10-11-2011, 08:34 PM
Tax on income (income tax) is an annual charge under the Income Tax Ordinance, 2001. Generally, the levy of income tax is by consolidation of all chargeable income (global income). However, in many countries, keeping in view the prevailing economic and social conditions, a concept of levy of final tax or fixed tax on certain income or transactions irrespective of the quantum of income is in place. Under the Income Tax Ordinance, 2001 a number of income and transactions are subject to separate charge, final tax and fixed tax.
Income subject to separate charge
âIncome Subject to Separate Chargeâ are those income, which do not form part of total income or taxable income and are subject to tax on the basis of gross income. Section 5, 6, 7 and 8 of the Income Tax Ordinance, 2001 governs the taxation of such income and these are
⢠Dividend;
⢠Royalty of non-resident;
⢠Fee for technical services of non-resident; and
⢠Shipping income of non-resident.
⢠Air transport income of non-resident.
Following rules apply to income subject to separate charge
⢠Tax imposed is a final tax;
⢠Such income is not chargeable to tax under any head of income in computing the taxable income of the person;
⢠No deduction is allowed for any expenditure incurred in deriving such income;
⢠The amount of the such income is not reduced by â
â Any deductible allowance; or
â The set off of any loss;
⢠The final tax payable is not reduced by any tax credit allowed (foreign tax credit or tax credits on donations, investments etc.);
⢠The liability of the recipient of such income is discharged to the extent that â
â In the case of shipping and air transport income, the tax is paid in accordance with section 143 or section 144 of the Ordinance.
⢠If the recipient of such income has no other source of income than
â An statement under section 115 of the Ordinance is required to be furnished by such person in lieu of a return of income as required under section 114.
â An assessment is treated to have been made under section 120 of the Ordinance (Self Assessment).
Income subject to final tax
âIncome subject to final taxâ are those, which are subject to collection or deduction of tax at source and the tax so collected or deducted at source is treated as final tax on the income arising from such transactions is classified as income subject to final tax. The tax collected or deducted on such transactions is commonly known as non-adjustable tax collected or deducted at source. The taxation of income subject to final tax is governed by Section 169 of the Income Tax Ordinance, 2001.
All transactions subject to collection or deduction of tax at source do not fall under income subject to final tax. Different set of rules apply for each nature of income.
Where the tax collected or deducted at source is not treated as final tax the income arising from such transactions is chargeable to tax under the respective heads of income (Salary, Property, Business, Capital Gains or Other Sources) and forms part of the taxable income. The tax collected or deducted on such transactions is commonly known as adjustable tax collected or deducted at source.
Following rules apply to the income subject to final tax
⢠Such income is not chargeable to tax under any head of income in computing the taxable income;
⢠No deduction is allowed for any expenditure incurred in deriving the income;
⢠The amount of the income is not reduced by â
â Any deductible allowance; or
â The set off of any loss;
⢠The tax deducted or collected is not reduced by any tax credit;
⢠There is no refund of the non-adjustable tax collected or deducted at source unless such tax is in excess of the amount of final tax for which the taxpayer is chargeable; and
⢠An assessment is treated to have been made and the person is not required to furnish a return of income in respect such income.
Separate block of income
âSeparate Block of Incomeâ are those, which are chargeable to tax under the respective head of income (salary, property, business, capital gains and other sources) as global taxable income but for the purposes of calculation of tax such income are excluded from the taxable income and tax thereon is calculated and charged at varying rates depending on the nature of each such income.
The tax payable on separate block of income is commonly called fixed tax.
Following natures of income are subject to a fixed tax and treated as a separate block of income
Retirement or termination benefits of an employee
Salary is chargeable to tax on the basis of actually received in a tax year. Accordingly the retirement or termination benefits received in lump sum, being covered under the definition of salary, are also chargeable to tax in the tax year in which received. As a result the income tax payable substantially increases, since the taxable income falls in a higher tax slab.
The taxpayer has an option to notify the concerned Commissioner by the due date for furnishing the return that he/she has elected for the retirement or termination benefits to be taxed as a separate block of income at the average rate of income tax of the three preceding years (fixed tax) [Sub-section (6) and (8) of section 12 of the Income Tax Ordinance, 2001].
Arrears of salary of an employee
Accordingly the arrears of salary received in lump sum are also chargeable to tax in the tax year in which received. As a result the income tax payable substantially increases, since the taxable income falls in a higher tax slab.
The taxpayer has an option to notify the concerned Commissioner by the due date of furnishing the return, that he/she has elected for the arrears of salary to be taxed as a separate block of income at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered (fixed tax) [Sub-section (7) and (8) of section 12 of the Income Tax Ordinance, 2001].
Flying and submarine allowance of certain employees
⢠âFlying allowanceâ of pilots, flight engineers, navigators of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority, Junior Commissioned Officers or other ranks of Pakistan Armed Forces; and
⢠âSubmarine allowanceâ of the officers of the Pakistan Navy;
is subject to fixed tax as a separate block of income at the rate of 2.5% of such allowance.
[Clause (1) of Part III of 2nd Schedule to the Income Tax Ordinance, 2001]
Property income
âRentâ received or receivable for a tax year, other than rent exempt from tax, is subject to a fixed tax as a separate block of income. [Section 15 of the Income Tax Ordinance, 2001]
Business income of certain retailers
A retailer being an individual or an association of persons having turnover not exceeding Rs. 5,000,000 for a tax year, can opt for payment of fixed tax at the rate of 1% of the turnover as a separate block of income [Section 113A of the Income Tax Ordinance, 2001].
Similarly, a retailer being an individual or an association of persons having turnover exceeding Rs. 5,000,000 for a tax year and who is subject to special procedure for payment of sales tax under chapter II of the Sales Tax Special Procedure Rules, 2007 can opt for payment of fixed tax at the rates of (specified in Section 113B) of the turnover as a separate block of income.
A retailer opting for fixed tax is not entitled to claim any adjustment of adjustable tax collected or deducted at source under any head during the year.
Business income from services rendered outside Pakistan of certain person
Business income from services rendered out-side Pakistan, the receipts of which are brought into Pakistan in foreign exchange through normal banking channel is subject fixed tax at the rate of 1% of the gross receipts.
[Clause (3) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Business income from construction contracts executed out-side Pakistan
Business income from execution of construction contracts out-side Pakistan, the income of which is brought into Pakistan in foreign exchange through normal banking channel is subject fixed tax at the rate of 1% of the gross receipts.
[Clause (3A) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Business income of certain manufacturers of cooking oil or vegetable ghee or both
Business income of manufacturers of cooking oil or vegetable ghee or both attributable to purchases of locally produced edible oil is subject fixed tax at the rate of 2% of purchase price of locally produced edible oil.
[Clause (13C) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Business income of resident from shipping business
Business income of a resident from business of shipping is subject fixed tax as under
⢠Amount equivalent to One US $ per gross registered tonnage per annum in respect of ships and all floating crafts including tugs, dredgers, survey vessels and other specialized craft purchased or bare-boat chartered and flying Pakistan flag; and
⢠Amount equivalent to fifteen US cents per ton of gross registered tonnage per chartered voyage but not exceeding one US $ per ton of gross registered tonnage per annum in respect of ships, vessels and all floating crafts including tugs, dredgers, survey vessels and other specialized craft not registered in Pakistan and hired under any charter other than bare-boat charter.
âEquivalent amountâ for the this purpose means the rupee equivalent of a US dollar according to the exchange rate prevalent on the first day of December in the case of a company and the first day of September in other cases in the relevant tax year.
[Clause (21) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Capital gains from sale of securities
Capital gains as reduced by capital losses, if any, arising from the disposal of the securities held for a period of less than a year [calculated from the date of acquisition (whether on or before 30th June 2010) to the date of disposal (on or after July 01, 2010)] is subject to fixed tax.
In case of a banking company and an insurance company the gain arising on disposal of securities is chargeable to tax as separately provided in the Seventh (7th) and Fourth (4th) Schedule to the Income Tax Ordinance, 2001.
âSecuritiesâ for the this purpose means share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative products.
[Section 37A of the Income Tax Ordinance, 2001]
Capital gains from the sale of shares or assets by a private limited company to Private Equity and Venture Capital Fund
Capital gains derived from sale of shares or assets by a private limited company to Private Equity and Venture Capital Fund is subject fixed tax at the rate of 10% of such gains.
[Clause (5B) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Obligations of the persons deriving income subject to separate charge, final tax and fixed tax
A person deriving income exclusively from the sources covered under separate charge, final tax or fixed tax is required to submit
#61607; An annual statement in the prescribed format (commonly known as statement under section 115) along with;
#61607; Certificates of the tax collected or deducted at source in the prescribed format obtained from the respective withholding agents;
#61607; Copies of relevant tax deposit receipts (challans); and
#61607; Where the final tax is of Rs. 35,000 or more in a tax year a Wealth Statement and a Re-conciliation Statement thereof.
A person deriving both taxable income (global income) and income from the sources covered under separate charge, final tax or fixed tax is required to submit in addition the annual Return of Income in the prescribed format.
Income subject to separate charge
âIncome Subject to Separate Chargeâ are those income, which do not form part of total income or taxable income and are subject to tax on the basis of gross income. Section 5, 6, 7 and 8 of the Income Tax Ordinance, 2001 governs the taxation of such income and these are
⢠Dividend;
⢠Royalty of non-resident;
⢠Fee for technical services of non-resident; and
⢠Shipping income of non-resident.
⢠Air transport income of non-resident.
Following rules apply to income subject to separate charge
⢠Tax imposed is a final tax;
⢠Such income is not chargeable to tax under any head of income in computing the taxable income of the person;
⢠No deduction is allowed for any expenditure incurred in deriving such income;
⢠The amount of the such income is not reduced by â
â Any deductible allowance; or
â The set off of any loss;
⢠The final tax payable is not reduced by any tax credit allowed (foreign tax credit or tax credits on donations, investments etc.);
⢠The liability of the recipient of such income is discharged to the extent that â
â In the case of shipping and air transport income, the tax is paid in accordance with section 143 or section 144 of the Ordinance.
⢠If the recipient of such income has no other source of income than
â An statement under section 115 of the Ordinance is required to be furnished by such person in lieu of a return of income as required under section 114.
â An assessment is treated to have been made under section 120 of the Ordinance (Self Assessment).
Income subject to final tax
âIncome subject to final taxâ are those, which are subject to collection or deduction of tax at source and the tax so collected or deducted at source is treated as final tax on the income arising from such transactions is classified as income subject to final tax. The tax collected or deducted on such transactions is commonly known as non-adjustable tax collected or deducted at source. The taxation of income subject to final tax is governed by Section 169 of the Income Tax Ordinance, 2001.
All transactions subject to collection or deduction of tax at source do not fall under income subject to final tax. Different set of rules apply for each nature of income.
Where the tax collected or deducted at source is not treated as final tax the income arising from such transactions is chargeable to tax under the respective heads of income (Salary, Property, Business, Capital Gains or Other Sources) and forms part of the taxable income. The tax collected or deducted on such transactions is commonly known as adjustable tax collected or deducted at source.
Following rules apply to the income subject to final tax
⢠Such income is not chargeable to tax under any head of income in computing the taxable income;
⢠No deduction is allowed for any expenditure incurred in deriving the income;
⢠The amount of the income is not reduced by â
â Any deductible allowance; or
â The set off of any loss;
⢠The tax deducted or collected is not reduced by any tax credit;
⢠There is no refund of the non-adjustable tax collected or deducted at source unless such tax is in excess of the amount of final tax for which the taxpayer is chargeable; and
⢠An assessment is treated to have been made and the person is not required to furnish a return of income in respect such income.
Separate block of income
âSeparate Block of Incomeâ are those, which are chargeable to tax under the respective head of income (salary, property, business, capital gains and other sources) as global taxable income but for the purposes of calculation of tax such income are excluded from the taxable income and tax thereon is calculated and charged at varying rates depending on the nature of each such income.
The tax payable on separate block of income is commonly called fixed tax.
Following natures of income are subject to a fixed tax and treated as a separate block of income
Retirement or termination benefits of an employee
Salary is chargeable to tax on the basis of actually received in a tax year. Accordingly the retirement or termination benefits received in lump sum, being covered under the definition of salary, are also chargeable to tax in the tax year in which received. As a result the income tax payable substantially increases, since the taxable income falls in a higher tax slab.
The taxpayer has an option to notify the concerned Commissioner by the due date for furnishing the return that he/she has elected for the retirement or termination benefits to be taxed as a separate block of income at the average rate of income tax of the three preceding years (fixed tax) [Sub-section (6) and (8) of section 12 of the Income Tax Ordinance, 2001].
Arrears of salary of an employee
Accordingly the arrears of salary received in lump sum are also chargeable to tax in the tax year in which received. As a result the income tax payable substantially increases, since the taxable income falls in a higher tax slab.
The taxpayer has an option to notify the concerned Commissioner by the due date of furnishing the return, that he/she has elected for the arrears of salary to be taxed as a separate block of income at the rates of income tax that would have been applicable if such arrears were received in the tax year in which the services were rendered (fixed tax) [Sub-section (7) and (8) of section 12 of the Income Tax Ordinance, 2001].
Flying and submarine allowance of certain employees
⢠âFlying allowanceâ of pilots, flight engineers, navigators of Pakistan Armed Forces, Pakistani Airlines or Civil Aviation Authority, Junior Commissioned Officers or other ranks of Pakistan Armed Forces; and
⢠âSubmarine allowanceâ of the officers of the Pakistan Navy;
is subject to fixed tax as a separate block of income at the rate of 2.5% of such allowance.
[Clause (1) of Part III of 2nd Schedule to the Income Tax Ordinance, 2001]
Property income
âRentâ received or receivable for a tax year, other than rent exempt from tax, is subject to a fixed tax as a separate block of income. [Section 15 of the Income Tax Ordinance, 2001]
Business income of certain retailers
A retailer being an individual or an association of persons having turnover not exceeding Rs. 5,000,000 for a tax year, can opt for payment of fixed tax at the rate of 1% of the turnover as a separate block of income [Section 113A of the Income Tax Ordinance, 2001].
Similarly, a retailer being an individual or an association of persons having turnover exceeding Rs. 5,000,000 for a tax year and who is subject to special procedure for payment of sales tax under chapter II of the Sales Tax Special Procedure Rules, 2007 can opt for payment of fixed tax at the rates of (specified in Section 113B) of the turnover as a separate block of income.
A retailer opting for fixed tax is not entitled to claim any adjustment of adjustable tax collected or deducted at source under any head during the year.
Business income from services rendered outside Pakistan of certain person
Business income from services rendered out-side Pakistan, the receipts of which are brought into Pakistan in foreign exchange through normal banking channel is subject fixed tax at the rate of 1% of the gross receipts.
[Clause (3) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Business income from construction contracts executed out-side Pakistan
Business income from execution of construction contracts out-side Pakistan, the income of which is brought into Pakistan in foreign exchange through normal banking channel is subject fixed tax at the rate of 1% of the gross receipts.
[Clause (3A) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Business income of certain manufacturers of cooking oil or vegetable ghee or both
Business income of manufacturers of cooking oil or vegetable ghee or both attributable to purchases of locally produced edible oil is subject fixed tax at the rate of 2% of purchase price of locally produced edible oil.
[Clause (13C) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Business income of resident from shipping business
Business income of a resident from business of shipping is subject fixed tax as under
⢠Amount equivalent to One US $ per gross registered tonnage per annum in respect of ships and all floating crafts including tugs, dredgers, survey vessels and other specialized craft purchased or bare-boat chartered and flying Pakistan flag; and
⢠Amount equivalent to fifteen US cents per ton of gross registered tonnage per chartered voyage but not exceeding one US $ per ton of gross registered tonnage per annum in respect of ships, vessels and all floating crafts including tugs, dredgers, survey vessels and other specialized craft not registered in Pakistan and hired under any charter other than bare-boat charter.
âEquivalent amountâ for the this purpose means the rupee equivalent of a US dollar according to the exchange rate prevalent on the first day of December in the case of a company and the first day of September in other cases in the relevant tax year.
[Clause (21) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Capital gains from sale of securities
Capital gains as reduced by capital losses, if any, arising from the disposal of the securities held for a period of less than a year [calculated from the date of acquisition (whether on or before 30th June 2010) to the date of disposal (on or after July 01, 2010)] is subject to fixed tax.
In case of a banking company and an insurance company the gain arising on disposal of securities is chargeable to tax as separately provided in the Seventh (7th) and Fourth (4th) Schedule to the Income Tax Ordinance, 2001.
âSecuritiesâ for the this purpose means share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative products.
[Section 37A of the Income Tax Ordinance, 2001]
Capital gains from the sale of shares or assets by a private limited company to Private Equity and Venture Capital Fund
Capital gains derived from sale of shares or assets by a private limited company to Private Equity and Venture Capital Fund is subject fixed tax at the rate of 10% of such gains.
[Clause (5B) of Part II of 2nd Schedule to the Income Tax Ordinance, 2001]
Obligations of the persons deriving income subject to separate charge, final tax and fixed tax
A person deriving income exclusively from the sources covered under separate charge, final tax or fixed tax is required to submit
#61607; An annual statement in the prescribed format (commonly known as statement under section 115) along with;
#61607; Certificates of the tax collected or deducted at source in the prescribed format obtained from the respective withholding agents;
#61607; Copies of relevant tax deposit receipts (challans); and
#61607; Where the final tax is of Rs. 35,000 or more in a tax year a Wealth Statement and a Re-conciliation Statement thereof.
A person deriving both taxable income (global income) and income from the sources covered under separate charge, final tax or fixed tax is required to submit in addition the annual Return of Income in the prescribed format.
