08-12-2011, 06:01 PM
Minimum tax is imposed in two different contexts under the Income Tax Ordinance, 2001 (ITO, 2001)
Under s.113, it is imposed upon companies & association of persons whose turnover exceeds certain stated limits and who either
a. Declare loss, or
b. Tax payable by them is less than 1% of their turnover
It is must for such companies and association of persons to pay minimum tax @ 1% irrespective of their normal tax liability. This phenomenon of minimum tax has been explained by two examples given in [url="http//www.fbr.gov.pk/Docs/20101249124710781991cir10.pdf"] Circular 10 of 1991 [/url]
Note at the time of said circular minimum tax was 0.5% now it is 1% of turnover.
Section 113A & 113B also falls within the Chapter of Minimum Tax , however, I feel they relate more to final taxation instead of calling them minimum tax.
Secondly, the term, Minimum Tax has been used with respect to withholding taxes. For example, tax deducted by company @ 6% while making payment on account of services received is a minimum tax u/s 153 for the recipient of services.
Minimum tax under withholding taxes means that if the rate of tax deducted is higher than the normal rate applicable to person then it will be a final tax. However, if it is lower than the normal rate applicable then it will become adjustable. This has been explained with the following illustrations
<b>Illustration 1</b>
Company has to pay Rs.100,000 as a fee for teacher for taking training classes of its employees. Company deducts tax @ 6% amounting to Rs.6000 and pays remaining Rs.94,000 to architect.
At the end of tax year teacher works out his total income as Rs.12,00,000 (including Rs.100,000 received from your company.) Remaining 11,00,000 is a salary income of teacher from his college. Thus the rate of salaried individuals would apply
Tax rate on 12 lac is 10%
10% is higher than 6% so the tax will become adjustable and teacher will have to pay further tax on said Rs.100,000 at the rate of 10% -6 %= 4%
Taxable Income 12,00,000
Tax Rate 10%
Total tax liability 120,000
Tax already paid 6000
Tax payable with return 114,000
<b>Illustration 1B</b>
Had the 6% tax deducted by company was final tax then this calculation would have been
Taxable income excluding Rs.100,000
on which final tax has
already been paid (12,00,000 â 100,000) = 11,00,000
Tax Rate = 10%
Tax Payable = 110,000
Total Tax liability =110,000 + 6000 (already deducted) = 116,000
The above two examples show that where tax deducted was minimum tax, tax liability of teacher was Rs.120,000, but where tax deduction is final tax in the second example then tax liability is 116,000
Another example to explain minimum tax deduction
<b>Illustration 2</b>
Suppose at the end of tax year teacher works out his total income as Rs.6,00,000 (including Rs.100,000 received from your company.) Remaining 5,00,000 is a salary income of teacher from his college. Thus the rate of salaried individuals would apply
Tax rate on 600,000 lac is 4.5%
4.5% is lower than 6% so the tax deducted will become final. No further tax will the teacher has to pay on Rs.100,000 received by the Company. He will only pay tax on 600,000 â 100,000 = 500,000
Taxable Income 5,00,000
Tax Rate 3.5%
Tax Payable 17,500
Total Tax liability 17,500 + 6,000 = 23,500
It is interesting to note that this one is unable to find this treatment of minimum withholding tax within the current provisions of the Ordinance, though Ordinance has used this term several times with respect to withholding taxes.
However this treatment was explained in the two provisions now repealed. These provisions were as follows
Section 148(8)ITO, 2001
#8213;(8) The tax collected from a person under this section on the import of edible oils for a tax year shall be treated as the minimum amount of tax payable by the person under this Ordinance and where the personâs final tax liability exceeds the amount collected under this section the tax collected shall be credited against that final liability.#8214;
Section 235(4)of ITO, 2001
4 Substituted by the Finance Act, 2009. The substituted sub-section (4) read as follows
#8213;(4) The tax collected under this section up to bill amount of twenty thousand rupees per month shall be minimum tax on the income of a person (other than a company). There shall be no refund of the tax collected under this section, unless the tax so collected is in excess of the amount for which the taxpayer is chargeable under this Ordinance in the case of a company.#8214;
