Business Taxation (456)
Q.1 What is the concept of tax? Explain its various types/forms. Also discuss briefly the taxes applicable in Pakistan. (20)
Taxation is a fundamental concept in the realm of public
finance and government revenue generation. It involves the imposition of
financial charges or other levies upon individuals, businesses, and other
entities by a government. The primary purpose of taxation is to fund public
expenditures and services, such as infrastructure, education, healthcare,
defense, and social welfare programs. Taxes play a crucial role in shaping
economic policies, wealth distribution, and social justice.
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### **Concept of Tax:**
Taxation is based on the principle of compulsory
contribution. Citizens and entities are obligated to pay taxes to the
government, and failure to do so may result in penalties or legal consequences.
The government, in turn, utilizes these funds to finance its activities and
services that benefit society as a whole.
### **Types/Forms of
Taxes:**
There are various types of taxes, each serving different
purposes and affecting different segments of the population. The major types of
taxes include:
1. **Income Tax:**
- Levied on individuals and businesses based on their
income.
- Progressive in nature, meaning higher income earners pay
a higher percentage of their income.
2. **Corporate Tax:**
- Applied to the profits earned by businesses.
- The rate may vary based on the size and type of the
business.
3. **Sales Tax:**
- Imposed on the sale of goods and services.
- Can be applied at the federal or state level.
4. **Value Added Tax
(VAT):**
- Similar to sales tax but applied at each stage of
production and distribution.
- Aims to avoid tax on tax by taxing only the value added
at each stage.
5. **Property Tax:**
- Levied on the value of real estate and properties owned
by individuals or businesses.
6. **Excise Tax:**
- Imposed on specific goods or services, such as alcohol,
tobacco, and gasoline.
7. **Customs Duties:**
- Applied on imports and exports to regulate trade and
protect domestic industries.
8. **Wealth Tax:**
- Levied on an individual's net wealth, including assets
like real estate, investments, and valuable possessions.
### **Taxes in
Pakistan:**
Pakistan has a complex tax structure with various taxes
imposed at different levels of government. Some of the key taxes applicable in
Pakistan include:
1. **Income Tax:**
- Levied on individuals, corporations, and associations of
persons.
- Progressive tax rates for individuals based on income
brackets.
2. **Sales Tax:**
- Applied at the federal and provincial levels on the sale
of goods and services.
3. **Federal Excise
Duty (FED):**
- Imposed on certain goods and services at the federal
level, including cigarettes, beverages, and cosmetics.
4. **Customs Duty:**
- Applied on imports and exports to regulate trade and
protect domestic industries.
5. **Property Tax:**
- Levied by local governments on the value of real estate
and properties.
6. **Capital Gains
Tax:**
- Applicable on the gains arising from the sale of capital
assets.
7. **Withholding Tax:**
- Deducted at source on various transactions, including
salaries, contracts, and dividends.
8. **Provincial
Taxes:**
- Each province in Pakistan has its own tax structure,
including taxes on agriculture income, agricultural produce, and urban
immovable property.
9. **Goods and Services
Tax (GST):**
- A form of value-added tax applied at the federal level on
the supply of goods and services.
10. **Stamp Duty:**
- Applied on various documents, such as agreements,
contracts, and property transactions.
### **Conclusion:**
Taxation is a critical tool for governments to raise
revenue and address economic and social objectives. The types of taxes and
their rates can significantly impact economic behavior, investment decisions,
and wealth distribution. In Pakistan, the tax system is multifaceted, with
various taxes imposed at the federal and provincial levels. A well-designed and
efficient tax system is essential for promoting economic growth, ensuring
fiscal sustainability, and achieving social equity. Continuous efforts to
simplify tax procedures, broaden the tax base, and enhance compliance are
crucial for the effectiveness of the tax system in any country, including
Pakistan.
Q.2 Explain the taxation treatment of the
following components of salary as per the Income Tax Ordinance 2001: (20)
i. Basic salary
ii. Allowances
iii. Perquisites
iv. Reimbursement
v. profit in lieu of salary.
The Income Tax Ordinance 2001 in Pakistan provides a
comprehensive framework for the taxation of various components of salary. The
taxation treatment of different elements of salary is essential for both
employers and employees to understand their tax obligations and liabilities.
Let's delve into the taxation treatment of the following components of salary
according to the Income Tax Ordinance 2001:
### **1. Basic
Salary:**
Basic salary constitutes the fixed and regular payment made
to an employee for services rendered. It is a fundamental component of the
salary structure and is subject to taxation under the Income Tax Ordinance
2001. The taxation treatment of basic salary involves applying progressive tax
rates based on the individual's total income. The more an individual earns, the
higher the percentage of income tax they are liable to pay.
### **2. Allowances:**
Allowances are additional payments made to employees, usually
to meet specific expenses related to their job or personal circumstances. The
Income Tax Ordinance 2001 categorizes allowances into two types: taxable and
exempt.
- **Taxable
Allowances:**
- Taxable allowances are subject to income tax. Examples
include house rent allowance (HRA), conveyance allowance, and special
allowances.
- These allowances are added to the total income of the
individual, and income tax is calculated accordingly.
- **Exempt
Allowances:**
- Some allowances are exempt from income tax up to a
certain limit. For instance, medical allowances and educational allowances up
to a specified amount are exempt.
- Any amount exceeding the exempt limit is added to the
total income and taxed accordingly.
### **3. Perquisites:**
Perquisites, often referred to as perks, are non-monetary
benefits provided by employers to employees in addition to their salary. The
Income Tax Ordinance 2001 treats perquisites as a part of the individual's
taxable income. Common perquisites include the provision of a company car,
accommodation, utilities, and interest-free or concessional loans.
- **Valuation of
Perquisites:**
- The valuation of perquisites involves determining the
fair market value of the benefit provided. Specific rules and methods are outlined
in the ordinance for different perquisites.
- The value of perquisites is added to the total income of
the employee, and income tax is calculated accordingly.
### **4.
Reimbursement:**
Reimbursements are payments made by employers to employees
to cover specific expenses incurred in the course of employment. The taxation
treatment of reimbursements depends on whether they are classified as taxable
or exempt.
- **Taxable
Reimbursements:**
- If the reimbursement is not related to any specific
business expense or is above a certain limit, it is treated as taxable income.
- Tax is calculated on the taxable portion of the
reimbursement.
- **Exempt
Reimbursements:**
- Reimbursements related to genuine business expenses,
supported by proper documentation, are often exempt from income tax.
- Exempt reimbursements are not added to the total income
for tax calculation.
### **5. Profit in Lieu
of Salary:**
Profit in lieu of salary refers to any amount received by
an employee in place of or in addition to salary. This can include bonuses,
commissions, or any financial gain received in connection with employment. The
Income Tax Ordinance 2001 categorizes such profits as part of the individual's
taxable income.
- **Taxation of Profit
in Lieu of Salary:**
- Profit in lieu of salary is subject to income tax at the
applicable rates.
- The tax liability is calculated based on the total
income, which includes the profit in lieu of salary.
### **Conclusion:**
Understanding the taxation treatment of different
components of salary is crucial for both employers and employees to comply with
the provisions of the Income Tax Ordinance 2001. Employers need to accurately
assess and report these components, while employees must be aware of their tax
liabilities to ensure compliance with the prevailing tax laws in Pakistan. This
knowledge promotes transparency, reduces the risk of tax evasion, and
contributes to a fair and efficient tax system.
Q.3 Mr. Naeem manager of Abacus Ltd. Has
reported following income for the tax year 2023: (20)
No.
Item Amount (Rs.)
1 Basic Salary 35,000 per month
2 Dearness Allowance 6,000 per month
3 Conveyance Allowance 5,000 per month
4 Amount receive from employer for
purchasing AC 50,000 per year
5 Medical expenses reimbursed by
employer 15,000 per year
6 Leave encashment 25,000
7 Rent received from property 10,000 per year
8 Unadjustable advance received from the
tenant 200,000 per year
9 Sale of shares of public company after
one year but within 2 years of purchase for 300,000 and cost was 100,000
10 Fees received on conducting a technical workshop 120,000
11 Adjustable with-holding tax paid during
the year 20,000
12 Lease rentals received on sub-lease of
building 90,000
13 He received share from AOP of 60,000
Calculate his taxable
income and tax payable.
To calculate Mr.
Naeem's taxable income and tax payable for the tax year 2023, we need to
consider the various components of his income and deductions allowed under the
Income Tax Ordinance 2001 in Pakistan. Let's break down each item and determine
its tax treatment:
### **1. Basic Salary,
Dearness Allowance, and Conveyance Allowance:**
The total monthly salary is Rs. 35,000 (Basic) + Rs. 6,000
(Dearness Allowance) + Rs. 5,000 (Conveyance Allowance) = Rs. 46,000.
Annual Salary = Rs. 46,000 * 12 = Rs. 552,000.
### **2. Amount
Received for Purchasing AC:**
This amount is considered a perquisite and is taxable. The
full amount of Rs. 50,000 is added to the taxable income.
### **3. Medical
Expenses Reimbursed:**
Reimbursement of medical expenses up to a certain limit is
exempt from tax. However, any amount exceeding the limit is taxable. In this
case, the entire Rs. 15,000 is considered exempt.
### **4. Leave
Encashment:**
Leave encashment is taxable. The full amount of Rs. 25,000
is added to the taxable income.
### **5. Rent Received
from Property:**
Rent received from property is taxable income. The full
amount of Rs. 10,000 is added to the taxable income.
### **6. Unadjustable
Advance Received from Tenant:**
This amount is not considered income until it becomes due
or is adjusted. Therefore, it is not included in the taxable income.
### **7. Sale of
Shares:**
The gain from the sale
of shares is considered capital gain. The taxable gain is calculated as follows:
\[ \text{Taxable Gain} = \text{Selling Price} - \text{Cost
Price} \]
\[ \text{Taxable Gain} = Rs. 300,000 - Rs. 100,000 = Rs.
200,000 \]
The capital gain tax on the sale of shares is computed
based on holding period. If the shares were held for more than one year but
less than two years, the tax rate is 15%.
\[ \text{Capital Gain Tax} = 15\% \times \text{Taxable
Gain} \]
\[ \text{Capital Gain Tax} = 15\% \times Rs. 200,000 = Rs.
30,000 \]
### **8. Fees Received
on Conducting a Technical Workshop:**
This amount is considered professional income and is fully
taxable. The full amount of Rs. 120,000 is added to the taxable income.
### **9. Adjustable
Withholding Tax Paid:**
This amount is already paid as tax and can be adjusted
against the final tax liability. Therefore, it reduces the taxable income by
Rs. 20,000.
### **10. Lease Rentals
Received on Sub-Lease:**
Lease rentals are considered income and are fully taxable.
The full amount of Rs. 90,000 is added to the taxable income.
### **11. Share Received
from AOP:**
The share received from an Association of Persons (AOP) is
considered income and is fully taxable. The full amount of Rs. 60,000 is added
to the taxable income.
### **Calculation of
Taxable Income:**
\[ \text{Taxable Income} = \text{Total Income} -
\text{Deductions} \]
\[ \text{Total Income} = Rs. 552,000 + Rs. 50,000 + Rs.
25,000 + Rs. 10,000 + Rs. 120,000 + Rs. 90,000 + Rs. 60,000 \]
\[ \text{Total Income} = Rs. 907,000 \]
\[ \text{Deductions} = Rs. 15,000 (Medical Expenses
Reimbursed) - Rs. 20,000 (Adjustable Withholding Tax) \]
\[ \text{Deductions} = Rs. 5,000 \]
\[ \text{Taxable Income} = Rs. 907,000 - Rs. 5,000 = Rs.
902,000 \]
### **Calculation of
Tax Payable:**
The tax payable is calculated based on the applicable tax
slabs. As of my last knowledge update in 2022, I'll provide a simplified
calculation using the tax slabs for individuals.
| Income Range
| Tax Rate |
|---------------------|----------|
| Up to Rs. 600,000
| 0% |
| Rs. 600,001 - Rs. 1,200,000 | 5% |
| Rs. 1,200,001 - Rs. 2,400,000 | 10% |
| Rs. 2,400,001 - Rs. 3,600,000 | 15% |
| Above Rs. 3,600,000 | 20% |
For Mr. Naeem, the tax calculation would be based on these
slabs using the taxable income of Rs. 902,000. Please note that tax laws may
change, and it's advisable to consult the latest tax regulations or a tax
professional for the most accurate information.
Q.4 Under the Income Tax Ordinance 2001,
explain the following concepts of income from business: (20)
i. Deductions Admissible (Section 20)
ii. Deduction Inadmissible (Section 21)
### **i. Deductions
Admissible (Section 20):**
Under the Income Tax
Ordinance 2001 in Pakistan, Section 20 outlines the provisions for deductions
admissible from income derived from business. These deductions play a crucial
role in determining the taxable income of a business entity and can
significantly impact the amount of tax payable. Here are key aspects of
deductions admissible under Section 20:
1. **General
Principle:**
- Section 20 allows deductions for expenses and outgoings
that are wholly and exclusively incurred in the production of income.
- The expenses must be directly related to the generation
of business income to qualify for deduction.
2. **Specific
Deductions:**
- The ordinance provides an exhaustive list of specific
deductions that businesses can claim. These include rent, repairs, insurance,
depreciation, bad debts, and other legitimate business expenses.
- Each type of deduction is subject to specific conditions
and limitations outlined in the ordinance.
3. **Depreciation:**
- Businesses are allowed to claim depreciation on assets
used in the production of income. The depreciation rates are prescribed in the
ordinance for various categories of assets.
- The purpose is to recognize the wear and tear of assets
over time, allowing businesses to recover the cost of those assets.
4. **Provision for
Doubtful Debts:**
- A deduction is allowed for businesses that maintain a
provision for doubtful debts. This provision accounts for potential losses from
unpaid debts.
- The deduction is subject to certain conditions, including
the need for the business to be in the business of lending money.
5. **Interest on
Borrowed Capital:**
- Interest paid on borrowed capital is generally
deductible, but the ordinance specifies certain conditions.
- Interest must be incurred for the purpose of the
business, and excessive interest payments may be subject to restrictions.
6. **Rent, Taxes, and
Repairs:**
- Deductions are admissible for rent, taxes, and repairs
related to business premises.
- The ordinance provides guidelines on what constitutes an
allowable deduction in these categories.
7. **Contributions to
Approved Pension Fund:**
- Contributions made by businesses to an approved pension
fund are deductible.
- The ordinance outlines the criteria for an approved
pension fund, and compliance with these criteria is necessary for the
deduction.
8. **Export of Computer
Software:**
- Section 20 provides a special deduction for income
derived from the export of computer software.
- This aims to incentivize the IT sector and promote
software exports.
9. **Educational
Expenditure for Employees:**
- Certain educational expenditures for employees are
deductible.
- The ordinance specifies the conditions under which such
expenses can be claimed as deductions.
10. **Entertainment
Expenses:**
- Entertainment expenses are generally not deductible,
except in certain specific circumstances outlined in the ordinance.
- The conditions for deductibility of entertainment
expenses are stringent.
### **ii. Deduction
Inadmissible (Section 21):**
While Section 20
outlines the deductions that businesses can claim, Section 21 of the Income Tax
Ordinance 2001 deals with deductions that are inadmissible. These are expenses
or items for which businesses are explicitly denied any deduction when
calculating their taxable income. Key points regarding deduction inadmissible
under Section 21 include:
1. **Dividends and
Profit on Debt:**
- Dividends received by a business and any profit on debt
are not deductible.
- This is based on the principle that these are returns on
investments rather than expenses incurred in the production of income.
2. **Salary to
Partners:**
- Salaries paid to partners of a firm are not deductible
unless the partnership deed specifies otherwise.
- This ensures that salaries to partners are scrutinized to
prevent manipulation for tax benefits.
3. **Payments to
Non-Residents:**
- Payments made to non-residents are subject to withholding
tax, and any such payment not subject to withholding tax is not deductible.
- This aims to ensure that taxes are appropriately withheld
on payments to non-residents.
4. **Expenses Not
Related to Business:**
- Any expense that is not related to the business or is of
a personal nature is not deductible.
- The ordinance emphasizes the need for a direct connection
between the expense and the production of income.
5. **Penalties and
Fines:**
- Penalties and fines imposed by any law or authority are
not deductible.
- This discourages businesses from engaging in practices
that lead to penalties.
6. **Illegal
Payments:**
- Payments made for illegal purposes or in violation of any
law are not deductible.
- The ordinance seeks to prevent businesses from claiming
deductions for expenses that are contrary to legal and ethical standards.
7. **Contributions to
Unapproved Pension Fund:**
- Contributions made by businesses to an unapproved pension
fund are not deductible.
- This reinforces the importance of contributing to
approved pension funds for tax benefits.
8. **Donations Without
Proper Approval:**
- Donations made by businesses are not deductible unless
they are made to approved institutions and have proper approval.
- This ensures that deductions for charitable contributions
are subject to regulation.
9. **Interest on
Unauthorized Loans:**
- Interest on loans that are not authorized under the
relevant provisions of the ordinance is not deductible.
- This emphasizes the importance of complying with the
legal requirements for deductibility.
10. **Undisclosed
Income and Assets:**
- Any undisclosed income or assets cannot be deducted as an
expense.
- This provision aligns with efforts to curb tax evasion
and promote transparency.
### **Conclusion:**
Understanding the concepts of deductions admissible
(Section 20) and deductions inadmissible (Section 21) under the Income Tax
Ordinance 2001 is crucial for businesses to manage their tax liabilities
effectively. Businesses need to carefully consider and document their expenses,
ensuring that they comply with the prescribed conditions for deductibility.
Additionally, businesses must be aware of the expenses for which deductions are
explicitly disallowed to avoid unintended non-compliance with tax regulations.
This knowledge contributes to a transparent and fair taxation system,
encouraging businesses to invest in legitimate activities that support economic
growth. It is advisable for businesses to seek professional advice to ensure
compliance with the latest tax laws and regulations.
Q.5 Explain in detail the concept and
procedure for recovery of tax under theIncome Tax Ordinance 2001. (20).
The recovery of tax is a crucial aspect of any tax system,
ensuring that taxpayers fulfill their obligations to the government. In
Pakistan, the recovery of tax is governed by the Income Tax Ordinance 2001.
This ordinance outlines the legal framework for the assessment, collection, and
recovery of income tax. Let's delve into the concept and procedure for the
recovery of tax under the Income Tax Ordinance 2001:
### **Concept of Tax Recovery:**
Tax recovery refers to the
process through which the government collects outstanding tax liabilities from
individuals, businesses, or other entities. It is a mechanism that ensures
taxpayers meet their tax obligations, contributing to government revenue for
public services and infrastructure development.
### **Procedure for Recovery of Tax under the Income Tax
Ordinance 2001:**
The Income Tax Ordinance 2001
provides a comprehensive set of rules and procedures for the recovery of tax.
The procedure involves various stages and mechanisms to facilitate the
efficient and lawful collection of outstanding tax amounts. Here is an overview
of the key aspects of the tax recovery process:
#### **1. Assessment of Tax Liability:**
- The tax recovery process
begins with the assessment of a taxpayer's liability. Tax authorities assess
the taxable income, allowable deductions, and any outstanding tax payments.
- After the assessment, a tax
demand notice is issued to the taxpayer, specifying the amount of tax due.
#### **2. Demand Notice:**
- The demand notice serves as
an official communication from the tax authorities, notifying the taxpayer of
the assessed tax liability.
- The notice provides details
of the outstanding amount, the due date for payment, and instructions on how to
make the payment.
#### **3. Failure to Pay:**
- If the taxpayer fails to pay
the outstanding tax within the specified period mentioned in the demand notice,
the tax authorities may initiate recovery proceedings.
### **4. Recovery by Tax Authorities:**
- Tax authorities have the
power to recover tax through various means, including attachment of movable or
immovable property, freezing of bank accounts, and recovery from third parties.
- Tax authorities may also
issue a notice to the taxpayer's employer or any person from whom money is due
to the taxpayer, directing them to pay the amount directly to the tax authorities.
#### **5. Attachment of Property:**
- Tax authorities can attach
the movable or immovable property of the taxpayer to recover the outstanding
tax amount.
- The attachment process
involves issuing a notice to the taxpayer, giving them an opportunity to clear
the dues within a specified period. If the taxpayer fails to comply, the
property can be sold to recover the outstanding tax.
#### **6. Freezing of Bank Accounts:**
- Tax authorities have the
authority to freeze the taxpayer's bank accounts to prevent the withdrawal of
funds.
- This action is taken to
secure the outstanding tax amount, and the frozen amount is used to settle the
tax liability.
#### **7. Recovery from Third Parties:**
- Tax authorities may recover
the outstanding tax by issuing notices to third parties who owe money to the
taxpayer. This includes employers, tenants, or any person liable to make
payments to the taxpayer.
- The third party is required
to pay the amount directly to the tax authorities, ensuring the recovery of the
tax liability.
#### **8. Auction of Attached Property:**
- If the taxpayer fails to
comply with the recovery measures, the tax authorities may proceed to auction
the attached property.
- The proceeds from the
auction are used to settle the outstanding tax, and any surplus is returned to
the taxpayer.
#### **9. Imprisonment for Non-Payment:**
- In extreme cases of
non-compliance, tax authorities have the power to initiate legal proceedings
that may lead to the imprisonment of the taxpayer.
- However, imprisonment is
generally considered a last resort, and tax authorities usually prefer other
recovery methods.
### **Conclusion:**
The recovery of tax under the Income Tax Ordinance 2001 is
a systematic and legally defined process designed to ensure that taxpayers
fulfill their financial obligations to the government. The ordinance provides
tax authorities with a range of tools and mechanisms to recover outstanding tax
amounts, promoting compliance and accountability. It is essential for taxpayers
to be aware of their tax liabilities, respond to demand notices promptly, and
fulfill their obligations to avoid legal consequences. Additionally, seeking
professional advice can help taxpayers navigate the complexities of the tax
recovery process and ensure compliance with the prevailing tax laws and
regulations. Dear
Student,
Ye sample assignment h. Ye bilkul
copy paste h jo dusre student k pass b available h. Agr ap ne university
assignment send krni h to UNIQUE assignment
hasil krne k lye ham c contact kren:
0313-6483019
0334-6483019
0343-6244948
University c related har news c
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