Tax Year and Tax Rates

May 3, 2004

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Professional accountants like members of ACCA, PIPFA, ICAP and ICMAP are aware of the concept of financial year in financial accounting. The concept of matching and accrual revolves around the concept of financial year. The concept of financial year is helpful in ascertaining the accounting profit and loss of a business entity and in order to make a sheet of paper balanced that is, balance sheet. The term financial year normally coincides with the term tax year. As per Income Tax Ordinance, 2001, the taxable income [profit or loss] is ascertained with reference to the concept of tax year instead of financial year. This article is an endeavor to assess the taxonomy of the concept of tax year, applicability of tax rates and anomalies attached thereto.

TAX YEAR

A tax year is a period of twelve months in respect of which a taxpayer is required to file a return of income or statement of sub-section (4) of section 115. Tax year can be classified as Normal Tax Year, Special Tax Year and Transitional Tax Year

NORMAL TAX YEAR

A tax year comprising of twelve months and ending on 30^th June of a Gregorian calendar year is termed as normal tax year. The said normal tax year is denoted by the calendar year in which the 30^th June falls. The key concept is that for denotation purposes the year is used. In case of discontinuance of business, a normal tax year may comprise of less than twelve months. In such case, the person must notify the commissioner of Income Tax within fifteen days of the date of discontinuance of business. On receipt of notice, the commissioner may require that person to submit a return of income for a period commencing from the first day of current tax year to the date of discontinuance of business. The period commencing from the first day of current tax year to the date of discontinuance of business shall be treated as separate tax year.

Apart from discontinuance of business, a normal tax year may comprise of less than twelve months in where person has died, person has become bankrupt or gone into liquidation, person is about to leave Pakistan permanently and where furnishing of return is considered appropriate by the commissioner. The commissioner may require a person or such person’s representative to furnish a return of income for a period of less than twelve months in above referred cases.

SPECIAL TAX YEAR

A tax year not ending on 30^th June may be termed as special tax year. A taxpayer’s tax year may be different from normal tax year due to the fact that tax year is already different from normal tax year before the promulgation of Income Tax Ordinance, 2001 or tax year becomes different normal tax year owing to the practical difficulties or due to other reasons. Before the promulgation of Income Tax Ordinance, 2001, the taxpayers normally use the following special tax years.

TAXPAYER

TAX YEAR [Start and end date]