FINAL TAX REGIME & MINIMUM TAX

Transcription

1 Chapter 22 FINAL TAX REGIME & MINIMUM TAX Section Topic covered For CA Mod F & ICMAP students Section Rule 169 General provisions regarding income under final tax regime 153 Minimum tax on services & goods transport services 148,150,151 Imports, dividend & profit on debt 235 Advance tax on electricity bills 152 Royalty or fee for technical services received by non-residents 153 Sale of goods, services & contracts 236C Advance tax on sale or transfer of immovable property 154 Export & export indenting commission 6 18 Income from royalty 156 & 156A Prizes & winnings & petroleum products 6 19 Fee for technical services 233 Local indenting commission Tax on income of non-resident shipping & 7, & air transport person, ship owner & air craft & owner 234 & 234A Goods transport vehicle & CNG stations MCQ s with solutions 113, 113A, 113B & 113C 148 Minimum tax on income of certain persons Tax on import of packing material & edible oil Practice question for CA Mod F & ICMAP ICMAP & CA Mod C past papers theoretical questions For CA Mod F and ICMAP students 1. General provisions regarding income under Tax Regime (Section 169): Where an income is chargeable to tax under final tax regime: a. The income shall not be chargeable to tax under any other head of income in computing the taxable income of the person. b. No deduction shall be allowable for an expenditure incurred in deriving the income or any deductible allowances. c. The amount of income shall not be reduced by any tax credits or set off of any losses (except stated otherwise). d. In case where a person has no income other than final tax regime and files a statement for final tax regime an assessment order shall be deemed as made u/s 120 on the date of filing such statement. e. Return of income is not required to be filed where the only source of income is final tax regime. However, statement for final tax regime u/s 115(4) is required to be filed on or before the due date for filing of return of income. f. There shall be no refund of the tax collected or deducted except where the tax so collected or deducted is in excess of the amount for which the taxpayer is chargeable under the ordinance. g. If tax deductible has not been deducted, or short deducted, the said non-deduction or short deduction may be recovered under section 162, and all the provisions of this Ordinance shall apply accordingly. Conceptual Approach to Taxes 383

2 2. Following incomes are chargeable to tax under final tax regime: Sr. Nature of payment Section Rate 1. Commercial imports 148(7) & (8A) General rate 5.5% (6% for individual and AOP s) 2. Dividend 5 and 150 General rate 10% 3. Profit on debt 151(3) 10% 4. Payments to non-residents 6 and 152(1B) and (1BB) Detail given as under 5. Sale of goods, rendering of services and contracts 153(3) and Detail given as under 6. Exporters 154(4) Detail given as under 7. Prizes and winnings 156(3) 15% & 20% 8. Petroleum products 156A(1) and (2) 12% 9. Brokerage and commission 233(3) 12% 10. Goods transport vehicles 234(5) Rs.2 per Kg of laden weight 11. CNG stations 234A 4% of gas consumption charges 3. Commercial Imports [Section 148(7) & (8A)]: (Covering NTR / FTR / MTL) 1. Tax rate The Collector of Customs shall collect advance tax from every importer of goods (other than the goods or persons specified by the Board) on the value of the goods at: 5.5% for companies & industrial undertakings. 6% for AOPs and individuals 12% of the value of film in case of foreign produced film imported for the purpose of screening & viewing. 4.5% tax collected at the time of import of ships by ship breakers. 2. Reduced tax rate Although the general rate of tax is 5.5%, however, the Board has specified reduced and more than general rate of 5.5% in Division II of Part V of Chapter X of first Schedule as rates of advance tax. 3. Value of goods Means value as increased by sales tax, federal excise duty and custom duty. 4. Exceptions from tax Regime Tax required to be collected on import of goods is final tax except the following: raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use; fertilizer by manufacturer of fertilizer; and motor vehicles in Completely Built Unit (CBU) condition by manufacturer of motor vehicles. large import houses. (Definition given in payment chapter u/s 148) (e) a foreign produced film imported for the purposes of screening and viewing (e) The tax required to be collected from a person on the import of edible oil and packing material for a tax year shall be minimum tax. (f) 12% tax collected on the value of film in case of foreign produced film imported for the purpose of screening & viewing is adjustable 5. Minimum tax liability The tax required to be collected from a person on the import of edible oil and packing material for a tax year shall be minimum tax. 6. Opting out from Tax Regime Commercial importers paying taxes under the Tax Regime of the Ordinance may opt for Normal tax regime [NTR], provided the tax liability under NTR does not fall below 100% of the tax collected on imports. [Clause 56B of Part IV of the Second Schedule] 384 Conceptual Approach to Taxes

3 Example: Following information relates to Mr. Kamran for tax year He imports garments goods from America and sells goods in the same condition in which they were imported. Rs. Sales 500,000 Expenses 350,000 Net Profit 150,000 Note: Expenses include imports of Rs. 300,000. For certain reasons, tax on half of the imports were not collected by collector of custom duty. Solution: In this case tax required to be collected shall be treated as final tax liability of the taxpayer. Tax required to be collected (300,000 x 6%) 18,000 Tax collected at import stage (8,250) Balance tax payable 9, Dividends (Section 5 and 150): Tax shall be deducted from gross dividend which shall be considered full and final tax for a person. This section is not applicable in case where dividend is exempt from tax e.g. dividend received from agricultural business u/c 105B of Part I of second schedule. Particulars 1. Dividend income is available to company s specified u/c 17 & 20 of part II of 2 nd schedule to the ITO, Facility of reduced tax rate has also been extended to companies supplying coal exclusively to power generation projects. Rate of tax 3. Normal rate shall be applicable on dividend income other than specified herein. 10% 4. In case of stock fund if dividend receipts are less than capital gains. 12.5% 5. Dividend received by a company from a collective investment scheme or a mutual fund, other than a stock fund, 6. Example: Which of the following incomes are chargeable to tax under Tax Regime or Normal Tax Regime? Dividend received by individual Dividend received by company Solution: tax regime tax regime 5. Profit on debt [Section 151(3)] The following are the various profits on debts that are chargeable to tax under this section where: Deposit or a certificate under the National Saving Scheme or Post Office Savings Account. Profit is being on a saving account or Profit and loss sharing account or deposit maintained with the banking Company or financial institution. Profit on any bond, certificate, debenture etc. including term finance certificates, certificates of investment issued by a banking company or a financial institution, company as defined in the Companies Ordinance, 1984, body corporate or a finance society. Tax shall also be deducted from profit on securities other than above issued by Federal Government or Local Government. to any person other than a financial institution. Zakat (where applicable under Zakat and Ushar Ordinance) shall be deducted from the amount of profit on debt on payment to the recipient. 10% tax deductible on interest income from all of the above shall be final tax (whether tax has been deducted or not) under Separate Block of Income except the following: 1. A company 2. Profit on debt in respect of a loan agreement between a borrower and a banking company or a development finance institution. 7.5% 25% Conceptual Approach to Taxes 385

4 3. As stated in above. 4. Where profit is paid by any person other than banking company, a financial institution, or a company or a finance society on any bond, certificate, or under any instrument in writing. 5. The rate for filers is 10% and for non filers it is 15% provided the Profit on debt is in excess of Rs.500, For a non filer, other than a company, the 10% withholding tax will be final tax and any excess will be treated as advance tax adjustable against his tax liability. Example: Which of the following incomes are chargeable to tax under Tax Regime or Normal Tax Regime? Profit on Profit and loss sharing account (PLS) account received by individual and tax 10% Solution: Profit on regular income certificates received by an AOP Profit on PLS account received by company Profit on PLS account received by individual, however, tax was not deducted Case a, b, d fall under tax regime, 6. Payments to non-residents [Section 6 and 152]: c. Normal tax regime Section Nature of payment/transaction Tax rate Exemption 152(1) 152(1A) 152(1AA) 152(1AAA) Royalty & fee for technical services: Income from above in Pakistan Contracts: a contract or sub-contract under a construction, assembly or installation project in Pakistan, including a contract for the supply of supervisory activities in relation to such project; or any other contract for construction or services rendered relating thereto; or a contract for advertisement services rendered by T.V. Satellite Channels, Insurance Premium or Reinsurance premium: Insurance premium or re-insurance premium paid to non-resident person This shall not apply to an amount, with the written approval of the Commissioner Inland Revenue that is taxable to a permanent establishment [PE] in Pakistan of the non-resident person Advertisement services: Payment for advertisement services to a non-resident person 15% of gross amount 6% of the gross amount 5% of the gross amount 10% of the gross amount 152(2A)(i) Payment for sales of goods 3.5% Nil 152(2A)(ii) Payment for rendering of services - For transport services 2% - For other services 6% 152(2A)(iii) Payment on execution of contract 6% Nil Nil Nil Nil Nil Nil Status payment for non resident Deduction/ collecting authority Any person Any person Any person Any person Any person Any person Any person 386 Conceptual Approach to Taxes

5 2. Sub-section (1AA) shall not apply to an amount, with the written approval of the Commissioner Inland Revenue that is taxable to a PE in Pakistan of the non-resident person. 3. The tax deductible as above shall be a final tax on the income of a non-resident person except the following: Royalty and fee for technical services connected or through Permanent Establishment (PE) of nonresident in Pakistan. Exempt royalty and fee for technical services. In respect of non-resident contractors u/c 41 of Part IV of the second schedule unless he opts for Tax Regime for 3 years. 4. In this section prescribed person means a prescribed person as defined in sub-section (7) of section Sale of goods, rendering of services and contracts [Section 153 and ]: Every prescribed person making a payment to a resident person shall deduct tax at the time of payment (including sales tax) as per following schedule: Payment for: Rule for tax deduction Sale of goods 1. Tax shall be deducted on gross amount payable including sales tax. 2. In case of sale of rice, cotton seed or edible oils, rate of tax is 1.5%. 3. In case of sale of any other goods, rate of tax is 4.5% (for industrial undertakings and Companies it is 4%). 4. Reduced rates under second schedule where applicable. Rendering of services 1. Tax shall be deducted on gross amount payable. 2. In case of transport services, rate of tax is 2%. 3. In any other case, rate of tax is 10% (For companies it is 8%). 4. Where payment is made by an exporter or an export house to a resident person or PE in Pakistan of a non-resident person for services of stitching, dying, printing, embroidery, washing, sizing and weaving, rate of tax deduction is 1% - section 153(2). Execution of contract 1. Tax shall be deducted on gross amount payable. 2. Rate of tax is 7.5%. For companies rate of tax is 7%. 3. Sportspersons contracts 10%. Tax deductible on sale of good and execution of contract shall be final tax and tax deductible on rendering of services shall be minimum tax except in the following cases: - Tax deductible on sale of goods shall not be final tax if sale is made by a company being manufacturer or public listed company. - Tax deductible on execution of contracts shall not be final tax if payments are received by public listed company. Opting out from Tax Regime [Clause (56C), (56D) & (56E) of Part IV of the Second Schedule] In case of supply of goods, contracts & services of stitching, dying & printing etc. provided to exporter & export house, the said persons paying taxes under the Tax Regime of the Ordinance may opt for Normal tax regime [NTR], provided the tax liability under NTR does not fall below 100% of the taxes deducted under respective sub sections. Example: Following information relates of Mr. A. He is doing the business of manufacturing of garments for tax year Rs. Sales 6,500,000 Expenses 6,050,000 Net Profit 450,000 Note: All the sales amount has been received after tax 4% being as industrial undertaking. Conceptual Approach to Taxes 387

6 Solution: Computation of tax liability: Rs. Tax deducted u/s 153 (6,500,000 x 4%) 260,000 Total tax liability 260,000 Less: tax deducted at source (u/s 153) 260,000 Balance tax - - Example: Following information relates of Mr. B. He is doing the business of manufacturing of garments for tax year Rs. Sales 6,500,000 Expenses 6,050,000 Net Profit 450,000 Note: There was no tax deduction under section 153. Solution: Computation of tax liability: Rs. Tax deductible u/s 153 (6,500,000 x 4%) 260,000 Total tax liability 260,000 Less: tax deducted at source - _ Balance tax payable 260, Exports [Section 154(4)]: 1. Tax deductible under this section shall be final tax as per the following rates: Section Nature of payment/transaction Tax rate Exemption Status payment Deduction/collecting authority Direct export: 154(1) 154(3A) 154(3C) - Export proceeds realization - Export of the goods by an industrial undertaking located in EPZ - Clearing of the goods exported 154(3) Indirect export: 154(3B) - Realization of proceeds of goods sold to an exporter under an inland back -to-back letter of credit or standard purchase order - Payment for a firm contract to an indirect export 154(2) Foreign indenting commission: Realization of commission due to indenting agent 1% of export proceed received 1% at the time of export of goods without realization 1% at the time of export of goods without realization 1% of export proceeds received 1% of the export proceeds realized 5% of commission received 388 Conceptual Approach to Taxes Nil Nil Nil Nil Nil Nil Authorized dealer in foreign exchange Export processing Zones Authority Collector of customs Banking Company Direct export and export house registered under DTRE Rules 2001 Authorized dealer in foreign exchange 2. Income from export of computer software, IT services or IT enabled services is exempt up to Opting out from Tax Regime [Clause 41AA of Part IV of the Second Schedule] Due to omission of the aforesaid clause the option to exporter or an export indenting agent paying taxes under the Tax to opt for Normal tax regime [NTR] is no more available.

7 Example: Compute taxable income and tax liability of Mr. Jamil for the Tax year 2015 from following data: Local sales 600,000 Exports sales (total amount realized) 400,000 Cost of local sales 360,000 Cost of export sales 300,000 Other expenses related to local sales 100,000 Other expenses related to export sales 40,000 Solution: Computation of taxable income Rs. Local sales 600,000 Cost of local sales 360,000 Gross profit on local sales 240,000 Other expenses related to local sales 100,000 Taxable profit under NTR 140,000 Computation of tax liability: Tax on taxable income under NTR (140,000 x 0%) - Tax on export proceeds realized under FTR (400,000 x 1%) 4,000 Total tax liability 4,000 Note: Expenses related to income under FTR shall not be considered for computation of profit under NTR. 9. Prizes and winnings [Section 156(3)]: Tax shall be deducted by every person on payment of prizes and winnings as per following schedule: Gross amount of Rate of tax Prize on prize bond and cross-word puzzle 15% Any other prize (Raffle, Lottery, Prize on winning a quiz or Prize offered by promotion of sales) companies for Where a prize or winning, is not in cash, the person while giving the prize shall collect tax on the fair market value of the prize. Tax deductible under this section shall be final tax. Example: A person received prize of Rs. 5,000 (gross) on winning a cross word puzzle. Compute the amount of tax liability on such income for the tax year Solution: Tax on prize on winning a cross word puzzle (Rs. 5,000 x 15%) Rs. 750 Note: It is to be noted that tax liability shall be equal to amount tax required to be deducted, whether tax has been deducted or not. 10. Petroleum products [Section 156A(1) and (2)]: Every person selling petroleum products to a petrol pump operators shall deduct tax from the amount of commission or discount allowed to the operator at the rate of 12%.Amount deductible under this section shall be treated as final tax. Opting out from Tax Regime [Clause (56F) of Part IV of the Second Schedule] In case of petroleum products, the said person paying tax under the Tax Regime of the Ordinance may opt for Normal tax regime [NTR], provided the tax liability under NTR does not fall below 100% of the tax deducted under this section. Example: Ali is operating a petrol pump. Rs. 12,000 Tax 12% on commission on sale of petrol. What will be his tax liability? Solution: In this case tax deductible on commission on sale of petrol is treated as full and final of his tax liability and no other tax is payable by him, however option for equal amount of tax is available under normal tax regime. 11. Brokerage or commission [Section 233(3)]: 12% tax shall be deducted by the principal (being as Federal / Provincial / local Govt., a company or an AOP constituted under law) at the time of payment of commission to agent. If the agent retains Commission or brokerage from any amount remitted by him to the principal, he shall be deemed to have been paid the commission or brokerage by the principal and the principal shall collect advance 12% from the agent. Conceptual Approach to Taxes %

8 Tax rate is 7.5% for advertising agents, u/c 26 of Part II of second schedule. Where any tax is required to be collected from a person as above, such tax shall be the final tax on the income of such person. Opting out from Tax Regime [Clause (56G) of Part IV of the Second Schedule] In case of brokerage or commission, the said person paying tax under the Tax Regime of the Ordinance may opt for Normal tax regime [NTR], provided the tax liability under NTR does not fall below 100% of the tax deducted under this section. Example: Mr. Ahsan earned commission on local business of Rs. 500,000 (gross) during the tax year and incurred expenses of Rs. 100,000 in deriving this income. Compute his tax liability if tax was deductible on commission 12% but was not deducted. Solution: (FTR) Tax liability: Tax required to be deducted on commission (500,000 x 12%) 60,000 In this case tax deductible on commission on sale of petrol is treated as full and final of his tax liability and no other tax is payable by him, however option for equal amount of tax is available under normal tax regime. 12. Goods Transport Vehicles [Section 234(5)] Any person at the time of collecting motor vehicle tax shall also collect advance tax on it, if motor vehicle tax is collected in instalments the advance tax shall also be collected in instalments. Rs. 2 per Kg per annum shall be collected on registered laden weight from the owner of goods transport vehicle. However where the registered laden weight of vehicle is less than 8,120 Kg (equal or more than 8,120 Rs.1,200 per annum), advance tax shall not be collected after a period of 10 years from the date of first registration of vehicle in Pakistan. Where the tax so collected from any person from plying, or hiring out, of such vehicle being owner of goods transport vehicle, the tax so collected shall be the final tax on the income of such person. Example: Calculate the amount of tax on goods transport vehicle (for hiring) in tax year 2015, if the laden weight of vehicle is as follows: - Vehicle registered first time in Pakistan in 2013 with laden weight of 9,000 Kg. - Vehicle registered first time in Pakistan in 2003 with laden weight of 8,200 Kg. - Vehicle registered first time in Pakistan in 2003 with laden weight of 8,000 Kg. Solution: 1. The tax shall be Rs. 18,000 i.e. Re. 2 per Kg. 2. The tax shall be Rs. 1,200 as the goods transport vehicle is more than 10 years old. 3. There is no tax liability as the vehicle after first registration is more than 10 years old. 13. CNG stations (Section 234A): The person preparing the gas consumption bill shall charge 4% of the amount of gas consumption charges and such tax shall constitute final tax and further the taxpayer shall not be entitled to claim any adjustment of withholding tax under any other head. Example: Ali is operating a CNG station. Tax collected on gas consumption charges is Rs. 4,000. What will be his tax liability? Solution: The tax deducted on gas consumption charges is treated as full and final of his tax liability. 390 Conceptual Approach to Taxes

9 14. MINIMUM TAX Sr. Nature of payment Section Rate 1. Minimum tax for companies (except otherwise specified) 2. Minimum tax for individuals & AOP s having annual turnover Rs.50(M) or more in respective tax years 3. Reduced rate of tax u/s 113 are specified in Part IX in the First schedule to the Ordinance. 113 General rate 1% of turnover 113 General rate 1% of turnover 113 Sr. Persons u/c Part III of 2 nd Schedule u/c Minimum tax as the persons turn for the year (1) (2) (3) 1. Distributors of pharmaceutical products, fertilizers, consumer goods including fast moving consumer goods and cigarettes Flour Mills Petroleum agents and distributors who are registered under the STA, 1990; and Rice mills and dealers 2. Motor cycle dealers registered under the STA, Oil marketing companies, Oil refineries, Sui Southern Gas Company Ltd. And SNGPL (for cases whose annual turnover exceeds Rs. 1 billion). Pakistan International Airlines Corporation; and Poultry industry including breeding, boiler production, egg production and poultry feed production. 7 & % % 4. All other cases 1% 4. Minimum tax on builders 113A To be notify later by the Federal Govt. 5. Minimum tax on developers 6. Alternative Corporate Tax 7. Imports of edible and packing material 113B 113C 148(8) 5% 0.2% 2% of the value of land notified by any authority for the purpose of stamp duty Detail given in the explanation of this section 8. Services 153(1) 10% (other than companies) 9. Goods transport services 153(1) 2% 10. Electricity bills (other than companies) 235(4) up to bill Rs. 30,000 Conceptual Approach to Taxes 391

10 Minimum tax on income of certain persons (section 113): 1. To whom applicable A resident company An AOP having turnover of Rs.50 million or above in the tax year 2007 or in any subsequent tax year, or An individual having turnover of Rs. 50 million or above in the tax year 2009 or in any subsequent tax year. 2. When applicable If tax payable (other than tax payable or paid as final tax) is zero or less than minimum tax on turnover because of: Loss for the current of earlier year, Exemption from tax, or Rebates of credits 3. When not applicable This section shall not apply to a company which has declared gross loss before set off of depreciation and other inadmissible expenses. However if the loss is arrived at by setting of depreciation and other inadmissible expenses of by changing accounting pattern, the Commissioner Inland Revenue may ignore such claim and proceed to compute the tax as per historical accounting pattern. 4. Rate of tax 1% or reduced tax rates as the case may be of the turnover. 5. Definition of turnover 6. Facility of carry forward Turnover means: the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise duty or any trade discounts shown on invoices, or bills, derived from the sale of goods, and also excluding any amount taken as deemed income and is assessed as final of the tax liability for which tax is already paid or payable; Gross fee for rendering of services, Gross receipts from contracts and commission excluding chargeable to tax under final tax regime. If the company is member of an AOP then share of company in above amounts of the AOP. (See Example A hereunder) Minimum tax in excess of actual tax liability shall be carried forward and adjusted against the tax liability of subsequent 5 tax years. Facility of carry forward has also been extended to individuals and AOP s from the tax year (See Example B hereunder) Example A: ABC Limited is member of an AOP with 50% share. Sale of AOP for the year is Rs. 100,000 while sale of company for the year is Rs. 50,000 including sales tax of Rs.10,000. What would be the turnover of the company for the purpose of section 113? Solution: Rs. Sales of the company excluding sales tax 40,000 Add: Share in sales of AOP 50,000 Turnover of company for the purpose of section ,000 Example B: Following data relates to ABC (Pvt.) Ltd: Solution: Year Actual tax liability Minimum tax At 1% ,000 (NTR) 50, ,000 (NTR) 55,000 Year 2014 Rs. Tax payable 50,000 (Higher of actual or minimum tax) Year 2015 Tax liability (Higher of actual or minimum tax) 60,000 Less: b/f balance from minimum tax of tax year 2014 for adjustment (5,000) * 55, Conceptual Approach to Taxes

11 * Tax liability cannot be less than the minimum tax for the year i.e. Rs. 55,000. Remaining minimum tax shall be carried forward i.e. 40,000-5,000 = Rs. 35, Minimum tax on builders [U/s 113A] The entirely newly substituted section provides that minimum tax on builders. A person that derives income from the business of construction and sale of residential, commercial or other buildings, shall pay minimum tax that shall be notify later by the Federal Government. This section shall not have effect till the 30 th June, Minimum tax on developers [U/s 113B] The entirely newly substituted section provides that minimum tax on developers. A person who derives income from the business of development and sale of residential, commercial or other plots, shall pay minimum tax 2% of the value of land notified by any authority for the purpose of stamp duty. 17. Alternative Corporate Tax [U/s 113C] (1) Notwithstanding anything contained in this Ordinance, for tax year 2014 & onwards, tax payable by a company shall be higher of the corporate tax or alternative corporate tax. (2) For the purposes of this section Accounting income means the accounting profit before tax for the tax year, as disclosed in the financial statements or as adjusted under sub section (7) or sub section (11) excluding share from the Associate recognized under equity method of accounting; Alternative corporate tax means the tax at a rate of 17% of a sum equal to accounting income less the amount as specified in sub section (8) & determined in accordance with provisions of sub section (7) hereinafter; Corporate tax means the total tax payable by the Company in respect of income which is subject to tax under Division II of Part I of the including tax payable on account of minimum tax, final taxes payable, under any of the provisions of this Ordinance but not including those mentioned in section 8, 161 and 162 and any amount charged or paid on account of default surcharge or penalty & the tax payable under this section. (3) The sum equal to accounting income, less any amount to be excluded there from under sub section (8) shall be treated as taxable income for the purpose of this section; (4) The excess of alternative corporate tax paid over the corporate tax payable for the tax year shall be carried the tax payable under Schedule, for following; (5) If the excess tax, as mentioned in sub section (4) is not wholly adjusted, the amount not adjusted shall be carried forward to the following tax year & adjusted as specified in sub section (4) in that year and so on, but the said excess cannot be carried forward to more than ten (10) tax years immediately succeeding the tax year for which the excess was first computed; Explanation: For the purposes of this sub section the mechanism for adjustment of excess of alternative corporate tax over corporate tax, specified in this section, shall not prejudice or affect the entitlement of the taxpayer regarding carrying forward & adjustment of minimum tax referred to in section 113 of this Ordinance. (6) If corporate tax or alternative corporate tax is enhanced or reduced as a result of any amendment or as a result of any order under the Ordinance, the excess amount to be carried forward shall be reduced or enhances accordingly. (7) For the purposes of determining the accounting income expenses shall be apportioned between the amount to be excluded from accounting income under sub section (8) & the amount to be treated as taxable income under sub section (3). (8) The following amount shall be excluded from accounting income for the purposes of computing alternative corporate tax:- (i) Exempt income; (ii) Income subject to tax under section 37A & final tax chargeable under sub section (7) of section 148, section 150, sub section (3) of section 233 (iii) Income subject to tax credit u/s 65D & 65E. (iv) (v) Income subject to tax credit u/s 100C and Income of the Company subject to clause (18A) of Part II of the 2 nd schedule. Conceptual Approach to Taxes 393

12 (9) The provisions of this section shall not apply to taxpayers chargeable to tax in accordance with the provisions contained in the fourth, fifth & seventh schedules. (10) Tax credit u/s 65B shall be allowed against alternative corporate tax. (11) The commissioner may make adjustments & proceeds to compute accounting income as per historical accounting pattern after providing opportunity of being heard. 18. Tax paid on import of edible oil and packing material (section 148): The tax collected from a person on the import of edible oil and packing material for a tax year shall be minimum tax. Edible oil: Edible oils includes crude oil, imported as raw material for manufacture of ghee or cooking oil. Example: A company is engaged in the business of sale of cooking oil by manufacturing. Tax deducted on import of edible oil is Rs. 10,000. Compute the income tax liability of the company from following data assuming that all the expenses are admissible: Rs. Sales 40,000 Cost of sales 20,000 Other operating expenses 10,000 Solution Rs. Sales 40,000 Cost of sales 20,000 Gross profit 20,000 Other operating expenses 10,000 Taxable income 10,000 Computation of tax liability: Higher of: Tax on Rs. 33% 3,300 OR Tax deducted on import of Edible oils 10,000 Tax liability 10, Tax deducted on services (section 153): a. For a person other than a company, tax deductible on gross amount of 10% u/s 153 shall be minimum tax. b. If the person to whom the services are provided is not required to deduct tax u/s 153 then minimum tax shall not be applicable. Example: Compute the tax liability of Mr. A from following information: 1. Tax liability under NTR 15, Tax deducted on services u/s ,000 Solution: As the tax liability under NTR is higher than tax deducted on services, hence tax liability of the Tax payer is Rs.15, Advance tax on Electric bills (section 235(4)): For a person other than a company tax collected on commercial or industrial electric bill up to Rs. 30,000 shall be treated as minimum tax. In case of a company or where the amount of bill is more than Rs. 30,000 then the tax collected shall not be treated as minimum tax and shall be adjustable / refundable against the tax liability of the person. Example: Compute the tax liability of Mr. B from following information: 1. Tax liability under NTR 10, Tax deducted on electric bills 15,000 Solution: Tax liability of the tax payer shall be higher of Rs. 10,000 or Rs. 15, Conceptual Approach to Taxes

13 21. Tax on certain payments to non-residents [Section 6] (1) Subject to this Ordinance, a tax shall be imposed, at the rate specified in Division IV of Part I of the First Schedule, on every non- resident person who receives any Pakistan-source royalty or fee for technical services. (2) The tax imposed under sub-section (1) on a non-resident person shall be computed by applying the relevant rate of tax to the gross amount of the royalty or fee for technical services. (3) This section shall not apply to - any royalty where the property or right giving rise to the royalty is effectively connected with a permanent establishment in Pakistan of the non-resident person; any fee for technical services where the services giving rise to the fee are rendered through a permanent establishment in Pakistan of the non-resident person; or any royalty or fee for technical services that is exempt from tax under this Ordinance. (4) Any Pakistani-source royalty or fee for technical services received by a non-resident person to which this section does not apply by virtue of clause or of sub-section (3) shall be treated as income from business attributable to the permanent establishment in Pakistan of the person. Income from royalty [Rule 18] Fee for technical services [Rule 19] The income of a non-resident person by way of royalty received from a resident person or a PE in Pakistan of a nonresident person shall be- 1. Royalty received as per agreement made before covered under NTR: in the case a royalty received in pursuance of an agreement made before , or an agreement made on or after the said date the proposal in respect of which was approved by the Government before the said date, the gross amount of the royalty less the deductions allowed u/s 40; or 2. Where final tax regime does not apply OR Royalty received in pursuance to any other agreement: In any other case where FTR does not apply, the gross amount of the royalty less the following expenditure: Any expenditure incurred in Pakistan in earning such income and in respect of any work done in pursuance of such agreement; and Any expenditure incurred outside Pakistan in pursuance of such agreement not exceeding 10%of gross amount of royalty. No expenses shall be allowed where royalty is fully covered under FTR. Same as in column except that royalty shall be replaced by the words fee for technical services 1. Same as in column 1 except that royalty shall be replaced by the words fee received: 2. Fee for technical services received as per agreement made on or after but before covered under NTR: In the case of fee received in pursuance of an agreement made on or after but before , the gross amount of the fee less the deductions allowed u/s 40 with a maximum total deduction equal to 20% of the gross amount of such fee; or 3. Fee for technical services received covered under NTR on which FTR is not applicable: In any other case to which FTR does not apply, the gross amount of fee for technical services less the following expenditures; Any expenditure incurred in Pakistan to earn such fee for technical services, wherever paid. Any expenditure incurred outside Pakistan in pursuance of such agreement not exceeding10% of gross amount of fee for technical services. Provided that a non-resident may opt for taxation under final tax regime by filing a written declaration/ option within 15 days of the commencement of contract. Such option shall remain operative till completion of the said contract. No expenses shall be allowed where fee for technical service is fully covered under FTR. Conceptual Approach to Taxes 395

14 Tax on shipping income of a non-resident person [Section 7] Tax on air transport income of a non-resident person [Section 7] A tax shall be imposed at 8% on the gross amount (except exempt amount)on every non-resident person carrying on the business of operating ships as the owner or charterer in respect of the gross amount received or receivable (whether in or out of Pakistan) for the carriage of passengers, livestock, mail or goods embarked in Pakistan and outside Pakistan. Non-resident ship owner or charterer [Section 143] 1. Before the departure of a ship owned or chartered by a non-resident person from any port in Pakistan, the master of the ship shall furnish to the Commissioner Inland Revenue a return showing the gross amount in respect of the ship. 2. Where the master of a ship has furnished a return, the Commissioner Inland Revenue shall, after calling for such particulars, accounts or documents, determine the amount of tax due in respect of the ship and shall notify the master in writing the amount payable within specified time. 3. The master of a ship shall be liable for the tax as if it were tax due under an assessment order. 4. Where the Commissioner Inland Revenue is satisfied that the master of a ship or non-resident owner or charterer of the ship is unable to furnish the return required before the departure of the ship from a port in Pakistan, the Commissioner Inland Revenue may allow the return to be furnished within 30 days of departure of the ship andon satisfactory arrangements for the payment of the tax due in respect of the ship. 5. The Collector of Customs or other authorised officer shall not grant a port clearance for a ship owned or chartered by a non-resident person until tax due in respect of the ship has been paid or arrangements payment have been made to their satisfaction. Same as given in first column except that rate of tax shall be 3% and ships shall be replaced by air transport. Non-resident aircraft owner or charterer [Section 144] 1. A non-resident owner his agent or charterer of an aircraft liable for tax shall furnish to the Commissioner Inland Revenue within 45 days from the last day of each quarter of the financial year quarterly returns showing the gross amount. 2. Same as given in first column except that in place of master of the ship the non-resident agent or charterer shall be replaced. 3. Where the tax is not paid within 3 months of service of the notice, the Commissioner Inland Revenue may issue a certificate to the authority by whom clearance may be granted to the aircraft operated by the non-resident person and until the tax has been paid such authority shall refuse clearance from any airport in Pakistan to any aircraft owned or chartered by the non-resident. Return to be furnished by a non resident ship owner or charterer [RULE 37] Return to be furnished by a non resident aircraft owner or charterer [RULE 38] A return required to be furnished u/s 143 shall be accompanied by such documents, statements and certificates as specified in the form, and in the Ordinance, these rules and circulars issued under the Ordinance and may be furnished by any of the methods specified in rules 73 & 74. Same as given in first column U/R 37 except that section 143 shall be replaced by section Conceptual Approach to Taxes

15 MULTIPLE CHOICE QUESTIONS Q.1 Dividend received by a company is treated As a separate block of income Under NTR as SBI Under FTR Both a and c Q.2 Gross dividend received is charged to tax at the rate of 5 % 7.5% 10% 20% Q.3 Fee for technical services received by a non resident within Pakistan is charged on the gross amount at the rate of 5% 10% 20% None of the above Q.4 A non resident person or his authorized agent in case of shipping income shall furnish a return to the Commissioner Inland Revenue within 60 days 30 days 15 days 40 days from the end of December and June in every financial year. Q.5 Where a non-resident person derives income from royalty he shall pay tax on gross amount at the rate of 15% 10% 20% None of the above Q.6 Maximum expenses incurred outside Pakistan in case of royalty which is chargeable to tax other than u/s 6(2) shall be 15% 10% 20% 5% of the gross amount of royalty income Q.7 Tax rate on import of edible oils including crude oil imported as raw material for the manufacture of ghee of cooking oil is 2% 1% 5% 3% Q.8 The tax under section 113A on builders shall be treated as. Minimum tax tax Fixed tax None of the above Conceptual Approach to Taxes 397

16 Q.9 The tax under section 113B on developers shall be treated as. Fixed tax tax Minimum tax None of above Q.10 A person who pays profit on debt, on account or deposit maintained by a banking company or financial institution shall deduct tax at source at rate of 10% 15% 5% None of above Q.11 Tax rate applicable to the contract with a T.V channel for advertisement services is 2% 6% 3% 1% on the gross amount payable Q.12 Tax deduction on payment to a resident person on account of sale of edible oil is at 1.5% 3.5% 6% None of the above Q.13 Goods supplied to an exporter under an inland back-to-back letter of credit is taxable at the rate of 2% 5% 1% None of the above Q.14 Tax deducted on imported plant & machinery for own use shall be treated under. NTR FTR Minimum tax Both b and c Q.15 Prizes and winnings are covered under NTR FTR as SBI As a separate block Both b and c Q.16 Prize on prize bond is taxable at the rate of 20% 15% 10 % 5% of the gross amount paid. Q.17 Prize on winning a quiz is taxable at the rate of 20% 398 Conceptual Approach to Taxes

17 15% 10% 5% of the gross amount paid. Q.18 A person selling petroleum products to a petrol pump operator is required to deduct tax from the amount of commission or discount allowed at the rate of. 15% 12% 20% None of the above Q.19 The tax rate applicable to the indenting agent receiving commission or brokerage is. 12% 5% 5% None of the above Q.20 Owner of goods transport vehicles shall pay tax on motor vehicles on the basis of. taxable income laden weight number of wheals none of above Q.21 Where the income is taxable under it shall not be chargeable to tax under any head of income while computing the taxable income of the person. FTR SBI under NTR NTR all of above Q.22 The person deriving income covered under shall be allowed deduction for expenditure incurred in deriving such income. FTR SBI under NTR NTR all of above Q.23 Amount of tax paid by the owner of the goods transport vehicle having registered laden weight from 8,120 kg to 14,999 kg is taxable under. FTR NTR SBI None of the above Q.24 Amount of tax paid by the owner of the goods transport vehicle having registered laden weight above 59,999 kg is taxable under. FTR NTR SBI None of the above Q.25 The amount of tax per annum on the goods transport vehicle having registered laden weight more than 5,120 kg after 10 years of registration will be Rs.. Conceptual Approach to Taxes 399

18 Nil 1,200 7,200 None of the above Q.26 Turnover tax under section 113 may be levied at the rate of. 0.50% 1% 0.2% Any of the above Q.27 The turnover tax in excess of NTR shall be adjusted against the normal tax liability for the immediately succeeding the years for maximum period of upto the extent that the NTR liability of the following years should not be less than the turnover tax of the following years. 6 years 5 years 10 years 3 years Q.28 Turnover tax is not applicable where there is in a tax year before setting off of depreciation and inadmissible expenses. gross loss net loss net profit gross profit Q.29 The general tax rate of 10% is applicable on dividend received by. individual company AOP All of the above Q.30 Tax rate on dividend income is applied on the. net amount gross amount amount after zakat deduction none of above Q.31 Dividend income by an individual from a power generation company shall be % covered under FTR Q.32 Where applicable tax at source is deducted by a company at the time of making payment to an AOP taxpayer for the same shall deemed as final of tax in respect of such income. dividend sale of goods commission all of the above Q.33 Where the non-resident is likely to leave Pakistan, who has earned income under fee for technical services, within the period of one year, he shall fulfil all those requirements as are applicable to the. 400 Conceptual Approach to Taxes

19 deceased person resident person discontinuance of business none of above Q.34 The amount paid as tax by a non-resident person on his income as royalty shall fully him from. tax liability business liability personal loan all of above Q.35 Fee for technical services which are rendered through a Permanent Establishment of the non-resident will be % of gross amount received Q.36 means transfer of rights or granting of a licence in respect of a patent, invention, model, design, secret process or formula, trade mark or similar property. dividend fee for technical services royalty all of above Q.37 includes the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. dividend fee for technical services royalty all of above Q.38 Tax on imports by the importer at the time of clearance from custom authorities in respect of fertilizer for manufacturing purpose shall be treated as. final tax adjustable custom duty none of above Q.39 Tax is deducted at % of the gross amount of profit on debt as reduced by Zakat under Zakat and Ushr Ordinance Q.40 A person shall be not required to furnish the return of income when all the incomes derived by him in the tax year are covered under. FTR SBI under NTR NTR all of above Conceptual Approach to Taxes 401

20 Q.41 Turnover tax is applicable on on fulfilment of certain conditions. companies individuals AOP all of above Q.42 While making payment in respect of brokerage or commission to the taxpayers, prescribed persons making payment are required to. deduct tax at source deduct service charges inform to SECP all of above Q.43 Tax deducted on brokerage or commission received by an agent is treated of the agent for such income. normal tax liability final tax liability last tax liability all of above Q.44 Where the taxpayer is an owner of goods transport vehicles, the tax deducted at source excluding motor vehicle tax shall be treated as. final tax last tax minimum tax None of the above MULTIPLE CHOICE ANSWERS Conceptual Approach to Taxes

21 PRACTICE QUESTIONS FOR CA MOD F AND ICMA STUDENTS You are provided with the following data of financial results of some taxpayers relevant to the tax year 2016 in order to compute tax liability: 1. Company 1 achieved the turnover of Rs. 300 million during the year. Taxable income was computed at Rs.2,000,000. The taxable income of the company includes interest income amounting to Rs. 500, Company 2 although achieved the gross sales volume of Rs. 400 million, however, this year the company could not achieve profits and fetch losses to the tune of Rs. 20 million. It is worth mentioning that the products of the company are subject to levy of sales tax and excise duty. During the year, the company charges sales tax amounting to Rs.45 million after allowing a discount of Rs. 30 million. Whereas the company has paid excise duty amounting to Rs. 20 million on the production of excisable goods. 3. Company 3 is a non-resident company and the company also suffered losses aggregating to Rs. 40 million as compared to sales of 3 billion. 4. Company 4 is engaged in the supply of goods and execution of contracts. During the year, the company only executed contract in FATA and due to non existence of banking system in FATA, all these sums are received in cash to the company. Total contract receipts are Rs. 400 million. Total turnover of supplies made in Pakistan aggregates to Rs.200 million. Whereas aggregate overall profit of the company is Rs. 7 million. It is worth mentioning that the company assessed carry forward losses for the last six years aggregates to Rs. 9 million. The company paid commission to its dealers amounting to Rs. 7 million. 5. Company 5 is incorporated in July, Total paid up capital of the company is Rs. 20 million and during the year, the company achieved a sales volume of Rs. 200 million. The company earned a profit of Rs. 1,800,000 during its first year of operation. 6. Company 6 is incorporated in September, Total paid up capital of the company is Rs. 15 million and during the year, the company achieved a sales volume of Rs. 200 million. The company has gross loss before depreciation and inadmissible expenses Rs. 5 million during its first year of operation. Compute the tax liability of the aforesaid taxpayer for the tax year Solution:Computation of tax liability: A. Under minimum tax: Rs. Rs. Rs. Rs. Rs. Rs. Gross turnover 300,000, ,000,000 3,000,000, ,000, ,000, ,000,000 Less: sales tax - 45,000, Less: discount - 30,000, Net turnover 300,000, ,000,000 3,000,000, ,000, ,000, ,000,000 Tax on 1% 3,000,000 3,250,000-6,000,000 2,000,000 - B. Under Normal tax: Taxable income 2,000,000 (20,000,000) (40,000,000) 7,000,000 1,800,000 (5,000,000) Carry forward of losses - - (9,000,000) - - Income 2,000,000 (20,000,000) (40,000,000) (2,000,000) 1,800,000 (5,000,000) 32% 640, ,000 - (25% for small company) Tax liability (Higher of A or B) 3,000,000 3,250,000-6,000,000 2,000,000 - Definition of company includes the following: Banking company, public company, private company, co-operative society, finance society, assets management company, financial institutions, HBFC, investment company, leasing company, mutual fund, non-banking finance company, venture capital company, real estate investment trust scheme and real estate investment trust management company. Rate of tax: 1. The rate of tax imposed on the taxable income of a company for the tax year 2016 is 32%. 2. The rate of tax imposed on the taxable income of a small company shall be 25%. 3. The rate of tax imposed on the taxable income of a Modaraba shall be 25% excluding income covered under FTR. Conceptual Approach to Taxes 403