct an audit or reassessment to verify the accuracy and completeness of the
taxpayer's declarations. If any discrepancies, omissions, or under-reporting of
income are identified during the audit, the tax authorities can issue a notice
for reassessment.
5. Penalties and Interest: In case of
non-compliance with the provisions of the ordinance, penalties and interest may
be imposed. These penalties can be levied for late filing of returns, late
payment of taxes, incorrect self-assessment, or any other violations specified
in the ordinance.
It's essential
for taxpayers to maintain accurate records, comply with the provisions of the
Income Tax Ordinance 2001, and ensure proper self-assessment and timely payment
of taxes. Seeking guidance from tax professionals or referring to the relevant
tax laws and regulations can help ensure accurate self-assessment and compliance
with the ordinance.