CFAP 5: Tax Planning and Practices

INTRODUCTION &
KEY CONCEPTS
Compiled by: Murtaza Quaid, ACA
Introduction & Key Concepts

In this Part:
 Income Tax Ordinance, 2001
 Charging Section
 What is “Tax”
 What is “Income”
 What is “Person”
 What is “Tax Year”
 Meaning of different terms used in
ITO-2001
 Interpretation of Statute
Compiled by: Murtaza Quaid, ACA
 Income Tax Ordinance, 2001
 The Federal levy, “Tax” on income (Income Tax) is governed by the Income Tax Ordinance,
2001 and Income Tax Rules, 2002. It is an annual charge on income.

Short title, extend and commencement of ITO-2001 Section 1

 The short title of the Ordinance dealing with taxation of income in Pakistan is “Income Tax
Ordinance, 2001”.

Explanation
a) ITO-2001 has two titles i.e. long and short. The long title is
“An ordinance to consolidate and amend the law relating to income tax and to
provide for matters ancillary thereto or connected therewith”.
b) Other ancillary and connected matters are :
i. Return Filling
ii. Announcement and Audit
iii. Recovery proceedings
iv. Appeal
v. Administration and Authorities.

Compiled by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001

Short title, extend and commencement of ITO-2001 Section 1

 ITO-2001 extends to the whole of Pakistan.

Explanation
a) Pakistan comprises of:
i. Baluchistan, KPK, Sindh and Punjab;
ii. Islamabad Capital Territory; and
iii. Such states and territories as are or may be included in Pakistan, whether by accession or
otherwise. [Article 1(2) the Constitution of Pakistan, 1973]
b) ITO-2001 does not apply to Azad Jammu and Kashmir (AJ&K), as it is not legally the part of
Pakistan.

 ITO-2001 shall come into force on a date specified by the Federal Government by notification
in the official gazette.

Explanation
The Federal Government appointed 1st July 2002 as the date on which the ITO-2001 came into
force. [SRO 381(I)/2002 dated 15/06/2002]

Compiled by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001

Savings of Repealed Ordinance [Income Tax Ordinance, 1979] Section 239

 Any proceeding under the repealed Ordinance pending on the

commencement of ITO-2001 before
 any income tax authority, the Appellate Tribunal or any Court by way of
 appeal, reference, revision or prosecution
shall be continued and disposed of as if this Ordinance has not come into
force.

 Any notification issued under the repealed Ordinance and in force on the
commencement of ITO-2001 shall continue to remain in force, unless
amended, modified, cancelled or repealed by, or under ITO-2001.

Compiled by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001

Ordinance to override other law Section 3

 The provisions of ITO-2001 shall apply notwithstanding anything to the contrary contained in
any other law for the time being in force.

Explanation
ITO-2001 is a special law. It overrides all other laws. Hence, in case of clash between the
provision of ITO-2001 and any other law, the ITO-2001 shall prevail. However, ITO-2001 does
not have overriding effect on the Constitution of Pakistan, as it is the supreme law of the country.

Explanation
Provision in any other law providing for:
i. an exemption from any tax imposed under ITO-2001;
ii. a reduction in the rate of tax imposed under ITO-2001;
iii. a reduction in tax liability of any person under this ITO-2001; or
iv. an exemption from the operation of any provision of ITO-2001,
shall have no legal effect unless also provided for in ITO-2001.

Compiled by: Murtaza Quaid, ACA

 Charging Section [Section 4]

 Tax shall be imposed

on every person

having income

for the year

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 What is “Tax” [Section 2(63)]
Tax
 means any tax imposed under Chapter II (Charge of
Tax), and
 includes any penalty, fee or other charge or any sum
or amount leviable or payable under ITO-2001.

What is “Income” [Section 2(29)]

Income includes
 any amount chargeable to tax under ITO-2001;
 any amount subject to collection or deduction
of tax under the provision of ITO-2001;
 any amount treated as income under any
provision of ITO-2001; and
 any loss of income.
Compiled by: Murtaza Quaid, ACA
 What is “Person” [Section 80]
The following shall be treated as persons for the purposes of ITO-2001, namely:
1. Individual;
2. Company;
3. Association of persons incorporated, formed, organized or established in Pakistan or
elsewhere;
4. Federal Government;
5. Foreign Government;
6. Political sub-Division of a Foreign Government;
7. Public international organization.

Reasons to establish “Person”

 To determine applicable tax regimes;

 To determine applicable tax rates;
 To determine residential status;
 To determine applicable tax exemptions;
 To determine applicable tax credits;
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 What is “Person” [Section 80]

Association of Person [Section 80(2)(a)]

Association of Person includes Explanation

(i) a firm; In order to establish an AOP under tax laws,
(ii) a Hindu undivided family; method of formation is irrelevant. It is a joint
venture between persons for
(iii) any artificial juridical person; and  Joint ownership;
(iv) any body of persons formed under a foreign  Joint operation; or
law but does not include a company.  Joint event.

Firm [Section 80(2)(c)]

Firm means the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.

Compiled by: Murtaza Quaid, ACA

 What is “Person” [Section 80]

Company [Section 80(2)(b)]

Company means
(i) company as defined in the Companies Act, (vi) a trust, an entity or a body of persons
2017; established or constituted by or under
any law for the time being in force;
(ii) a body corporate formed by or under any
law in force in Pakistan; (vii) a foreign association,
(iii) a modaraba;  whether incorporated or not,
(iv) a body  which the FBR has, by general or
special order, declared to be a
 incorporated by or under the law of a
company for the purposes of ITO-
country outside Pakistan
2001; (Link point (iv) of definition
 relating to incorporation of of AOP)
companies;
(xi) a Provincial Government;
(v) a co-operative society, a finance society or
(xii) a Local Government in Pakistan; or
any other society;
(xiii) a Small Company
(vi) a non-profit organization;

Connecting Concept:
An NPO may be with the structure of AOP, but for the purpose of ITO-2001, it
will be considered as “Company”.
Compiled by: Murtaza Quaid, ACA
 What is “Person” [Section 80]

Trust [Section 80(2)(d)] Unit Trust [Section 80(2)(e)]

Trust means Unit trust means

 an obligation annexed to the ownership of  any trust under which beneficial interests
property and are divided into units
 arising out of the confidence  such that the entitlements of the
beneficiaries to income or capital are
- reposed in and accepted by the owner,
determined by the number of units held.
or
- declared and accepted by the owner
 for the benefit of
- another, or
- of another and the owner,
 and includes a unit trust.

Compiled by: Murtaza Quaid, ACA

 What is “Person” [Section 80]

Company [Section 80(2)(b)]

Public Company & Private Company [Sec. tion2(45) & 2(47)]

Public Company means
Reason to establish “Public
(i) a company in which not less than 50% of the shares are Company”
held by
 Shares of Public Company
 Federal Government or
are included in definition of
 Provincial Government; “Securities” and gain on
(ii) a company in which not less than 50% of the shares are disposal of securities are
held by taxable under the head
 Foreign Government or “Capital Gain” as separate
 Foreign company owned by a foreign Government; block of income.
(iii) a company
 whose shares were traded on a registered stock exchange in Pakistan at any time in the
tax year and
 which remained listed on that exchange at the end of that year; or
(iv) a unit trust whose units are widely available to the public and any other trust as defined in the
Trusts Act, 1882.
Private Company means a company that is not a public company.
Compiled by: Murtaza Quaid, ACA
 What is “Person” [Section 80]

Company [Section 80(2)(b)]

Small Company [Section 2(59AB)]

Small Company means a company registered on or after the first day of July, 2005,
under the Companies Act, 2017, which
(i) has paid up capital plus undistributed reserves not exceeding 50 million rupees;
(ii) has employees not exceeding 250 at any time during the year;
(iii) has annual turnover not exceeding 250 million rupees;
(iv) is not formed by the splitting up or the reconstitution of company already in
existence; and
(v) is not a small and medium enterprise.

Reason to establish “Small Company”

 Tax rates for Small Company is lower than tax rates for other than Small Company.

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”
As defined in Section 74 of the Income Tax Ordinance, 2001, there are three
kinds of tax years as follow:
1. Normal tax year;
2. Special tax year; and
3. Transitional tax year.
However, there are two additional tax year, that
are treated as tax year under the provisions of ITO-2001.
 Tax year of persons about to leave Pakistan [Section 145]
 Tax year of discontinued business [Section 117]

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”

Reasons to establish “Tax year”

 To determine applicable finance act;

The provision of Finance Act are generally applicable from the start of the upcoming financial
year, unless otherwise specified. This mean that the provision Finance Act, 2023 are applicable
from 01 July 2023 (i.e. for tax year 2024 onwards).
 To determine due date for filling of return of income;
 For individual / AOP;
on or before 30th September next following the end of the tax year;
 For Company;
- with a tax year ending between 1st January and 30th June
on or before 31st December next following the end of the tax year
- with a tax year ending between 1st July and 31st December
on or before 30th September next following the end of the tax year;

Compiled by: Murtaza Quaid, ACA

 Tax Year [Section 74]

Normal Tax Year Special Tax Year Transitional Tax Year

 Normal tax year is a  Special tax year is a period of  In case of change in tax year, the period between
period of 12 months 12 months different from  the end of the last tax year prior to change and
ending on the 30th day normal tax year.  the date on which the changed tax year
of June. commences,
 Special tax year is denoted shall be treated as transitional tax year.
 Normal tax year is by the calendar year relevant
denoted by the calendar to normal tax year in which  Transitional tax year is denoted by the calendar year
year in which the said the closing date of the special relevant to normal tax year in which the closing
date falls. tax year falls. date of the Transitional tax year falls.
 For example, normal  For example, special tax year  For example, A person having normal tax year from
tax year ends on 30th of a person ends on 31st 1st July 2003 to 30th June 2004 (NTY 2004) makes
June 2018, which falls in December 2017, which falls transition to special tax year from 1st January 2005
calendar year 2018, in normal tax year 2018 (1st to 31st December 2005 (STY 2006). Due to this
therefore, Tax year is July 2017 – 30th June 2018). transition, a period of 6 months (i.e. from 1st July
2018. The calendar year in which 2004 to 31st December 2004) is left out between
year-end date of normal tax the two tax years. This period is referred to as
year 2018 falls is 2018. Thus transitional tax year.
tax year of the person is
“Special tax year 2018”.  The closing date of this transitional tax year ends on
31st December 2004, which falls in normal tax year
2005 (1st July 2004 – 30th June 2005). The
Short cut to denote Tax Year calendar year in which year-end date of normal tax
year 2005 falls is 2005. Thus tax year of the person
Tax year ending Tax year denoted by is “Transitional tax year 2005”.
January to June Same calendar year
July to December Next calendar year
Compiled by: Murtaza Quaid, ACA
 What is “Tax Year”

Special Tax Year

 The FBR may by notification in the official gazette permit:

 a class of person having special tax year, to use normal tax year; or
 a class of person having normal tax year, to use special tax year.
 For example in respect of certain classes, following special tax years are specified by the FBR.

S. No. Classes of persons Special Tax year

1. Companies manufacturing sugar 1st October to 30th September
2. Rice Exporter
3. Insurance Companies 1st January to 31st December
4. Banking Companies
5. Cotton Ginner
6. Rice Husking 1st September to 31st August
7. Oil Milling Business
8. Manufacturer of Shawals 1st April to 31st March

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”

Procedure for change in tax year

 A person having normal tax year may apply in writing to the Commissioner to allow
him to use 12 month period, other than normal tax year, as special tax year.

 A person having special tax year may apply in writing to the Commissioner to allow him to use normal tax
year.

 The Commissioner shall, by an order, grant permission

 only if the person has shown a compelling need to use special tax year or normal tax year, as the case
may be; and
 subject to any conditions that may be imposed by the Commissioner.

 An order by Commissioner shall be made after providing an opportunity of being heard to the applicant
and where his application is rejected, the Commissioner shall record the reason for rejection in the order.

 The order by Commissioner (i.e. the change of tax year) shall take effect from the first day of the special
tax year or normal tax year, as the case may be, as may be specified in the order.

 The Commissioner may, after providing an opportunity of being heard to the person, withdraw the
permission granted to use special tax year or normal tax year, as the case may be.

 A person dissatisfied with the order of the Commissioner,

 Rejecting the application for the change of tax year; or
 Withdrawing permission granted to use special tax year or normal tax year, may file a review
application to the FBR, and the decision by the FBR on such application shall be final.
 What is “Tax Year”

Assessment of persons about to leave Pakistan [Section 145]

1. Where
 any person is likely to leave Pakistan
 during the concurrency of tax year or
 shortly after its expiry
 with no intention of returning to Pakistan,
he shall give to the Commissioner a notice to that effect at least 15 days before the probable date of his
departure.
2. The above notice shall be accompanied by a return or returns of taxable income in respect of the period
 commencing from the end of the latest tax year for which an assessment has been made and
 ending on the probable date of his departure,
and the period commencing from the end of the latest tax year to the probable date of his departure
shall be deemed to be a tax year (distinct and separate from any other tax year) in which the said date
falls.
3. The Commissioner may serve a notice on any person who, in his opinion,
 is likely to leave Pakistan
 during the current tax year or
 shortly after its expiry and
 has no intention of returning to Pakistan,
to furnish within such time as may be specified in such notice, a return or returns of taxable income for
the tax year or tax years for which the taxpayer is required to furnish such return or returns.
4. The taxable income shall be charged to tax at the rates applicable to the relevant tax year and all the
provisions of ITO-2001 shall, so far as may be, apply accordingly.
Compiled by: Murtaza Quaid, ACA
 What is “Tax Year”

Assessment of persons about to leave Pakistan [Section 145]

Particulars Case (a) Case (b) Case (c)

Probable date of departure 15 May 2020 15 Aug 2020 15 Nov 2020

Latest assessed tax year

Due date of notice u/s 145
Tax year u/s 145
 Commencing from
 Ending on
Period of tax year u/s 145

Applicable tax rate

**The income is required to be split up to 30 June 2020 and thereafter,

and charged to tax at the rates applicable to the relevant tax year.

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”

Assessment of persons about to leave Pakistan [Section 145]

Particulars Case (a) Case (b) Case (c)

Probable date of departure 15 May 2020 15 Aug 2020 15 Nov 2020

Latest assessed tax year Tax year 2019 Tax year 2019 Tax year 2020

Due date of notice u/s 145 30 Apr 2020 31 Jul 2020 31 Oct 2020

Tax year u/s 145

1 Jul 2019 1 Jul 2019 1 Jul 2020
 Commencing from 15 May 2020 15 Aug 2020 15 Nov 2020
 Ending on
Less than 12 More than 12 Less than 12
Period of tax year u/s 145 months months months
Tax year 2020 &
Applicable tax rate Tax year 2020
Tax year 2021**
Tax year 2021

**The income is required to be split up to 30 June 2020 and thereafter,

and charged to tax at the rates applicable to the relevant tax year.

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”

Notice of discontinued business [Sec. 117]

1. Any person discontinuing a business shall give the Commissioner a notice in writing to
that effect within 15 days of the discontinuance.
2. The person discontinuing a business shall furnish a return of income for the period
 commencing on the first day of the tax year in which the discontinuance occurred
and
 ending on the date of discontinuance
and this period shall be treated as a separate tax year.
3. Where no notice has been given by the person discontinuing a business but the
Commissioner has reasonable grounds to believe that a business
 has discontinued or
 is likely to discontinue,
the Commissioner may serve a notice on the
person to furnish a return of income for the
period specified, to the Commissioner within
the time specified in the notice.

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”

Notice of discontinued business [Sec. 117]

Particulars Case (a) Case (b) Case (c)

Date of discontinuance of business 30 Apr 2020 31 Jul 2020 31 Oct 2020

Due date of notice u/s 117

Tax year u/s 117

 Commencing from
 Ending on

Period of tax year u/s 117

Applicable tax rate

Compiled by: Murtaza Quaid, ACA

 What is “Tax Year”

Notice of discontinued business [Sec. 117]

Particulars Case (a) Case (b) Case (c)

Date of discontinuance of business 30 Apr 2020 31 Jul 2020 31 Oct 2020

Due date of notice u/s 117 15 May 2020 15 Aug 2020 15 Nov 2020

Tax year u/s 117

1 Jul 2019 1 Jul 2020 1 Jul 2020
 Commencing from 30 Apr 2020 31 Jul 2020 31 Oct 2020
 Ending on

Period of tax year u/s 117 Less than 12 months Less than 12 months Less than 12 months

Applicable tax rate Tax year 2020 Tax year 2021 Tax year 2021

Compiled by: Murtaza Quaid, ACA

 Meaning of different terms used in ITO-2001

Defined in ITO-2001 Not defined in ITO-2001

 Apply the definition /

Defined in section 2 Defined in other sections interpretation given by court
of law.
 Applicable for the  Applicable for that specific
 Apply the common dictionary
entire ITO-2001 section

Types of Definitions

Exclusive definitions Inclusive definitions Hybrid definitions

 Start with “means” and  Start with “includes” and  Start with “means” but
exclude the common / retain the common / then goes to on to use
dictionary meaning of dictionary meaning of the “includes” to include
the term. term but makes certain certain specific cases in the
addition / deletion in it. definition. Hybrid
definition is the type of
Compiled by: Murtaza Quaid, ACA exclusive definition.
 Interpretation of Statute
1. Specific provision shall prevail over general provision.
2. Where more than one interpretation / treatment is possible
for any provision of law, the interpretation / treatment
beneficial for the taxpayer shall be adopted.
3. Revenue receipts are always taxable, unless specifically
made exempt under the ITO-2001.
4. Capital receipts are always not taxable, unless specifically
made taxable under the ITO-2001.
5. Revenue expenditures are always allowed, unless specifically made disallowed
under the ITO-2001.
6. Capital expenditures are always not allowed, unless specifically made allowed
under the ITO-2001.
7. Ejusdem generis, or literally “of the same kind or class,” is a long-standing principle
of both contract and statutory interpretation. It provides that, where a general
word or phrase follows a list of specific terms, the general word will be interpreted
to include only items of a similar nature to the terms specified.

Compiled by: Murtaza Quaid, ACA