INCOME TAX MANUAL PART I
INCOME TAX ORDINANCE, 2001
AMENDED UPTO 30th June, 2012
GOVERNMENT OF PAKISTAN
FEDERAL BOARD OF REVENUE (REVENUE DIVISION)
.
INCOME TAX MANUAL PART I
INCOME TAX ORDINANCE, 2001
AMENDED UPTO 30TH JUNE, 2012
Published by:
FACILITATION AND TAXPAYERS EDUCATION WING
INCOME TAX ORDINANCE 2001
TABLE OF CONTENTS CHAPTER 1 PRELIMINARY 1. 2. 3. Short title, extent and commencement Definitions Ordinance to override other laws CHAPTER II CHARGE OF TAX 4. 5. 6. 7. 8. Tax on taxable income Tax on dividends Tax on certain payments to non-residents Tax on shipping and air transport income of a nonresident person General provisions relating to taxes imposed under sections 5, 6 and 7 CHAPTER III TAX ON TAXABLE INCOME PART I COMPUTATION OF TAXABLE INCOME 9. 10. 11. Taxable income Total income Heads of income PART II HEAD OF INCOME SALARY 12. 13. 14. Salary Value of perquisites Employee share schemes 29 31 34 27 27 27 23 24 24 24 25 1 1 22
PART III HEAD OF INCOME INCOME FROM PROPERTY 15. 16. 17. Income from property Non-adjustable amounts received in relation to buildings Omitted by the Finance Act, 2006. PART IV HEAD OF INCOME INCOME FROM BUSINESS Division I Income from Business 18. 19. Income from business Speculation business Division II Deductions General Principles 20. 21. Deductions in computing income chargeable under the head "Income from Business" Deductions not allowed Division III Deductions Special Provisions 22. 23. 23A. 23B. 24. 25. 26. 27. 28. 29. 29A Depreciation Initial allowance First Year Allowance Accelerated depreciation to alternate energy projects. Intangibles Pre-commencement expenditure Scientific research expenditure Employee training and facilities Profit on debt, financial costs and lease payments Bad debts Provision regarding consumer loans 45 49 50 50 50 53 53 54 54 56 57 42 43 40 41 37 38
30. 31.
Profit on non-performing debts of a banking company or development finance institution Transfer to participatory reserve Division IV Tax Accounting
58 58
32. 33. 34. 35. 36.
Method of accounting Cash-basis accounting Accrual-basis accounting Stock-in-trade Long-term contracts PART V HEAD OF INCOME CAPITAL GAINS
59 59 59 61 63
37. 37A. 38.
Capital gains Capital gain on disposal of securities Deduction of losses in computing the amount chargeable under the head Capital Gains PART VI HEAD OF INCOME INCOME FROM OTHER SOURCES
64 65 66
39. 40.
Income from other sources Deductions in computing income chargeable under the head Income from Other Sources PART VII EXEMPTIONS AND TAX CONCESSIONS
68 70
41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
Agricultural income Diplomatic and United Nations exemptions Foreign government officials Exemptions under international agreements Presidents honours Profit on debt Scholarships Support payments under an agreement to live apart Federal and Provincial Government, and local authority income Foreign-source income of short-term resident individuals
72 72 73 73 74 74 75 75 75 76
51. 52. 53. 54. 55.
Foreign-source income of returning expatriates Omitted by Finance Ordinance, 2002 Exemptions and tax concessions in the Second Schedule Exemptions and tax provisions in other laws Limitation of exemption PART VIII LOSSES
76 77 77 78
56. 56A. 57. 57A. 58. 59. 59A. 59AA. 59B.
Set off of losses Set off of losses of companies operating hotels. Carry forward of business losses Set off of losses consequent to amalgamation Carry forward of speculation business losses Carry forward of capital losses Limitations on set off and carry forward of losses Group Taxation. Group relief PART IX DEDUCTIBLE ALLOWANCES
79 79 79 80 81 82 82 83 84
60. 60A. 60B.
Zakat Workers Welfare Fund Workers Participation Fund PART X TAX CREDITS
87 87 87
61. 62. 63. 64. 65. 65A. 65B. 65C. 65D. 65E.
Charitable donations Tax credit for investment in shares and insurance Contribution to an Approved Pension Fund. Profit on debt Miscellaneous provisions relating to tax credits Tax credit to a person registered under the Sales Tax Act, 1990 Tax credit for investment Tax credit for enlistment Tax credit for newly established undertakings Tax credit for industrial undertakings established before the first day of July, 2011
88 89 91 92 93 94 94 95 95 96
CHAPTER-IV COMMON RULES PART I GENERAL 66. 67. 68. 69. 70. 71. 72. 73. Income of joint owners Apportionment of deductions Fair market value Receipt of income Recouped expenditure Currency conversion Cessation of source of income Rules to prevent double derivation and double deductions PART II TAX YEAR 74. Tax year PART III ASSETS 75. 76. 77. 78. 79. Disposal and acquisition of assets Cost Consideration received Non-arm's length transactions Non-recognition rules CHAPTER V PROVISIONS GOVERNING PERSONS PART I CENTRAL CONCEPTS Division I Persons 80. Person Division II Resident and Non-resident Persons 81. Resident and non-resident persons 109 108 103 103 105 106 106 101 98 98 98 99 99 99 99 100
82. 83. 84.
Resident individual Resident company Resident association of persons Division III Associates
110 110 110
85.
Associates PART II INDIVIDUALS Division I Taxation of Individuals
110
86. 87.
Principle of taxation of individuals Deceased individuals Division II Provisions Relating to Averaging
113 113
88. 88A. 89.
An individual as a member of an association of persons Share profits of company to be added to taxable income Authors Division III Income Splitting
114 114 115
90. 91.
Transfers of assets Income of a minor child PART III ASSOCIATIONS OF PERSONS
115 116
92. 93.
Principles of taxation of associations of persons Omitted by the Finance Act, 2007. PART IV COMPANIES
117
94. 95. 96.
Principles of taxation of companies Disposal of business by individual to wholly-owned company Disposal of business by association of persons to wholly-owned company
118 118 120
97. 97A.
Disposal of asset between wholly-owned companies Disposal of asset under scheme of arrangement and reconstruction.
121 123
PART V COMMON PROVISIONS APPLICABLE TO ASSOCIATIONS OF PERSONS AND COMPANIES 98. Change in control of an entity PART VA TAX LIABILITY IN CERTAIN CASES 98A. 98B. 98C. Change in the constitution of an association of persons Discontinuance of business or dissolution of an association of persons Succession to business, otherwise on death 126 126 126 125
CHAPTER-VI SPECIAL INDUSTRIES PART I INSURANCE BUSINESS 99. Special provisions relating to insurance business PART II OIL, NATURAL GAS AND OTHER MINERAL DEPOSITS 100. 100A. 100B. Special provisions relating to the production of oil and natural gas, and exploration and extraction of other mineral deposits Special provisions relating to banking business. Special provision relating to capital gain tax. CHAPTER VII INTERNATIONAL PART I GEOGRAPHICAL SOURCE OF INCOME 101. Geographical source of income 130 129 129 131 128
PART II TAXATION OF FOREIGN-SOURCE INCOME OF RESIDENTS 102. 103. 104. Foreign source salary of resident individuals Foreign tax credit Foreign losses 133 133 134
PART III TAXATION OF NON-RESIDENTS 105. 106. Taxation of a permanent establishment in Pakistan of a non-resident person Thin capitalization PART IV AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION 107. Agreements for the avoidance of double taxation and prevention of fiscal evasion 139 135 137
CHAPTER VIII ANTI-AVOIDANCE 108. 109. 110. 111. 112. Transactions between associates Re-characterization of income and deductions Salary paid by private companies Unexplained income or assets Liability in respect of certain security transactions 140 140 140 140 142
CHAPTER IX MINIMUM TAX 113. 113A. 113B. Minimum tax on the income of certain persons. Tax on income of certain persons Taxation of income of certain retailers 143 144 145
CHAPTER X PROCEDURE PART I RETURNS 114. 115. 116. 117. 118. 119. Return of income Persons not required to furnish a return of income Wealth statement Notice of discontinued business Method of furnishing returns and other documents Extension of time for furnishing returns and other documents PART II ASSESSMENTS 120. 120A. 121. 122. 122A. 122B. 122C. 123. 124. 124A. 125. 126. Assessments Investment Tax on income Best judgment assessment Amendment of assessments Revision by the Commissioner Revision by the Regional Commissioner Provisional assessment Provisional assessment in certain cases Assessment giving effect to an order Powers to tax authorities to modify orders, etc. Assessment in relation to disputed property Evidence of assessment PART III APPEALS 127. 128. 129. 130. 131. 132. 133. 134. 134A. 135. 136. Appeal to the Commissioner (Appeals) Procedure in appeal Decision in appeal Appointment of the Appellate Tribunal Appeal to the Appellate Tribunal Disposal of appeals by the Appellate Tribunal Reference to High Court Omitted by Finance Act, 2005 Alternative Dispute Resolution Omitted by the Finance Ordinance, 2002 Burden of proof 171 173 173 175 177 178 180 182 184 159 160 161 162 165 166 166 167 167 169 169 169 147 151 153 155 155 157
PART IV COLLECTION AND RECOVERY OF TAX 137. 138. 138A. 138B. 139. 140. 141. 142. 143. 144. 145. 146. 146A. 146B. Due date for payment of tax Recovery of tax out of property and through arrest of taxpayer Recovery of tax by District Officer (Revenue) Estate in bankruptcy Collection of tax in the case of private companies and associations of persons Recovery of tax from persons holding money on behalf of a taxpayer Liquidators Recovery of tax due by non-resident member of an association of persons Non-resident ship owner or charterer Non-resident aircraft owner or charterer Assessment of persons about to leave Pakistan Recovery of tax from persons assessed in Azad Jammu and Kashmir Initiation, validity, etc., of recovery proceedings. Tax arrears settlement incentives scheme PART V ADVANCE TAX AND DEDUCTION OF TAX AT SOURCE Division I Advance Tax Paid by the Taxpayer 147. Advance tax paid by the taxpayer Division II Advance Tax Paid to a Collection Agent 148. Imports Division III Deduction of Tax at Source 149. 150. 151. 152. Salary Dividends Profit on debt Payments to non-residents 204 205 205 206 201 196 185 186 187 187 187 188 189 191 191 192 193 193 194 194
153. 153A. 154. 155. 156. 156A. 156B. 157. 158.
Payments for goods, services and contracts Payment to Traders and distributors Exports Income from property Prizes and winnings Petroleum products Withdrawal of balance under pension fund Omitted by the Finance Ordinance, 2002 Time of deduction of tax
209 214 214 215 216 216 217 218
Division IV General Provisions Relating to the Advance Payment of Tax or the Deduction of Tax at Source 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. Exemption or lower rate certificate Payment of tax collected or deducted Failure to pay tax collected or deducted Recovery of tax from the person from whom tax was not collected or deducted Recovery of amounts payable under this Division Certificate of collection or deduction of tax Statements Priority of tax collected or deducted Indemnity Credit for tax collected or deducted Tax collected or deducted as a final tax 218 219 220 221 221 221 222 224 224 224 226
PART VI REFUNDS 170. 171. Refunds Additional payment for delayed refunds PART VII REPRESENTATIVES 172. 173. Representatives Liability and obligations of representatives 231 233 229 230
PART VIII RECORDS, INFORMATION COLLECTION AND AUDIT 174. 175. 176. 177. 178. 179. 180. Records Power to enter and search premises Notice to obtain information or evidence Audit Assistance to Commissioner Accounts, documents, records and computer-stored information not in Urdu or English language Power to collect information regarding exempt income PART IX NATIONAL TAX NUMBER CERTIFICATE 181. 181A. 181B. Taxpayers Registration Active taxpayers list Taxpayer card PART X PENALTY 182. 183. 184. 185. 186. 187. 188. 189. 190. Exemption from penalty and default surcharge Penalty for non-payment of tax Omitted by the Finance Act, 2010. Omitted by the Finance Act, 2010. Omitted by the Finance Act, 2010. Omitted by the Finance Act, 2010. Omitted by the Finance Act, 2010. Omitted by the Finance Act, 2010. Omitted by the Finance Act, 2010. PART XI OFFENCES AND PROSECUTIONS 191. 192. 192A. 193. 194. 195. Prosecution for non-compliance with certain statutory obligations Prosecution for false statement in verification Prosecution for concealment of income. Prosecution for failure to maintain records Prosecution for improper use of National Tax Number Card Prosecution for making false or misleading 249 249 250 250 250 250 242 246 241 241 247 234 234 236 237 240 240 240
196. 197. 198. 199. 200. 201. 202. 203. 203A. 204.
statements Prosecution for obstructing an income tax authority Prosecution for disposal of property to prevent attachment Prosecution for unauthorized disclosure of information by a public servant Prosecution for abetment Offences by companies and associations of persons Institution of prosecution proceedings without prejudice to other action Power to compound offences Trial by Special Judge Appeal against the order of a Special Judge Power to tender immunity from prosecution
251 251 251 252 252 252 252 253 254 254
PART XII ADDITIONAL TAX 205. 205A. Default surcharge Reduction in default surcharge, consequential to reduction in tax or penalty PART XIII CIRCULARS 206. 206A. Circulars Advance ruling CHAPTER XI ADMINISTRATION PART I GENERAL 207. 208. 209. 210. 211. 212. 213. Income tax authorities Appointment of income tax authorities Jurisdiction of income tax authorities Delegation Power or function exercised Authority of approval Guidance to income tax authorities 259 260 261 263 264 265 265 258 268 255 257
214. 214A. 214B. 214C. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226. 227.
Income tax authorities to follow orders of the Board Condonation of time limit Power of the Board to call for records Selection for audit by the Board Furnishing of returns, documents etc. Disclosure of information by a public servant Forms and notices; authentication of documents Service of notices and other documents Tax or refund to be computed to the nearest Rupee Receipts for amounts paid Rectification of mistakes Appointment of expert Appearance by authorized representative Proceedings under the Ordinance to be judicial proceedings Proceedings against companies under liquidation Computation of limitation period Bar of suits in Civil Courts
265 265 266 266 267 267 271 271 272 272 272 273 273 276 276 276 277
PART II DIRECTORATE-GENERAL OF INSPECTION 228. 229. 230. 230A. 231. The Directorate-General of Inspection and Internal Audit Directorate General of Training and Research Directorate General (Intelligence and Investigation), Inland Revenue Directorate-General of Withholding Taxes Omitted by Finance Act, 2005 CHAPTER XII TRANSITIONAL ADVANCE TAX PROVISIONS 231A. 231AA. 231B. 232. 233. 233A. 233AA. 234. 234A. 235. Cash withdrawal from a bank Advance tax on transactions in bank
Purchase of motor cars and jeeps
278 278 286 280
281 281 282 283 283 292 284 285 285
Omitted by the Finance Ordinance, 2002 Brokerage and Commission Collection of tax by a stock exchange registered in Pakistan Collection of tax by NCCPL Tax on motor vehicles CNG Stations. Electricity Consumption
236. 236A. 236B. 236C.
Telephone users Advance tax at the time of sale by auction Advance tax on purchase of air ticket Advance Tax on sale r transfer or immovable property CHAPTER XIII MISCELLANEOUS
286 287 287 296
237. 237A. 238. 239. 239A. 239B. 240.
Power to make rules Electronic record Repeal Savings Transition to Federal Board of Revenue. Reference to authorities Removal of difficulties
288 289 289 289 293 293 293
SCHEDULES
FIRST SCHEDULE PART I RATES OF TAX Division I Rates of Tax for Individuals and Association of Persons Division IA Rate of Tax on Certain Persons Division IB Rates of Tax for Association of Persons [Omitted] Division II Rates of Tax for Companies Division III Rate of Dividend Tax Division IV Rate of Tax on Certain Payments to Nonresidents Division V Rate of Tax on Shipping or Air Transport Income of a Non-resident Person Division VI Income from Property 295
295
300
300
301
302 302
302
303
Division VII Capital Gains on disposal of Securities
305
Division VIII Capital Gains on Disposal of Immovable Property
315
PART II Rates of Advance Tax Tax on Import of Goods
307
PART IIA Collection of Tax from Distributors, Dealers, And Wholesalers
317
PART III DEDUCTION OF TAX AT SOURCE Division I Profit on debt Division II Payments to non-residents
308
308
308
Division III Payments for Goods or Services Division III A Payments to non-resident media persons [Omitted]
308
309
Division IV
310
Exports Division V Income from Property Division VI Prizes and Winnings Division VIA Petroleum Products Division VIB CNG Stations
311
312
313
313
PART IV
DEDUCTION OR COLLECTION OF ADVANCE TAX Division II Brokerage Commission Division IIA Rates for Collection of Tax by a Stock Exchange Registered in Pakistan Division III Tax on motor vehicles Division IV Electricity Consumption
314
314
314
315 316
Division V Telephone users
317
Division VI Cash withdrawal from bank Division VIA Advance tax on Transactions in Bank Division VII Purchase of Motor Cars
318
318
318
Division VIII Advance tax at the time of sale by auction
Division IX Advance tax on Purchase of Air Ticket
319
319
Division X Advance tax on sale or transfer of Immovable property SECOND SCHEDULE EXEMPTIONS AND TAX CONCESSIONS PART I EXEMPTIONS FROM TOTAL INCOME PART II REDUCTION IN TAX RATES PART III REDUCTION IN TAX LIABILITY PRT IV EXEMPTION FROM SPECIFIC PROVISIONS
329
320
320
362
373
376
THIRD SCHEDULE
PART I DEPRECIATION
403
403
PART II INITIAL ALLOWANCE PART III PRE-COMMENCEMENT EXPENDITURE
405
406
FOURTH SCHEDULE
RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS OF INSURANCE BUSINESS 407
FIFTH SCHEDULE
PART I RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS FROM THE EXPLORATION AND PRODUCTION OF PETROLEUM PART II RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS FROM THE EXPLORATION AND EXTRACTION OF MINERALS DEPOSITS (OTHER THAN PETROLEUM)
412
412
418
SIXTH SCHEDULE
421
PART I RECOGNIZED PROVIDENT FUNDS
421
PART II APPROVED SUPERANNUATION FUNDS
430
PART III APPROVED GRATUITY FUNDS
434
SEVENTH SCHEDULE
RULES FOR THE COMPUTATION OF THE PROFITS AND GAINS OF A BANKING COMPANY AND TAX PAYABLE THEREON
437
EIGHTH SCHEDULE
RULES FOR THE COMPUTATION OF CAPITAL GAINS ON LISTED SECURITIES
460
