Status of Zakat in income tax return?

mensan · 08-11-2011, 12:44 PM

What is the status of

1. zakat paid to registered charities like Edhi or Shaukat Khanum?
2. zakat deducted from bank account on 1 Ramazan?

Should we deduct the amount from taxable income or from the tax itself?

student_of_law · 08-12-2011, 08:11 PM

According to s.9 ITO,2001, taxable income is worked out by deducting Zakat from total income.

Further s. 60 says that a person shall be entitled to a deductible allowance for the amount of any Zakat paid ....... According to s.2(16), deductible allowance is deductible from total income.

Hence Zakat paid is to be deducted from total income not from tax liability.

Zakat to Edhi or deducted by Bank, shall be deducted from total income. Remaining will be taxable income. (Total Income - Zakat) = Taxable Income. On the basis of taxable income you will determine your tax rate in accordance with the First Schedule

Sayub · 08-13-2011, 02:00 AM

please clarify zakat deducted by bank at the time of payment of profit on debt is deductible allowance or not. <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 According to s.9 ITO,2001, taxable income is worked out by deducting Zakat from total income.

Further s. 60 says that a person shall be entitled to a deductible allowance for the amount of any Zakat paid ....... According to s.2(16), deductible allowance is deductible from total income.

Hence Zakat paid is to be deducted from total income not from tax liability.

Zakat to Edhi or deducted by Bank, shall be deducted from total income. Remaining will be taxable income. (Total Income - Zakat) = Taxable Income. On the basis of taxable income you will determine your tax rate in accordance with the First Schedule
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student_of_law · 08-13-2011, 04:45 PM

[quote]Originally posted by Sayub
 please clarify zakat deducted by bank at the time of payment of profit on debt is deductible allowance or not. [quote]

Zakat is not deducted with payment of profit on debt. It is deducted on the first day of Ramazan, according to Zakat & Ushr Ordinance, 1980. Zakat deducted by bank is deductible allowance.

Deduction at the time of payment of profit on debt is that of withholding income tax. This is final tax.

Sayub · 08-13-2011, 09:24 PM

Please refer to any bank's personnel(for your knowledge only) zakat is deducted by bank at the time of payment of profit on debt.#8626;This zakat is not deductible allowance u/s 60. One may diagree on the basis of referrence to the law<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 [quote]Originally posted by Sayub
 please clarify zakat deducted by bank at the time of payment of profit on debt is deductible allowance or not. [quote]

Zakat is not deducted with payment of profit on debt. It is deducted on the first day of Ramazan, according to Zakat & Ushr Ordinance, 1980. Zakat deducted by bank is deductible allowance.

Deduction at the time of payment of profit on debt is that of withholding income tax. This is final tax.
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student_of_law · 08-15-2011, 03:30 PM

Neither any zakat is ever deducted along with payment of profit on debt on my account nor have I seen so in any of my client's statements. Any how if any Zakat is deducted it is a deductible allowance.

Sayub · 08-17-2011, 06:56 AM

There are many products offered by different banks it is possible that you might not have subscribed for the one. Iam maintaining that zakat is deducted, as i was involved in the ICFR exercise of a reputed bank there i learned this. Focussing on the point please clarify what is meant by sec 60(2) and practicality of sec 40(2).<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 Neither any zakat is ever deducted along with payment of profit on debt on my account nor have I seen so in any of my client's statements. Any how if any Zakat is deducted it is a deductible allowance.
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student_of_law · 08-17-2011, 08:49 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Sayub
 There are many products offered by different banks it is possible that you might not have subscribed for the one. Iam maintaining that zakat is deducted, as i was involved in the ICFR exercise of a reputed bank there i learned this. Focussing on the point please clarify what is meant by sec 60(2) and practicality of sec 40(2).[quote]Originally posted by student_of_law

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I apologize for entering into discussion without gaining sufficient knowledge. You are right. According to Schedule of Zakat & Ushr Ordinance, 1980, Zakat is deductible on many transactions at the time of payment of return. I thank you for enriching my knowledge.

As far as practical application of s.40(2) is concerned, I am of the view that it will come into play where deduction at source is not a final tax. For example in the case of company u/s 151(3) or by virtue of Part IV of Second Schedule.

Where deduction is not a final tax , the taxpayer, shall show profit on debt as income from other sources and calculate his tax liability, by adding this income to other heads of income.

For example a company is given profit on debt amounting to Rs.100
Simultaneously, zakat is deducted amounting to Rs.15
Now the company will show its income from other sources as Rs.85
Suppose income from business of company is Rs.1000

Now total income of company is 1085

s.9 and S.60 (1) say that from total income Zakat is to be deducted to calculate taxable income. However, in the above case, according to s.60(2), Zakat will not be deducted from total income of Rs.1085, as the deduction thereof has already been made from income from other sources (i.e. Profit on debt.).

I think the net effect will remain the same.

This is my understanding of the provision. It may need certain Correction.

Sayub · 08-18-2011, 03:26 AM

you are absolutely right in your example. <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by student_of_law
 <blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Sayub
 There are many products offered by different banks it is possible that you might not have subscribed for the one. Iam maintaining that zakat is deducted, as i was involved in the ICFR exercise of a reputed bank there i learned this. Focussing on the point please clarify what is meant by sec 60(2) and practicality of sec 40(2).[quote]Originally posted by student_of_law

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I apologize for entering into discussion without gaining sufficient knowledge. You are right. According to Schedule of Zakat & Ushr Ordinance, 1980, Zakat is deductible on many transactions at the time of payment of return. I thank you for enriching my knowledge.

As far as practical application of s.40(2) is concerned, I am of the view that it will come into play where deduction at source is not a final tax. For example in the case of company u/s 151(3) or by virtue of Part IV of Second Schedule.

Where deduction is not a final tax , the taxpayer, shall show profit on debt as income from other sources and calculate his tax liability, by adding this income to other heads of income.

For example a company is given profit on debt amounting to Rs.100
Simultaneously, zakat is deducted amounting to Rs.15
Now the company will show its income from other sources as Rs.85
Suppose income from business of company is Rs.1000

Now total income of company is 1085

s.9 and S.60 (1) say that from total income Zakat is to be deducted to calculate taxable income. However, in the above case, according to s.60(2), Zakat will not be deducted from total income of Rs.1085, as the deduction thereof has already been made from income from other sources (i.e. Profit on debt.).

I think the net effect will remain the same.

This is my understanding of the provision. It may need certain Correction.

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