Income Tax Ordinance 2001
It is basic constitute of Income Tax Law in Pakistan. On its basis, the whole taxation structure of the country is founded. The whole procedure of taxation including matters regarding payment of tax, collection of tax, penalties, assessments, refunds, appeals etc. has been provided in this Ordinance. It consists of thirteen chapters deals with a particular subject and has been divided into parts. Many parts are further subdivided into divisions. There are 240 sections and seven schedules, schedules are also treated as part of Ordinance, Income tax law also consists of Income Tax Rules and Notifications Circulars and orders issued time to time by FBR. The changes in the Ordinance are brought about by the Finance Ordinance or Finance act every year.
Income Tax is payable by every person (subject to the exemptions and exceptions given in the law) with regard to his taxable income for the tax year (period of 12 months ending on June 30th) under the two tax regimes viz. Net Income Basis (NIB) or normal tax regime and Final Tax Regime (FTR).
NIB or normal tax regime is the conventional basis of taxation whereby a person is liable to pay tax on net taxable income arrived at after deducting all admissible deductions and allowances from the gross revenues / receipts for a particular tax year. Generally, under this basis, a person is only liable to pay tax when he derives “profit” for the year as computed under the tax rules whereas no tax is payable in case of loss. Losses are also allowed to be carried forward for adjustment against future tax profits.
NET INCOME BASIS (Normal Tax Regime)
For income covered under NIB (i.e. Salary, Business Income and Capital Gains on certain assets), persons are required to file a detailed return of income on a yearly basis, alongwith the audited financial statements (only for companies) which is then assessed under self assessment scheme.
Normal cases or NIB returns are filed under section 144, several provisions are in place to ensure only admissible expenditures are claim which can be verified reasonably. Once tax liabilities are established and tax payable is computed, an adjustment is made for the amount already deducted as withholding tax, by withholding agent , this hardly leaves any balance payable, as income tax
The tax authorities are, however, empowered to conduct a tax audit by scrutinizing the accounts and if they found any inadmissible deductions or under-declaration of income, they are empowered to pass assessment orders by making adjustments to the declared income. The selection of cases are based on balloting, that means it is not discretion of tax officials to open anybody’s case unless in some special cases.
FINAL TAX REGIME
FTR was introduced in 1991, which prescribed a transaction based tax liability and, therefore, a major shift from the traditional income tax, which was always based on NIB.
Under FTR a statement under section 115 is filed annually, in place of return of income, the taxes deducted by customers are considered as final tax liability and no adjustment for any deduction or losses and no carry forward or refund is allowed, cases under FTR are not subjected to audit by department, however withholding tax monitoring is carried out, by FBR, from time to time to ensure proper compliance.
FTR is a flat tax regime, whereby tax is charged on the basis of gross receipts / turnover for the year, irrespective of whether or not the person ultimately derived any profits from the respective activity. By nature, FTR is akin to transaction tax and, therefore, its impact is regressive. Under this regime. Usually, tax under FTR is paid by way of withholding tax.
ADJUSTABLE WITHHOLDING TAXES
In addition to the withholding taxes levied as final taxes, following further withholding taxes are applicable which are adjustable against the payer’s ultimate tax liability.
Nature of payments
Sale of property by auction
Purchase of air tickets
Electricity bills of commercial
Cash withdrawal above Rs 50, 000
Registration of Motor cars & Jeeps
Payment of vehicle tax
MAJOR EXEMPTIONS IN INCOME TAX
- Agricultural Income having wide scope;
- Foreign exchange remitted through normal banking channel and encashed in Pak Rupees;
- Pension received by former Government and Armed forces’ employees;
- Education expenses paid
- Capital gains from sale of listed shares and other securities held for more than one year;
- Capital gains from sale of immovable properties held for more than two years;
- Income of Funds, Board of Education, Universities;
- Income of Religious and Welfare trusts; and
- Income of Power Project Companies.