Income Tax

INCOME TAX (Tax Year 2011)
SHORT NOTES OF INCOME TAX

By: Kashif Nawaz
Under the Supervision of :
Prof. Imran Shahzad Sb. ACA
Topics Covered:
1. Salary 2. Employee share scheme 3. Income from property 4. Capital Gains 5. Final Tax Regime 6. Tax Credit 7. Income From Business 8. Tax on Tax 9. Losses 10. Minimum Tax 11. AOP
!!!When you truly believe that you deserve success, your mind will generate ways to achieve !!!!!!!
By: Kashif Nawaz Jakhar
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PREFACE
Al-Hamd-O-Lillah, the 1st addition of Short Notes on Income Tax has been completed. These notes have been prepared under the senior guidance of my dearest teacher Mr. Imran Shehzad (ACA), who guided me through the way in the preparation of such quality notes for the students of Module-C. In these note, I covered almost all the material areas covering upto 50 to 60 marks in the paper including numerical calculations and fair presentations of the conceptual queries frequently asked by the ICAP-Examiner. These notes include: a) Salary b) Income from property c) Income from business d) Capital Gain (37 & 37A) e) Income from other sources f) Final Tax Regime I try to retain the focus of the ICAP-examiner in paper construction relative to the marks allocation as: Topics Individual or AOP Conceptual queries Marks 20-25 30-35
I recommend to study these notes with reference to INCOME TAX & SALES TAX Khalid Petiwalas Notes.
I hope my efforts will help you to retain maximum marks in your examination. Utmost efforts have been made to make these notes free from errors, yet there is always a room for improvement. Any suggestion from you will highly be appreciated. Kashif Nawaz
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TABLE OF CONTENTS
Sr. no. Topics
1 2 3
Page no. Sr. no. Topics

5 9 11
12 13 14
Page no.
35 36 38
Basic concepts Salary Provident Fund
Bad Debts SPV Methods of Accounting Minimum Tax
Employee Share Scheme Capital Gain
12
15
39
13
16
Losses ( concepts ) Losses
42
Final Tax Regime Tax Credit
15
17
44
18
18
Group Taxation 48 & Group Relief AOP 52
Income From Business In-admissible Expenses Depreciation
21
19
24
20
Tax on Tax
56
10
26
21
Share from AOP
58
11
Amortization
34
22
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COMPUTATION OF TAX LIABILITY(Under NTR)

Profile of Assessee Computation of Taxable Income Computation of Taxable Liability Tax on Taxable Income Name: NTN: A) Personal Status: Salaried Non-Salaried AOP Company iv) B) Residential Status: Resident Non-Resident Pak and Foreign Source Income v) i) ii) iii) Salary (u/s 12) (Income from Property) * Income from business a) Non-Speculative b) Speculative Capital gains Other sources: Less : WWF WWP Zakat Donations u/c 61 Total Income (Excluding share from AOP) (relevant for salaried / non salaried) Add: Share from AOP Total Taxable Income (relevent for IPDP) xxx xxxxx Tax Payable/Refundable xxxx xxx xxx xxx xxx Less: Advance Tax Collection of Tax Category-B xxx N/A xxx xxx xxx xxx xxx Less: Category-A (under 1st Schedule) Tax Credits Less: Senior Citizen Allowance Full Time Teacher Allowance Foreign Tax Credit Average Relief (IPDP) Investment in Shares Contribution in Pension Fund Donation Profit on Debt
C) Tax Year: Normal Special Transitional
xxxx xxxxx Category-C
Deduction of Tax Advance Tax u/s 147
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INCOME TAX ( Tax year 2011) TAX LAWS
Income Tax Ordinance

( Ref. book page # 303 )
Income Tax rules
Ordinance
Schedule
Explanation
STATUS
Personal Status
Residential Status
Individual
AOP ( 25%)
Company ( 35%)
Resident
Non Resident
Salaried
Non Salaried
Salaried Person :
Total Salary Income . X 100=If answer is >50%,then salaried person. Total Taxable Income
AOP ( Association of person ) 25% ( Ref. book page # 4 )

Resident when control and management of affairs is situated wholly or partially in Pakistan. AOP may be a * firm * joint venture * Hindu undivided family * but does not include a company.
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Company : 35% ( Ref. book page # 3) (1) private (2) Public (3) Banking
Company incorporated in Pakistan , provincial govt. , and local govt. are resident Other companies are resident if control and management affairs are situated wholly in Pakistan.
Resident : ( Ref. book page # 3 )

183 or more days Half day consider full day NOTE: Only transit days are excluded.
Computation of Taxable income

Income is classified as by law Geographical Source of Income
1) Pakistan source Income 2) Foreign source income
Heads of income Regimes

1) Normal 2) Final
SCOPE OF TAXABLE INCOME ( Ref. book page # 4) 1. Resident ( Ref. book page # 36 ) Both incomes are taxable 2. Non resident ( Ref. book page # 36 ) Only Pakistan source income is taxable
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3. Foreign source income of a short term resident (Ref.page#3) Pakistan source income is taxable Foreign source income exempt which is not brought / received in Pakistan He is in Pakistan only for employment not for business Present in Pakistan for not exceeding 3 years 4. Foreign source income of a Returning Expatriate (page # 4) non resident for last 4 years National of Pakistan An individual Income ( current & next year exempt )
TAX YEAR
Normal Tax Year
Special Tax Year
Transitional Tax Year
1july 02------30june 03 A period of 12 months ending on 30th June
1-10-2008-to 30-09-2009
A period of 12 months ending on any date other than 30th June
Whenever there is a change in tax year the period in between the normal tax year and special tax year is treat as transitional tax year
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HEADS OF INCOME
1. 2. 3. 4. 5.
( Ref. My register page # 26 )
Salary Income from property income from salary capital gain income from other sources ( Ref. book page # 21 ) relationship of employee and employer Cash basis From property : ( taxed on accrual basis )( Ref. book page # 41 ) Rent from immoveable property ( Land & building ) Forfeited deposit against sale of immovable Property Only for that year in which Forfeited Advance unadjusted Rent {Unadjusted amount X 1/10} in that year Signing amount I. Mod of payment is irrelevant II. Any benefit given by tenant to his landlord is rent
SALARY : ( taxed on receipt basis ) Income

Note :
Income from business

( Ref. page # 45 )
Capital Gain ( gain from disposal of capital assets ) Income from other sources
Shares , coins , postage stamp, jewelry
Trade , manufacturing . any profession
If any income does not fall under any other heads . then it will be under the head of income from other sources. e.g., Dividend
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( Ref. book page # 21 ) Any kind of benefit transfer or given by employer to employee will be taxed and it will be add in the salary income of the employee.
SALARY
Components of salary
Basic Salary
Perquisites
Allowances
Others benefits
Terminal benefits
T.T
Accommodation Conveyance Medical facility
H.R.Allowance ( T.T ) Conveyance allowance ( T.T ) Medical allowance (exempt upto 10% of B.S)
Loans U. bills Comp. shares TA / DA
Gratuity Provident fund Pension Golden hand Shake
Perquisites ( Ref. book page # 22 )
1) ACCOMMODATION :
45% of BS or Actual Expense of employer(rent) ( whichever is higher = add in salary ) 2) Conveyance: ( Ref. book page # 24 ) Only for office use ( T.E )
Owned ( cost ) I. Personal II. Personal + Business use Leased ( FMV ) I. Personal II. Personal + Business use
( 10% ) ( 5% ) ( 10% ) ( 5% )
3) Medical Facility : ( Ref. book page # 25 ) a) Facility Given

i. ii. Under the contract Not Under the Contract ( T.E ) (T.T )
b) Re-imbursement c) Insurance
Amount contributed by employer will be added in salary
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4) Medical facility & medical Allowance both given
i. ii. Under the contract a. Facility ( T.E ) b. Allowance ( T.T ) Not Under the contract a. Facility ( T.T ) b. Allowance (Exempt upto 10% of BS )
5) Asset is given to employee Permanently 6) Marginal cost:
FMV of Asset payment by employee = add in salary Nothing will be added in salary. Because no additional cost incurred by the employer
Other Benefits : Loan provided by employer
( Ref. book page # 22 ) point (h).
Loan X 13% X time = XXX add in salary Note : if any interest paid by employee then that amount will be deduct from above answer . and the remaining will be added in salary.
Terminal Benefits 1. Pension ( Exempt ) ( Ref. book page # 24 ) a. In case of 2 or more than 2 pensions
( higher will be exempt) b. In case of re-employment with same employer or group
No amount will be exempt
2. Gratuity ( Ref. book page # 24 ) a. Approved I. Government II. Fund III. Scheme b. Unapproved
( T.E ) ( T.E ) (exempt upto Rs.200,000 )
Rs. 75000 or 50% of gratuity amount ( lower will be exempt)
Note : unapproved conditions or exemptions will be not applied on the following Cases.
i. ii. iii. Non employee Non resident Not received in Pakistan Re-employment
iv.
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3. Provident Fund. ( Ref. book page # 26) = Employer + employee contribution
Unrecognized PF Annual X Withdrawal Employer Contribution + interest = add in salary Recognized PF ? X
e.g
Employer contribution (p.a) 10% X ( BS + DA ) Whichever Or 100,000 is lower Interest on Acc. Balance (p.a ) 1/3 X ( BS + DA ) Whichever Or 16% X Acc.Balance is lower
Rs.
XXX (xxx) XXX (XXX)
Rs.
XXX
add in salary
XXX
add in salary
Note : Acc. Balance = Employee cont. + Employer Cont. + interest
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EMPLYEES SHARE SCHEME
60 Capital Gain Rs.20 40 Salary Rs.10 30 Benefit given by employer or company Benefit given by Market
( Ref. book page # 29 ) ( Ref. my register page # 50 )
Example : Persons 2010 Kashif Option sale = Rs.5000 Rameez Farhan Option sale of 200 shares @ sale price Rs. 3000 On march 2010. FMV = Rs. 50/share Offer value = Rs. 30/share No. of share = 500 shares Advance = 2 per share On march 2011 FMV= Rs.40/ share
2011
2012
Acquisition of shares Sale = Rs. 70 Balance(300) Acquisition Sale Rs.60/ share
SOLUTON:
Persons Kashif Rameez Salary Capital Gain Salary Capital Gain X Farhan Salary Capital Gain 2600
{3000-(200 X 2 )
2010 4000 X X
2011 X X 5000 (500 X 10 ) X 3000 (300 X 10 ) 6000 {300 X (60-40)}
2012 X X X SP-FMV=70-40=30 500 X 30 = 15000 X X
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CAPITAL GAINS
Definition: The gain from disposal of capital assets. Gain: o Sale price or FMV (whichever is higher) o Cost of Disposal ( selling + purchase cost ) Formula : SP/ FMV --- Cost of Disposal
Note After one year 25% of gain is Exempt. So 75% of gain is taxable {ref. page no. 45 (1.4)}
Non recognition rule: ( Ref. book page # 46 ) under the following conditions income is not taxed. 1) Inheritance 2) Gift 3) To transfer to a spouse 4) In case of dissolution of a company ASSETS whose Gain is Taxable But no treatment of loss ( Ref. book page # 46 ) 1) Jewelry 2) Coins 3) Medallions 4) Postage stamp 5) Sculpture Disposal : Means Sale Transfer Destroyed Gift Relinquished
etc
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Capital Assets :
These are not capital assets o Immovable o Intangible o Depreciable o Stock-in-trade o Other movables ( cars ) These are Capital Assets o Shares o Debentures o Shares of Private company o Shares of AOP o Membership cards of stock exchange SPECIFIED CAPITAL ASSETS ( Under Section 37A) ( Ref. book page # 46 ) Shares of public limited company Redeemable debentures Modaraba certificates PTC vouchers Derivatives Note If these assets sold With in 6 months With in one year After one year = 10% of gain is taxable = 7.5% of gain is taxable = No tax
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Final Tax Regimes

Regime: Traditions 1. NTR ( normal Tax Regime ) 2. FTR ( Final Tax Regime )
1. NTR :
Just add the income on the basis of persons and applied tax.
PERSONS I. Individual Salaried Non Salaried II. AOP 25% III. Company 35% Incomes should be under there related head of incomes Revenue Expense = Income Sale price purchase price = income Return file in case of NTR. 2. FTR :
No expenses are allowed e.g. Revenue = income No heads of incomes Tax rates are independents for persons No loss Income is Tax on gross basis Statement file in case of FTR.
Note
Dividend fallen under FTR for o Individual o AOP Dividend fallen under NTR for o Company so dividend will be under the head of income from business in case of banking business.
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Important Terms
Deduction Of Tax Collection Of Tax Advance Tax Final Tax 1. Deduction Of Tax: Deduct from Income Payer will deduct the Tax in case of deducting authority Income over which Deduction of Tax Applied
Supply of Goods , Dividend , Services , Price winning , Salary , Export
2. Collection Of Tax :
Collect from expense Services provider will collect the tax Expenses over which Collection of tax applied Cell phone payment , imports
D I C E = = = = Deduction from Income Collection from Expense
Formula to Remember
3. Advance Tax : ( NTR ) 4. Final Tax :

( FTR )
The items which fall under NTR ( according to law ). So the tax deduct or collect on such items is Advance tax The items which fall under FTR ( according to law ). So the tax deduct or collect on such items is Final tax.
Withholding TAX
Aisa tax ho kisi bhi source say collect ya deduct hova hoo.
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Table For understanding ( book Page 54)

Persons Supply Contracts Trading Manufacturing Individual/ AOP FTR FTR FTR Unlisted companies FTR NTR FTR listed companies NTR NTR NTR
Retailers ( sale goods for final consumptions )

Individual / AOP
Turnover < 5 million
Turnover > 5 millions
Option to pay tax. @.5% of Sale as Final Tax. Compulsory to pay as final tax
Condition
Turnover > 5 m but < 10 m Turnover > 10 m
Rate of Tax
Rs.25000 + .5% of turnover > 5 m Rs.25000 + .75% of Turnover > 10 m
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TAX CREDIT
Tax liability Less: Senior citizen allowance ( Ref. book page # 10 ) Less: Full time teacher allowance ( Ref. book page # 11 ) Less: Foreign Tax Credit ( Ref. book page # 12 ) Less: Less: Less: Less: Investment in shares Pension fund Donation Profit on debt
( Ref. book page # 16) ( Ref. book page # 15 ) ( Ref. book page # 13 ) ( Ref. book page # 15 )
Rs. XXXX (xxx) (xxx) (xxx) XXXX (xxx) (xxx) (xxx) (xxx) XXXX (xxx) XXXX (XXXX)
Less: Advance Tax Tax Payable or Tax Refundable (negative figure)
Note
Lower
Invest. In shares Pension Fund 10 % 20 % 300,000 500,000
Donation 30 % ------
Profit on debt 50 % 750,000
% of taxable income
FORMULA :
TAX liability . Taxable Income X Lower = Tax credit
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Senior Citizen Allowance : ( Ref. book page # 10 ) Age 60 years or more Taxable income does not exceed Rs. 10,00,000 Then his tax liability shall be reduced by 50%. Full Time Teacher Allowance : ( Ref. book page # 11 ) A full time teacher ; or A researcher of a recognized non-profit educational or research institution including government training and research institution . Then his tax payable shall be reduce by 75%. Formula : Taxable salary(as F.T.T) X Tax payable X 75% = Taxable Income Where : After deducting senior F.T.T = Full time Teacher
citizen allowance
Foreign Tax Credit : ( Ref. book page # 12 ) If the foreign source income of a resident person is taxable in Pakistan then the taxpayer shall be allowed tax credit in respect of foreign income tax paid by him as lower of : Foreign income tax paid; and Pakistan tax payable in respect of foreign source income at average rate of tax. Formula : Tax payable(Note 1) X Foreign source income = xxxx Taxable Income Tax paid in foreign Country = xxxx Note 1 :
Tax Payable Less: Senior citizen allowance
xxxxx
(xxxxx) Less: Full time Teacher allowance (xxxxx) Tax Payable ( Note 1 ) xxxxxx
Lower will be deducted from tax payable
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INVESTMENT IN SHARES : ( Ref. book page # 15 ) Shares must be of listed companies Must be original allottee Did not dispose in one year DONATION : ( Ref. book page # 13 ) Approves Institution ( tax Department ) Govt. hospital / Govt. university Not trough CASH May be direct or by cheque. CONTRIBUTION IN PENSION FUND : Eligible person (u/s 19A ) PF must be approved
Profit on debt: Or Allowance for Mark up paid Loan for house build. Loan from bank or financial institution
(Ref. book page # 15 )
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INCOME FROM BUSINESS
(Income Deduction = T.Income)
Taxable
Income
( 5 % discussion)
Deduction
( 95 % Discussion )
Exempt
Non speculative
Speculative
WE discuss about it: 1: Definition 2: Losses
Special
(Separate Calculation)
Allowed (20% discussion) Or ( Admissible )
Dis-Allowed (80% discussion) Or ( inadmissible )
Depreciation
Amortization
Pre-commencement
Research & Development
Without any condition e.g. * Tax * Personal expenditure
Conditionally e.g. * salary in certain condition paid through cash * Tax is deducted
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Example for Allowed and disallowed Expenses !!!!!!!! Income statement according to IAS !!!!!! Purchase Opening Stock Factory Salary (10) Depreciation (70) Income Tax Admin salary Profit 300 100 50 50 40 30 500 1070 1070 Sales Closing Stock Dividend 1000 50 20
!! Income statement according to Income Tax Ordinance 2001 !! Purchase Opening Stock Factory Salary Depreciation Admin salary Profit 300 100 40 70 30 510 1050 1050 Sales Closing Stock 1000 50
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Computation OF Taxable Income : Rs. Accounting Profit Add: Disallowed Expenses Salary Depreciation Income tax Less: Allowed Expenses: Dividend Income Depreciation Taxable Income SECTION. 20. ALLOWED EXPENSES ( Ref. book page # 82 ) All expenses incurred for business. e.g.
FTR
Rs. 500
10 50 40 20 70
100
(90) 510
Common Expenses
NTR
500,000 Expenses 333333 27778 16667
400,000 Expenses 266667 22222 13333
=900,000 (turnover) Expenses
600,000 50,000 30,000
purchases salary depreciation
Income under FTR ( no expenses allowed ) = Rs. 500,000 Income under NTR ( expenses are allowed ) = Rs. 337,778 Formula for calculate Expense: Sale(under NTR) X Expense = xxxx Total Turnover

Section . 21:
In-Admissible Expenses
Not Allowed Expenses:
Following expenses are not allowed TAX : Income Tax Sales Tax Advance Tax Violation Of Law ( Penalty )
Allowed (For Business)
Disallowed (Against Law)

Salary or other benefit by AOP to its members are not allowed. Salary Paid Notes : o Salary , commission o Deducting the authority but did not deduct tax o Then the tax expense not allowed. TRADING LIABILITY Those liabilities which effect the P & L A/C e.g. a. Cash To Loan XXX XXX XXX XXX ( Capital Liability ) . ( Trading Liability ) . ( Trading Liability ) .
AOP
b. Salary XXX To Salary Payable c. Purchases To Mr. Z XXX
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DONATION
INCOME U/S 61 of 2nd Schedule Less: ( as Zakat ) Rate: 30 % TAX Donation to approved institution. e.g. Govt. hospital ( Chapter #2) Rate: 30 % Conditions: o Do not pay in cash o By cheque o In any kind
Conditions: o Pay in cash o By cheque o In any kind
Preliminary Expenses:
are disallowed upto commercial production ( pre-commencement expense )
Trading Liability:
Not paid with in 3 years.
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Chapter # 12
DEPRECIATION
The Rules and Regulation For Depreciation Rules:
Depreciation shall be charged on depreciable assets. Depreciation shall be charged after deducting initial
allowance . FORMULA : ( cost initial allowance ) X Rate of depreciation e.g. ( 100 50 ) X 10% = 5 INITIAL ALLOWANCE
( Rate 50% ) All depreciable assets are also eligible depreciable assets except the following : 1. Furniture and Fixture 2. Transport vehicle not plying(use) for hire e.g. business or rent a car 3. Second time used plant and machinery Note: In Pakistan one asset is : Depreciable + eligible depreciable asset Only for 1st user . For all other users that asset will be only a depreciable asset. INITIAL ALLOWANCE ON VEHICLE CASES
Rent a car + Daewoo ( eligible depreciable asset )
Directors car + company car ( not plying for hire )
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Eligible depreciable Assets:
Life more than one year Subject to wear and tear For business use
IMPORTANT NOTES
Initial allowance @ 50% shall be charged on the eligible depreciable assets in the 1st year only. Depreciation shall be charged on reducing balance method.
Depreciation Rates
Depreciation rates are as follows. Rates 10 % 30 % 15 % Assets Building Computer and related equipment All other assets
HINT
Try to compute depreciation in the examination / prepare the depreciation schedule on written down value bases.
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Assets use partially for Business:
If an asset , use partially for business and partially for other objectives , we will charge deprecation proportionally BUT initial allowance fully Example: Business use ( 60 % ) & for other objectives ( 40 % ) Full yearly 10,00,000 (5,00,000) 5,00,000 (50,000) 4,50,000 60 % 5,00,000 50,000 (60%) 5,00,000 30,000 5,30,000
Cost Initial allowance Depreciation
NOTE
Full year depreciation charge in the year of
purchase.
No depreciation is charged in the year of disposal.
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GAIN or LOSS in disposal of Depreciable Asset:

The gain or loss on disposal of depreciable assets charged to income from business.
COMPUTATION OF GAIN or LOSS
Gain or Loss = Sale price/FMV ( higher) - Tax WDV WHERE: Tax written down value = Cost Tax depreciation WHERE: Tax Depreciation = Depreciation + Initial allowance
NOTE
Full year depreciation charge in the year of
purchase.
No depreciation is charged in the year of disposal.
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a(I)
Computation of Depreciation
e.g. numerical example Year
2007 cost Initial allowance(50%) Depreciation(15%) 2008 2009 Depreciation(15%) Depreciation(15%)
Furniture & Fixture

500,000 500,000 (75000) 425,000 (63750) 361250 (54188) 307062
Plant
10,00,000
Tax allowance
500,000
(500,000) 500,000 (75000) 425,000 (63750) 361250 (54188) 307062
150,000 650,000 127500 108376
b(II)
Computation of Gain or Loss
Assume the plant sold for Rs.500,000 in 2009. now compute the gain or loss. = sale price tax WDV = 500,000 361250 Gain = 138750
its the income from business in 2009. now less depreciation Rs. 54188 of this year from this income .
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a(II)
Asset Partially Used For Business
(assume 60% for business use )
Year
2007 Cost Initial allowance Depreciation(15%) 2008 2009 Depreciation(15%) Depreciation(15%)
Plant
10,00,000 (500,000) 500,000 (75000) 425,000 (63750) 361,250 (54188) 307,062
Tax Allowance/ dep. allowance

500,000 45000 545,000 38250 583,250
NOTE: the depreciation column must be draw and calculate depreciation.
b(II)
!!!! Calculation of Profit or Loss !!!!!!!!! when !!!!!Asset partially used for business !!!!!
Assume the plant sold for Rs.500,000 .
= sale price Tax WDV = Sale price - ( cost depreciation allowances ) = Sale price [ cost ( initial allowance + depreciation)]
= 500,000 [ 10,00,000 583250 ] = 83250 income from business
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Cases for Gain or Loss

Exceptions:
( three cases )
Building ( Case 1 )
= sale price Tax WDV = Sale Price ( cost tax Depreciation )
Export of use asset ( Case 2 )

= sale price Tax WDV = Sale Price ( cost tax Depreciation )
NOTE:
NOTE:
If sale price is above the cost price If a used asset sold, out of Pakistan , then the cost shall be consider as sale price sale price will be consider as cost. So, So, =Sale Price ( sale price tax Depreciation ) = cost ( cost tax Depreciation ) =Sale Price - sale price + tax Depreciation = cost cost + tax Depreciation = Tax depreciation = Tax depreciation It means that the INCOME will be equal to the TAX DEPRECIATION . e.g. Tax depreciation = Gain 500,000 = 500,000
NOTE:
It is assume that the asset , sold at price , at which that was purchased.
Case 3:
CAR
Maximum cost of car is Rs. 1500,000
its not about vehicle . because all cars are vehicle but all vehicles are not cars.
NOTE
Even it is purchased above the Rs. 1500,000 , we will consider Rs. 1500,000 and the depreciation will be calculated on this amount. e.g. Year
2010 Cost Depreciation ( 15 % )
X car
Y car
1200,000 ( 180,000 ) 1200,000 X 15 % 1020,000
20,00,000 ( 225,000 ) 1500,000 X 15 % Written Down Value *1275,000 *Where 1500,000 225,000 = 1275,000
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ASSUME
Both cars were sold for Rs. 1500,000 each
NOTE: sale price ki amount utni laini hai , jitni cost ki %age allow ki gai thi FORMULA : n= 1500,000 X 100 cost
only for those assets whose cost id above Rs.1500,000
So, = sale price Tax WDV and , sale price = 1500,000 X 75% = 1125,000 1500,000 . X 100 20,00,000 Y car
= sale price Tax WDV = 1500,000 10,20,000 Gain = 480,000
X car
= ( sale price x n ) Tax WDV = 1125,000 1275,000 Loss = ( 150,000 )
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AMORTIZATION
NOTE
amortization is allowed on intangible assets. intangible asset--------definition . amortization shall be charged on per day used method. no amortization in the year of disposal the maximum life of a intangible asset is 10 years.
if life exceeds 10 years or unknown , in this case, 10 years will be consider as the life of intangible asset.
e.g. Year Copy Right Purchase price= Rs. 200,000 Life = 7 years Date of purchase . 1-1-2011 Year end = 30 June, 2011 Solution, 2011 = useful life
cost . x days used
Patent Purchase price= Rs. 300,000 Life = 15 years Date of purchase . 1-1-2011 Year end = 30 June, 2011 Solution, =
cost . useful life x days used
= 200,000 . x 181
7 X 365
= 300,000 .
10 X 365
x 181
= 14168 2012 = 200,000

7 X 365 . x 365
= 14876 = 300,000 .
10 X 365 x 365
= 28571
= 30,000
NOTE: use full life in days
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BAD DEBTS
Sale to Mr. A for Rs. 100,000 on credit in 2009. it will the income for 2009 under NTR. 2010 : Mr. A didnt pay back. we claim Rs. 100,000 in Tax` Department for allowing us expense.( bad debts ). but tax department allow expense to us Rs. 50,000.
2011:
No. A B C D Situations. (Receipts)
100,000 50,000 Nothing 80,0000
Actual Bad Debts

nil 50,000 100,000 20,000
Tax Treatment
50,000 ---Income No treatment 50,000 --- expense allowed 30,000 ---income
Ways of asking question about Bad Debts in exam. 1) Conditions of Bad Debts :
how to claim bad debts in the department.
2) Recovery of Bad Debts :

Tax treatment .
Formula :
Allowed Actual = + or
NOTE If answer is + then = add in income from business If answer is - then = less from income from business
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!!!!!!! Perquisites for claiming Bad Debts !!!!

The amount must be declared as income before.(pahly) Entry of bad debts has been passed in the books of
accounts. NOTE : it is not necessary that the department will allow the whole amount as expanse which we claimed in the department.
!!!!!!! ACCOUNTING TREATMENT OF LEASE !!!!

amount paid for lease. Amount of Lease ( Rs.50,000 )
Depreciation ( 10,000 )
Capital
Interest ( 1000 )
Insurance ( 500 )
Expense claim in accounting : depreciation Interest Insurance Expense claim in Tax : The amount which paid against lease that amount will be allowed. ( Rs. 50,000 ) 10,000 1,000 500 11,500
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!!!!!!!!!
PROFIT ON DEBT !!!!!!!! ( Ref. book page # 100)

Interest.
We borrow the amount . So interest is our expense
ALLOWED EXPENSE debt is utilized for business .its not the part of cost.
SALE OF DEBTOR SPV

Special purpose vehicle A person or Organization which used for special purpose. e.g. SPV: Originator
Itefaq (Sugar)
single company = loan 5 million Group = loan 20 million
SPV
.5 interest Itefaq ( IT ) Investment .5 interest 5 m loan
NOTE NOTE
loan from subsidiary is not allowed . Loan & lease are both allowed to SPV.
BANK
NOTE
If any Income earned by SPV . That income will be exempt because income earning is not its objective.
Originator
6 million
SPV Bank 0331-4791167
1 m --income(exempt) 5 m loan return
Page 37
METHODS OF ACCOUNTING
Accrual Basis ( Absorptional Costing )
Cash basis ( Marginal Costing )
Company
Individual / AOP Option
Closing Stock Valuation
Absorptional Costing ( Add all kinds of Costs )
Marginal Costing ( Fixed FOH will be excluded )
e.g.
Factor of Production
Material Labour FOH Variable Fixed
Absorptional Costing
50 10 20 10 90
Factor of Production
Material Labour FOH Variable
Marginal Costing
50 10 20 80
Define Small company .
Rate : 25 %
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Page 38
MINIMUM TAX
Rate :
1 % of Turnover Or Actual Tax Liability income is exempt .
Higher
Who will pay Tax :

Resident Company Individual having Turnover 50 million or Above. AOP having 50 million or Above.
Turnover :
means,
Sale
Provisions :
1st Year
Excludes sales tax , excise duty Services Share from AOP
forward
Excess of actual Tax Liability shall be carry for subsequent 3 years.
2nd Year
Advance Tax = Actual Tax Liability 1 % of Turn Over
Advance Tax =Remaining Actual Tax Liability 1 % of Turn Over
HINT
Excess of 1 % of T.O from Actual Tax Liability will be advance tax and that excess amount will be deduct in the next year from actual tax liability. And then the remaining of actual tax liability will be compare with 1 % of turn over. Higher of : Actual Tax liability & 1 % of Turnover will be payable. By: Kashif Nawaz Jakhar 0331-4791167 Page 39

EXCEPTIONS:
Minimum tax not apply , if business entity declare gross loss before depreciation and other inadmissible expenses. Commissioner has the power to re-asses the income. Minimum tax not apply on certain cases. e.g. Modaraba , non-profit organization.
Employee Training and Facilities :

allowed expenditures other than capital expenditures .
o Hospital or educational institution for the benefit o o

of employees. For the training of industrial workers run by federal or Provincial Government Training of citizen of Pakistan . e.g. PHD
TAX paid on import Stage :

Tax collected by collector of custom on import of, edible oil & packing material
TAX deduct from services as minimum Tax : 6 % at source from gross income. no adjustment or refund shall be allowed.
NOTE :
HINT
Services provided to a person , who is not Tax deducting authority then the said services income is not subject to minimum Tax.
This provision of minimum tax is not applicable for a company , receiving income from services.

Advance Tax on Electricity Bill As minimum Tax :
advance tax is payable on 1. Commercial & 2. Industrial Bills RANGE : TAX
From Rs.80 to Rs. 1500
Amount
Monthly bill exceeds Rs.400 but does not exceeds Rs. 2000
If monthly bill exceeds Rs. 20,000 Users

Commercial Industrial
Rate
10 % 5%
Electricity bill for person other than Company :

Bill upto Rs. 30,000 per month shall be treated as minimum tax. No refund or adjustment shall be allowed.
Scientific Research Expenditure :

Deduction allowed , if expenditure incurred in Pakistan For business purpose
!!!!!! Scientific Research !!!!!

Any activity in the field of natural (mining, oil refinery) or Applied Science (new technology) for the development of human knowledge.
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Page 41
CH # 15 :
LOSSES
in urdu
General concepts :
ENGINE 1
Categories of tickets :
A type ticket B type ticket C type ticket Usage of tickets : explanation in Urdu.
A type ticket:
A type ticket say ap train k box 1 & 2 main baith sakty hain. ager in boxes main jaga na hoo tu ap next any wali 6 ( six ) trains main bhe ap un k box no. 1 & 2 main baith sakty hain. laiken in boxes k elawa ap kisi bhi aor box main nai baith sakty.
B type ticket:
B type ticket say ap mojoda train k kisi bhi box main baith sakty hain. aor ager is train main jaga nai hai tu ap any wali kisi bhi train main nai baith sakty.
C type ticket:
C type ticket ki madad say ap mojoda train k to kisi bhi box main baith sakty hain laiken ager mojoda train main jaga na hoo to ap next any wali 6 ( six ) trains main un k box no. 3 main hii baith sakain gay.
HINT
for understanding
mojoda train main bathny say morad next train main bathny say morad
====
set off
===== carry forward.
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Page 43

Ch # 15.
LOSSES
under NTR. because under FTR losses and expenses are not allowed. HEADS OF INCOMES UNDER NTR
salary income from property income from business
NO Loss No Loss C type A type A type

Losses can be set off only against the incomes from other items U/S 37 A.
separate block of income non-speculative speculative 37 37-A
capital gain
other losses.
EXPLANATION:
A type:
B type
can be carry forward but they can by set off only against the incomes of their heads. B type: can be set off only C type: can be carry forward and set off. but they can be set off only in 1st year.
Set off :
adjustment of one income or loss in
other head . Inter head adjustment: adjustment in the same head. Carry forward: Transfer to next year.
Example : 1
Case 1 Rs.(000)
Salary Non-speculative business Speculative Capital gain Other Losses 500 (800) (400) 700 (300)
Case 2 Rs.(000)
500 (900) (400) 700 (300)
Total Income 1200 1200 Requirement : I. Compute taxable income II. amount of loss to be carry forward Solution: I. Case 1 Rs.(000)
Total Income Other losses Non-speculative business 1200 (300) 900 (800)
Case 2 Rs.(000)
1200 (300) 900 (900)
Total Income II. Losses to be c/f. non-speculative
100 ( 400 )
-----( 400 )
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Example : 2
Case 1 Rs.(000)
Salary Non-speculative business Speculative Capital gain Other Losses or Gain 500 (1000) (400) 700 (300)
Case 2 Rs.(000)
500 (1000) (400) 700 300
Total Income 1200 1500 Requirement : III. Compute taxable income IV. amount of loss to be carry forward Solution: I. Case 1 Rs.(000)
Total Income Other losses Non-speculative business 1200 (300) 900 (900)
Case 2 Rs.(000)
1500 (1000)
Total Income II. Losses to be c/f.
-------
500 .
non-speculative (1000-900) ( 100 ) Speculative ( 400 )
------( 400 )
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Page 46
INCOME TAX (Tax Year 2011) HINT
A: In case set off losses.

1st set off other losses 2nd set off non-speculative business losses.
B: In case of carry forward losses.

year wise. 2009 2010 2011 ( 100 ) ( 200 ) ( 500 )
If there is gain in 2012 , then use FIFO method of adjustment of losses. 2012 2009 2010 2011 10000 ( 100 ) ( 200 ) ( 500 ) 200 .
remaining examples are ate page no. 189 of my register.
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Page 47
GROUP TAXATION
Features of group taxation:
as a single fiscal unit. 100% owned group of companies locally incorporated under companies ordinance 1984. Loss of any group will be set-off against income of any other group. consolidated group accounts as required under companies ordinance , 1984 will form. I. Basis of computation of income II. tax payable by the person GT relief will not be available to losses prior to the formation of the group. Inter corporate dividend income with in the group companies entitled to group taxation shall be exempt .
Note
GROUP RELIEF
{ surrender of tax loss by a subsidiary company } a subsidiary company may surrender its assessed loss ( excluding b/f loss and capital loss ) for the tax year in favor of its holding company or any subsidiary of the holding company. The holding company shall directly hold , share capital of the subsidiary company as under, 55% or more 75% or more in case of listed companies. in case of non-listed companies.
Note
NOTE
The loss surrender by 1 subsidiary company may be adjusted by the holding company or subsidiary company against its business income in the tax year and the following two tax year. Any un-adjusted loss shall be revert back to the subsidiary company and shall be carry forward in the normal manner. By: Kashif Nawaz Jakhar 0331-4791167 Page 48

Example : S H stands for stands for
1st year = 30
subsidiary company holding company
2nd year = 40
S-2
H
LOSS = 100 (surrender)
Listed Company
S-1
loss incurred in 2006 (adjusted in next 6 tax years) 2012.
Assume :
the losses were surrender for two years.
So, 2007----- 2008

S-2
losses = 30+40= 70
2009, 2010, 2011, 2012

S-1
Remaining 30 were adjusted by original subsidiary company.
0331-4791167
Page 49
Conditions of Group Relief

1. Ownership of share capital shall be continued for 5 years to the extent of 75% or 55%. 2. Trading company with in the group shall be entitled to avail group relief. 3. If the holding company is a private company, it is required to be listed with in 3 years from the year in which loss is claimed. 4. group companies are locally incorporated companies under companies ordinance 1984. 5. board of directors approval of both the companies is required. 6. Subsidiary company , continuous the same business during the said period of 3 years. 7. all the companies in the group shall comply with specific corporate governance requirement. 8. Inter corporate dividend with in the group companies entitled to group taxation shall be exempt. 9. The subsidiary company cannot surrender its assessed losses for more than the 3 tax years. 10. The tax relief availed would be reversed if holding companys equity interest falls below 75% or 55%. As a consequences of disposal of shares during the stipulated period of 5 years . 11. Loss claiming company , may , with the approval of Board of directors , transfer cash to loss surrendering company , equal to the amount of tax saving in this respect. This transfer shall would not be allowed tax expense for the loss claiming company or taxable income for the loss surrendering company.
0331-4791167
Page 50

Some Important Concepts
S H
stands for stands for
subsidiary company holding company
1st year = 30
2nd year = 40
Benefit
= Rs15
S-2
H
LOSS = 100 (surrender)
Cash Rs.10
S-1
This Cash of RS.10 received by Loss surrendering company will be not treated as income of this company.
Transfer of shares between the companies and the
shareholder , in one direction , would not be taxable capital gain provided the transfer is , to acquire share capital for the formation of the SECP or STATE BANK has been obtained in this effect.
0331-4791167
Page 51

CH # 6
ASSOCIATION OF PERSONS ( AOP )

1. In Case of Loss ( Loss of AOP ):
Loss shall not be distributed among the partners .
Important Notes
2. In case of income:
Income shall be distributed among the
partners . 3. If any partner have no income other than the share from AOP ( income from AOP ) then his , this income ( share from AOP ) shall be exempt. 4. if any partner have income other than the share from AOP ( income from AOP ) then his , this income ( share from AOP ) shall be included only for tax purpose. 5. For checking individual status share from AOP shall be excluded. 6. For calculating full time teacher allowance share from AOP shall be excluded. 7. For average relief share from AOP shall be included.
Rules For
1. Investment in shares 2. Donations 3. Contribution in
pension fund 4. profit on debt
Assume for Investment in shares : 10% of Taxable income 300,0000 Actual And :
Lower
Excluding Share from AOP
TAX . X Lower Taxable income (Including share from AOP )


Example :
Total taxable business income = Rs. 10,00,000 Tax ( 25% ) = Rs ( 2,50,000 ) Distributable Income 7,50,000 .
Income After Tax Not Distributable Income
Assume there are 3 partners of AOP. Partners Rate of share Share from AOP A ( Individual ) 20% 150,000 B ( Individual ) 30% 225,000 C ( Ltd Company ) 50% 375,000 Requirement : compute taxable income of AOP and Business Income 500,000 ------------500,000 its members.
Solution : Mr. A
business income Add: share from AOP Total Taxable Income Tax Liability Tax on Rs. 650,000 @ 10% Less: Tax ( individual) . X share form AOP Taxable Income ( individual ) 65000 . 650,000 X 150,000 Tax Liability ( 15000 ) 50,000 . Rs. 500,000 150,000 650,000 65000
Mr. B;
Mr. Bs income shall be exempt because he has no income other than share from AOP.
INCOME TAX (Tax Year 2011) C ltd Company :

Rs. Business income Add: share from AOP Total Taxable Income Tax Liability Tax on Rs. 875,000@ 35% Less: Tax ( of AOP) Taxable Income ( AOP ) 250,000 . X 375,000 10,00,000 Tax Liability . 500,000 375,000 875,000 306250
X share form AOP
( 93750) 212500 .
Another example at page no.211 of my register.
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Page 54
General Format:
Compute Taxable Income
Salary Income Capital Gain Business Income Other source income Zakat Donation Add : share from AOP Taxable Income
RS
XXXX XXXX XXXX XXXX XXXX ( XXX ) ( XXX ) XXXXX ( XXXX ) XXXX .
Computation of tax liability .

Tax liability Property 37-A Tax Liability Less : Senior citizen Allowance Less : Full time Teacher Allowance Less : Foreign Tax Credit
RS
XXXXX
Less Less Less Less
: : : :
Investment in shares Donation Contribution Profit on debt Tax Payable
Less : Advance Tax
XXXXX XXXXX XXXXX (XXXX) (XXXX) (XXXX) XXXXX (XXXX) (XXXX) (XXXX) (XXXX) XXXXX (XXXX) XXXXX
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Page 55
TAX ON TAX
Impacts:
Tax Born by Employer
Tax of employee paid by the employer.
1. Income 2. Advance Tax
Tax in Salary. Less from tax liability.
How to Compute: Mostly in exam this amount will be given.
Compute:
Cases
1. Fully paid by employer 2. Partially paid by employer and

partially paid by employee
Example
Case 1: Total salary = 500,000 Tax employee paid by employer = 10,000 Explanation : According to Tax department the tax paid by the employer , will be income of the employee because , it was basically the expense of employee . So now the Total salary of the employee will be Rs.510,000 instead of Rs.500,000. Assume Tax on Rs. 510,000 is Rs. 12,000. and paid by the employer. so now Total salary = 500,000 Tax employee paid by employer = 12,000 According to Tax department the tax paid by the employer , will be income of the employee because , it was basically the expense of employee . So now the Total salary of the employee will be Rs.512,000 instead of Rs.500,000.

NOTE
The Tax calculation will be same as we calculte in other questions. Means : Tax on Rs. XXX @XXX % is = XXX 1 Marginal Relief Rs. XXXX @ XXX % = XXX Marginal amount {difference between total taxable income and Marginal relief @ XXX% } = XXX 2 = XXX Lower of 1 & 2 will be Tax liability = XXXX
NOTE
the same calculation should be repeated for minimum 3 times Maximum 5 times After the repeated calculations now the individual will calculate tax as below. The following figures are assumed figures. Taxable Income = 500,000 Tax paid by employer = 13050 Total taxable Income Tax on Rs. 513050 @ 2.544% Advance Tax ( paid by employer ) 513050 13050 13050 ------
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Page 57
SHARE FROM AOP

Computation of taxable income Taxation of members
Computation of taxable income :

Assume share fro AOP is equally distributed among the members of AOP. EXAPMLE : Salary Electricity Bills Share from AOP Mr. X ( 50% ) 50 ------200 250 Mr. Y ( 50% ) 10 40 200 250 Total 60 40 400 500
Rs.400 is balancing figure
This amount will be added in the income from other sources of the Mr. X only for Rate purpose
If we assume that Mr. Y have no any source of income other than share from AOP. So in this condition the share from AOP for Mr. Y will be exempt
Distributable Income
Calculation of distributable income taxable Income ( AOP ) Less: Tax liability Distributable income 1200 (700) 500
Solution of Past papers at page no.9 of new 1 register. book page no.

Income Tax

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INCOME TAX (Tax Year 2011)

SHORT NOTES OF INCOME TAX

Prof. Imran Shahzad Sb. ACA

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

INCOME TAX (Tax Year 2011)

Page no. Sr. no. Topics

Basic concepts Salary Provident Fund

Bad Debts SPV Methods of Accounting Minimum Tax

Employee Share Scheme Capital Gain

Losses ( concepts ) Losses

Final Tax Regime Tax Credit

Group Taxation 48 & Group Relief AOP 52

Income From Business In-admissible Expenses Depreciation

Share from AOP

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

COMPUTATION OF TAX LIABILITY(Under NTR)

C) Tax Year: Normal Special Transitional

xxxx xxxxx Category-C

Deduction of Tax Advance Tax u/s 147

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

Income Tax Ordinance

Income Tax rules

( Ref. book page # 4 )

AOP ( Association of person ) 25% ( Ref. book page # 4 )

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

Resident : ( Ref. book page # 3 )

Computation of Taxable income

Heads of income Regimes

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

( Ref. book page # 2 )

Normal Tax Year

Special Tax Year

Transitional Tax Year

1july 02------30june 03 A period of 12 months ending on 30th June

A period of 12 months ending on any date other than 30th June

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

SALARY : ( taxed on receipt basis ) Income

Income from business

( Ref. book page # 81 )

Trade , manufacturing . any profession

( Ref. book page # 338 )

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

Accommodation Conveyance Medical facility

Loans U. bills Comp. shares TA / DA

Gratuity Provident fund Pension Golden hand Shake

Perquisites ( Ref. book page # 22 )

3) Medical Facility : ( Ref. book page # 25 ) a) Facility Given

INCOME TAX (Tax Year 2011)

5) Asset is given to employee Permanently 6) Marginal cost:

Other Benefits : Loan provided by employer

( Ref. book page # 22 ) point (h).

( T.E ) ( T.E ) (exempt upto Rs.200,000 )

Rs. 75000 or 50% of gratuity amount ( lower will be exempt)

By: Kashif Nawaz Jakhar

INCOME TAX (Tax Year 2011)

Note : Acc. Balance = Employee cont. + Employer Cont. + interest