P

Tax Practices
Syllabus

Grid
 Preface to Second Edition
By the grace of Allah Almighty, my first effort, Core of Tax Practices, was widely appreciated by students
of professional education and warmly welcomed by various professionals in the field. Within such a
short period, the book garnered recognition, prompting the release of its second edition, which includes
certain additions and rectifications. I am pleased to present this updated version to you.
Despite facing numerous challenges in retrieving widely scattered references related to tax laws, which
involved considerable time and effort, I have compiled this book in a professional manner. Tax law is
often viewed as a complex field that requires a high level of professional knowledge and skill, especially
within the corporate sector.

As a teacher preparing students for the CA exams, I encountered several challenges that motivated me
to write this book. Understanding the needs of students, particularly those in professional studies, I
decided to create a resource that would clarify the provisions of the Income Tax Ordinance 2001 and
the Sales Tax Act 1990.
Primarily written for CAF-02 students of The Institute of Chartered Accountants of Pakistan (ICAP), the
book is also beneficial for CA CFAP Level students. In addition, students of the Institute of Corporate
Secretaries of Pakistan (ICSP), as well as MBA and M. Com students, can also find it useful. The chapters
are logically organized to meet the needs of students and corporate personnel alike.

I have made every effort to explain the provisions of the law in the simplest possible way, using
accessible language that is still legally precise. To enhance the book’s utility, relevant ‘Sections and
Rules’ are also referenced throughout.

I would like to express my special gratitude to Mr. Abdul Qayyum Raza, ACA, for his cooperation in
preparing this book. I also deeply appreciate the unwavering support of my family members and
partners.

I trust that this book will serve its intended purpose and prove helpful to students, professionals, and
general readers alike. I welcome any suggestions for improvement and will be grateful for any feedback
on shortcomings or errors that may have inadvertently occurred.

May Allah Almighty continue to bless and guide us all.

Ahmad Jabbar
(FCA, FPA, M. Com)

Director Academics
The TIPS College of Accountancy
(Approved RAET by ICAP)

Senior Partner
Parker Russell & Co.
Chartered Accountants
An independent member firm of Parker
Russell International
 C
Contents

Page

Chapter

1 Introduction and Definition 01

2 Income from Salary 22

3 Tax Credits 76

4 Income from Property 97

5 Income from Capital Gain 117

6 Income from Other Sources 140
7 Income from business 154
8 Method of Accounting 235
9 Set off and carry forward of losses 239
10 Returns, Assessment and Appeals 251
11 Miscellaneous 309
12 Income Tax Practice Question and Answers 330
13 System of Taxation in Pakistan 376
14 Constitutional Provisions on Taxes 384
15 Ethics 397
16 Scope of Sales Tax Law and Rules for Registration and Deregistration 412
17 Determination of Sales Tax Liability 438
18 Returns and Records 452
19 Sales Tax Practice Questions 467
 1

CHAPTER
Introduction and Definition

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Introduction and Definitions

Introduction and Definitions

Introduction:
DEFINITION OF 'LAW':
The term Law can be defined in different ways. Some of the definitions of Law are as follow:
 "A 'law' is a rule of conduct imposed and enforced by the sovereign." - Austin
 "Law is the command of a sovereign, containing a common rule of life for his subjects and
obliging them to obedience." - Jhon Erskine
 "Law is the system of rights and obligations which the state enforces." - Green

Sources of Law:
law is created either by legal means or by historical process. The legal sources are further
classified into the following categories:
1. Legislation (termed as Enacted law);
2. Rules, regulations or bye-laws (termed as procedural law);
3. Precedent (termed as case law);
4. Custom (termed as customary law having its source in custom); and
5. Agreement (termed as conventional law, based on agreement between the parties).
In Pakistan it is the Majlis-e·Shoora (Parliament) which acts as legislature. Article-70 through
Article-77 of the constitution of Pakistan deal with the Legislative Procedure. Any enactment of the
Parliament is termed as 'Act'.
Article-89 of the Constitution empowers the President of Pakistan to promulgated laws (termed as
Ordinances) if the National Assembly is not in session. An Ordinance Promulgated by the
President bears the same force and effect as an Act of the Parliament. In a case where the
parliament exists at the time of promulgation of an Ordinance, the Ordinance shall stand repealed
if not resented befo.re the parliament within one hundred and twenty (120) days of its
promulgation. However, if the parliament. does not exist at the time of issuance of an Ordinance,
the ordnance shall be as valid as an Act of the Parliament. Under the latter case the Ordinance is
presented before the parliament for ratification after constitution of the parliament.

IMPOSITION OF TAXES AND SOURCES OF INCOME TAX LAW:

Article-77 of the Constitution of Pakistan empowers the Federal Government to levy tax for the
purposes of the Federation. The Federal Government may levy a tax through an Act of the
Parliament or an Ordinance promulgated by the President. The following are the main sources of
the Income Tax Law:

1) The Legislative Law, I.e., The Income Tax Ordinance, 2001;

2) The Procedural Law, i.e., The Income Tax Rules, 2002 made by the Federal Board of
Revenue (Board) under the authority of section 237 of the Income Tax Ordinance, 2001;
3) The Notifications, Circulars, etc., issued by the Board under section 206 of the Income Tax
Ordinance, 2001; and
4) The Case Law, i.e., the judgments and interpretations of the Appellate Tribunal, High
Courts and the Supreme Court of Pakistan.

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Introduction and Definitions

DEFINITIONS
1. Person:
“Person” includes
 an individual;
 a company or association of persons incorporated, formed, organized or established in
Pakistan or elsewhere;
 The F e d e r a l Government, a foreign government, a political subdivision of a foreign
government, or public international organization.

2. Association of Persons:
“Association of persons” includes
 a firm,
 a Hindu undivided family,
 any artificial juridical person and anybody of persons formed under a foreign law, but does
not include a company;
“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.

3. Company:
“Company” means:
 a company as defined in the Companies Act,
 a small company
 a body corporate formed by or under any law in force in Pakistan;
 a modaraba;
 a body incorporated by or under the law of a country outside Pakistan relating to
incorporation of companies;
 a foreign association, declared to be a company for the purposes of this Ordinance;
 a Provincial Government; or
 a local Government in Pakistan; or
 a co-operative society, a Finance society or any other society
 a non-profit organization
 a trust, an equity or a body of persons established or constituted by or under any law for
the time being in force.
4. Public company means —
 a company in which not less than fifty per cent of the shares are held by the Government;
 a company in which not less than fifty per cent of the shares are held by a foreign
Government; or a foreign company owned by a foreign Government.
 a company whose shares were traded on a registered stock exchange in Pakistan and
which remained listed on that exchange at the end of that year; or
 a unit trust whose units are widely available to the public and any trust registered.

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5. Private company means a company that is not a public company

6. Non-profit organization means any person other than an individual which is

(i) established for religious, educational, charitable, welfare or development purposes, or for
the promotion of an amateur sport;
(ii) formed and registered under any law as a non- profit organization;
(iii) approved by the Commissioner for specified period, on an application made by such
person in the prescribed form and manner, accompanied by the prescribed documents
and, on requisition, such other documents as may be required by the Commissioner;
Assets of such organization are not available for private benefit to any other person.
Sec 2(11A) “charitable purpose” includes;
• relief of the poor, education, medical relief and
• the advancement of any other object of general public utility.
7. Board
Board means
 the Central Board of Revenue established under the Central Board of Revenue Act, 1924
(IV of 1924), and
 on the commencement of Federal Board of Revenue Act, 2007, the Federal Board of
Revenue established under section 3 thereof;

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

9. IT enabled services
IT enabled services, include but not limited to inbound or outbound call centers, medical
transcription, remote monitoring, graphics design, accounting services, Human Resource (HR)
services, telemedicine centers, data entry operations, cloud computing services, data storage
services, locally produced television programs and insurance claims processing

10. Permanent establishment

“Permanent establishment” in relation to a person, means a place of business through which the
business of the person is wholly or partly carried on, and includes –
(a) a place of management, branch, office, factory or workshop, premises for soliciting orders,
warehouse, permanent sales exhibition or sales outlet, other than a liaison office except
where the office engages in the negotiation of contracts (other than contracts of purchase);
(b) a mine, oil or gas well, quarry or any other place of extraction of natural resources;
(ba) an agricultural, pastoral or forestry property;

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(bb) virtual business presence in Pakistan including any business where transactions are
conducted through internet or any other electronic medium, with or without having any
physical presence;
(c) a building site, a construction, assembly or installation project or supervisory activities
[connected] with such site or project [but only where such site, project and its 5 [connected]
supervisory activities continue for a period or periods aggregating more than ninety days
within any twelve-months period];
(d) the furnishing of services, including consultancy services, by any person through
employees or other personnel or entity engaged by the person for such purpose;
(e) a person acting in Pakistan on behalf of the person (hereinafter referred to as the “agent
other than an agent of independent status acting in the ordinary course of business as
such, if the agent –
(i) has and habitually exercises an authority to conclude contracts on behalf of the
other person or habitually concludes contracts or habitually plays the principal role
leading to the conclusion of contracts that are routinely concluded without material
modification by the person and these contracts are─
(a) in the name of the person; or
(b) for the transfer of the ownership of or for the granting of the right to use
property owned by that enterprise or that the enterprise has the right to use; or
(c) for the provision of services by that person; or
(ii) has no such authority, but habitually maintains a stock-in-trade or other
merchandise from which the agent regularly delivers goods or merchandise on
behalf of the other person; or
(f) any substantial equipment installed, or other asset or property capable of activity giving rise to
income;
(g) a place of business that is used or maintained by a person if the person or an associate of a
person carries on business at that place or at another place in Pakistan and─
(i) that place or other place constitutes a permanent establishment of the person or an
associate of the person under this sub-clause; or
(ii) business carried on by the person or an associate of the person at the same place or at
more than one place constitute complementary functions that are part of a cohesive
business operation.
11. Principal Officer
“Principal officer” used with reference to a company or association of persons includes;
(a) a director, a manager, secretary, agent, accountant or any similar officer; and

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(b) any person connected with the management or administration of the company or association of
persons upon whom the Commissioner has served a notice of treating him as the principal officer
thereof.

Exercise
(a) Briefly state, with reasons, whether or not you consider the below mentioned companies to be
a public company for tax purpose.
(i) PPL is a company incorporated under the Companies Act and is not listed on any stock
exchange in Pakistan. 59 % of the shares in PPL are held by BBC Ltd, a company
incorporated in United Kingdom. United Kingdom holds 97% of the shares in BBC Ltd
(ii) XYZ Limited is a public company incorporated under the Companies Act whose shares
were traded on the Pakistan Stock Exchange from 01 August 2024 until 29 June 2025 on
which date the company was delisted on the exchange.
(iii) The Provincial Government of NWFP holds 50% of the shares in ABC Ltd, a public
company under the Companies Act. ABC Ltd is not listed on any stock exchange in
Pakistan.
(iv) BRR is a public company under the Companies Act. 41% of the shares are held by the
Federal Government, 50% by the Government of Saudi Arabia and 9% by the individuals
and group companies. BRR is not listed on any stock exchange in Pakistan.

(b)
Anderson Inc. a public company incorporated under the law of the United Kingdom relating to the
incorporation of companies, has been operating in Pakistan for over 50 years. The control and
management of the Pakistan branch for the accounting year ended 31 December 2024 was
situated wholly outside Pakistan.
Required: Briefly state, with reasons whether Anderson Inc. will be assessed as a company for
Pakistan tax purposes for the relevant tax year.

Answer
(a)
(i) A public company for Pakistan tax purposes, inter alia includes a company in which not
less than 50% of the shares are held by a foreign government or a foreign company
owned by a foreign government. 59% of the shares in PPL are owned by BBC Ltd, which
is a foreign company but BBC Ltd is not wholly owned by the United Kingdom (foreign
government). Therefore, PPL is not a public company for Pakistan tax purpose.
(ii) A company whose shares are 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 is
a public company for tax purpose. Although the shares of XYZ Limited were traded on the
Pakistan stock exchange during the tax year 2025, XYZ Ltd did not meet the test of being
a public company for tax purpose since its shares were not listed on the Lahore stock
exchange on 30 June 2025. XYZ Ltd is therefore not a public company for tax purpose.
(iii) A company in which not less than fifty per cent of the shares are held by the Federal
Government or Provincial Government is a public company for tax purpose. Since the
Provincial Government of NWFP holds 50 percent of the shares in ABC Ltd, ABC Ltd is a
public company for tax purpose
(iv) A public company for Pakistan tax purposes, inter alia means a company in which not less
than 50% of the shares are held by a foreign government, therefore, BRR is a public
company as 50% of the shares are held by Government of Saudi Arabia.

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(b)
As per section 80, a company mean a body incorporated by or under the law of a country outside
Pakistan relating to incorporation of companies. Therefore, Anderson Inc. will be treated as
company for Pakistan tax purpose.

12.Tax year (Sec 74)

There are three kinds of tax years as stipulated in Section 74 of the Income Tax Ordinance, 2001:
 Normal tax year
 Special tax year
 Transitional tax year

13. Normal tax year

Normal tax year is a period of twelve months ending on the 30th day of June and is denoted by the
calendar year in which the said date falls.

14. Special tax year

Where a person’s income year is different from the normal tax year, or where, by an order, a person
has been allowed by the Commissioner to use a twelve months’ period different from normal tax
year, such income year or such period shall be that person’s special tax year and shall be denoted
by the calendar year relevant to normal tax year in which the closing date of the special tax year
falls.
The Board has authority to prescribe any special tax year in respect of any particular class of
taxpayer. For example in respect of certain classes of assesses following special tax years are
specified by the Board.

Classes of persons Special tax year Notification No. (SRO) and Date
Companies manufacturing sugar 1st October to 134(R)/68,
30th September July 31,1968
All persons exporting rice 1st January to 367(I) /74,
31st December January 14,1974
All Banks &insurance companies 1st January to 878 (I) /95,
31st December August 30,1995

fulfilment of following conditions laid down in section 74, that is:

A person using a special tax year may apply in writing to the Commissioner to allow him to use
normal tax year and the Commissioner may by an order, allow him to use normal tax year

The Commissioner shall 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 the permission shall be subject to
such conditions, if any, as the Commissioner may impose.

A change of tax year from normal to special or vice versa, granted by the Commissioner is subject
to withdrawal if in his opinion it is no longer feasible but not unless the person has been provided an
opportunity of being heard.

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An order of the Commissioner for change of tax year shall take effect from such date, being the first
day of the special tax year or the normal tax year, as the case may be, as may be specified in the
order.

A person dissatisfied with the order may file a review application with the Board against the decision
of the Commissioner at the time of granting permission for a special tax year or withdrawal of the
same and the decision by the Board on such application shall be final.

15. Transitional tax year

Where the tax year of a person changes as a result of an order by the Commissioner of Income tax
either from the normal tax year to special tax year or vice versa, the period between the end of the
last tax year prior to change and the date on which the changed tax year commences shall be
treated as a ‘transitional tax year’.
Example
The normal tax year of ABC Limited was the period from 01 July 2023 to 30 June2024. On an
application by ABC Limited, Commissioner granted approval to adopt special tax year of 30
September each year. The period from 01 July 2024 to 30 September 2024 will be treated as
transitional tax year.

Exercise:
Determine the tax year in respect of each accounting periods mentioned below:
a) 1.09.2023 to 31.08.2024
b) 1.01.2024 to 31.12.2024
c) 1.04.2024 to 31.03.2025
d) 1.05.2024 to 30.04.2025
e) 1.07.2024 to 30.06.2025

Answer
For all the five cases mentioned above, relevant tax year will be 2025 i.e. calendar year
relevant to
normal tax year [1.07.2024 to 30.06.2025) in which the closing date (31.08.2024, 31.12.2024,
31.03.2025, 30.04.2025, 30.06.2025) of special year falls.

ICAP Past Papers

Q.1
Kaleem Limited (KL) is a listed company and its accounting year ends on 30 June 2025. KL is now
considering to change its accounting year from 30 June 2025 to 30 September 2025.
Under the provisions of the Income Tax Ordinance, 2001:
(a) briefly describe normal, special and transitional tax year.
(b) state the requirements regarding change in tax year from normal to special.
(c) state the tax year corresponding to the income year ended 30 September2025.

Ans.1
(a)
Normal tax year:
Normal tax year is a period of twelve months ending on the 30th day of June and is denoted by the
calendar year in which the said date falls.
Special tax year:

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Introduction and Definitions

Where a person’s income year is different from the normal tax year, or where, by an order, a person
has been allowed by the Commissioner to use a twelve months’ period different from normal tax year,
such income year or such period shall be that person’s special tax year and shall be denoted by the
calendar year relevant to the normal tax year in which the closing date of the special tax year falls.
Transitional tax year:
Where the tax year of a person changes as a result of an order by the Commissioner of Income tax
either from the normal tax year to special tax year or vice versa, the period between the end of the last
tax year prior to change and the date on which the changed tax year commences shall be treated as
transitional tax year. (Also called separate tax year)
(b)
Change of tax year from normal to special:
 A person shall apply in writing to the Commissioner for change in tax year from normal to
special.
 The Commissioner should grant permission only if he is satisfied that the company has a
compelling need to use special tax year.
 While giving the permission, the Commissioner may impose such conditions as he may deem
fit.
(c)
Tax year is 2026.

Q.2 {Spring 2017 Q.3 (a)(b)}

Under the provisions of the Income Tax Ordinance, 2001 explain the following:
(a) Special tax year
(b) Transitional tax year
Ans.2
Referred Ans.1

16. Resident and non-resident persons (Sec 81)

The determination of residential status of a person is necessary as the law explicitly provides that
a resident is taxable in respect of its worldwide income whereas the non-resident is taxable only in
respect of its Pakistan source income. The Ordinance lays down the method for determination of
residential status of a person in the following manner:
A person shall be a resident in Pakistan for a tax year if the person is:
i. a resident individual, resident company or resident association of persons for the year; or
ii. the Federal Government.
A person shall be non-resident person for a tax year if the person is not a resident person for
that year.
A very important point to note from the above discussion is that residential and non-residential
status of any person is to be determined in respect of each tax year as it may vary from year to
year. A person can be resident in tax year 2023 (01 July 2022 to 30 June 2023) but may be a
nonresident in tax year 2024 (01 July 2023 to 30 June 2024).
17. Resident individual
An individual shall be a resident individual for a tax year if the individual:
a) is present in Pakistan for a period of 183 days or more in the tax year; or
b) is an employee or official of the Federal Government or a Provincial Government posted
abroad in the tax year,
c) A citizen of Pakistan who is not present in any other country for more than 182 days during

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Introduction and Definitions

the tax year or he is not a resident taxpayer of any other country.

Note: The amendment is made basically for those Pakistani citizens who do not stay in
one country for 182 days and remain non-resident for all the countries they reside during
the year

The following rules apply for the purposes of section 82, which provides for the determination of a
person as resident individual.
 Part of a day that an individual is present in Pakistan (including the day of arrival in, and the
day of departure from, Pakistan) counts as a whole day of such presence;
 the following days in which an individual is wholly or partly present in Pakistan count as a
whole day of such presence, namely:
(i) a public holiday;
(ii) a day of leave, including sick leave;
(iii) a day that the individual’s activity in Pakistan is interrupted because of a
strike, lock-out or delay in receipt of supplies; or
(iv) a holiday spent by the individual in Pakistan before, during or after any
activity in Pakistan; and
 A day or part of a day where an individual is in Pakistan solely by reason of being in transit
between two different places outside Pakistan does not count as a day present in Pakistan.
18. Resident company
A company shall be a resident company in Pakistan for a tax year if:
(i) it is incorporated or formed by or under any law in force in Pakistan
(ii) the control and management of its affairs is situated wholly in Pakistan at any time in the
year; or
(iii) It’s a Provincial government or local Government in Pakistan.
19. Resident association of persons
if the control and management of the affairs of the association is situated wholly or partly in
Pakistan at any time in the year.

Exercise:
Explain the residential status of the following persons for the tax year 2025:
(i) Mr. Raza is working as Director Operations in the Ministry of Tourism. On 15 July 2024
he was posted to Pakistan Embassy in Italy for two years.
(ii) Anderson LLC was incorporated as limited liability company in UK. The control and
management of its affairs was situated wholly in Pakistan. However, with effect from 01
November 2024, the entire management and control was shifted to UK.
(iii) On 01 February 2025, Mr. Sameel a citizen of Pakistan was sent to Pakistan by his UK
based company to work on a special project. He left Pakistan on 23 August 2025.
(iv) BBL is a non-listed public company incorporated under the Companies Act. All the
shareholders of the company are individuals. The control and management of affairs of
the company during the year was outside Pakistan.
(v) Mr. Salman a property dealer in USA came to Pakistan on 01 February 2024. During his
stay up to 02 August 2024 in Pakistan, he remained in Peshawar up to 30 June 2024 and
thereafter till his departure from Pakistan, in Quetta. Assume that Commissioner has
granted him permission to use calendar year as special tax year.

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Answer
(i) Being an employee of Federal Government, Mr. Raza would be treated as resident
irrespective of number of days he stays in Pakistan.
(ii) A company shall be resident if control and management of the affairs of the company is
situated wholly in Pakistan at any time in the year. Therefore, company is resident
irrespective of the fact that it was incorporated in UK.
(iii) The stay of Mr. Sameel for the purpose of tax year 2025 is 150 days (28+31+30+31+30).
Since his stay in Pakistan is less than 183 days in tax year 2025, he is non-resident for
tax purposes. However, if he is not present in any other country for more than 182 days
during the tax year or he is not a resident taxpayer of any other country than he will be
treated as resident of Pakistan.
(iv) If a company is incorporated or formed by or under any law in force in Pakistan, it is
treated as a resident company. Such company cannot be treated as non-resident merely
on the basis that the control and management of the affairs of the company were situated
abroad. Therefore, BBL is a resident company.
(v) It is immaterial where he stayed in Pakistan. Number of days shall be counted from the
day of his arrival in Pakistan to the day of his departure in the following manner:
Accounting period 01 January 2024 to 31 December 2024 (Tax year 2025)
Month No. of Days
February 2024 29
March 2024 31
April 2024 30
May 2024 31
June 2024 30
July 2024 31
August 2024 02
Total 184
Since he was present in Pakistan for 184 days, therefore, he is resident individual. Mr.
Salman would not be resident individual, had the tax year been a normal financial year
ending on 30 June 2024.
Exercise:
Determine the residential status in view of the provisions of Income Tax Ordinance, 2001 and the
stated rules, of the following persons for the tax year ended June 30, 2025 under the given
circumstances.
(i) Mr. Mubeen came to Pakistan for the first time on a special assignment from his
company on April 01,2025 and left the country on September 30, 2025.
(ii) Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He went to
Canada on October 27, 2024 to assume his responsibilities as a CFO. In June, 2025 his
company sent him to India on a training workshop. On June 30, 2024 on his way back to
Canada he had to stay in Karachi for a whole day in transit. During the year his total stay
in Canada was 155 days and considered not be resident for any other country.
(iii) Mr. Baber, a Federal Government employee was posted to the Pakistan mission in
Geneva from July 01, 2024 to June 30, 2025.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 03, 2024. During his visit
he stayed at Lahore for 60 days and spent the rest of the days in Karachi. He left the
country on January 31, 2025. Assume that the Commissioner has granted him
permission to use calendar year as a special tax year.

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Answer:
Residential status of the following persons for the tax year ended June 30, 2025 under the given
circumstances.
(i) For the tax year ended June 30, 2025, the relevant period is July 01, 2024 to June 30,
2025. Therefore, the stay of Mr. Mubeen for the purpose of tax year 2025 is:

Month Days
April 2025 30
May 2025 31
June 2025 30
Total 91
Since his stay in Pakistan is less than 183 days in tax year 2025 so he is a non-resident
for tax purposes. However, if he is not present in any other country for more than 182
days during the tax year or he is not a resident taxpayer of any other country than he will
be treated as resident of Pakistan.

(ii) Since Mr. Rana never travelled abroad in his life before proceeding to Canada for
assuming his job responsibilities, the number of days he spent in Pakistan for the tax
year 2025 is:
Month Days
July 2024 31
August 2024 31
September 2024 30
October 2024 27
Total 119
Since his stay in Pakistan is less than 183 days in tax year 2025 but he is not present in
any other country for more than 182 days during the tax year and he is also not a
resident taxpayer of any other country then he will be treated as resident of Pakistan.

.
(iii) A Federal Government Employee posted abroad in terms of his employment is
considered as a resident person irrespective of his physical presence in Pakistan.
Therefore Mr. Baber is a resident individual for tax year 2025.

(iv) In case of Mr. Francis, it is immaterial where he stayed in Pakistan. The calculation will
be made from the day of his arrival in Pakistan to the day of his departure from
Pakistan. Therefore, the total number of days he spent in Pakistan during the calendar
year 2024 i.e. the year starting from January 01, 2024 to December 31, 2024 (Special
tax year 2025) is:
Month Days
July 2024 29
August 2024 31
September 2024 30
October 2024 31
November 2024 30
December 2024 31
Total 182
In view of the permission granted by Commissioner Income Tax to Mr. Francis to use

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Introduction and Definitions

special tax year, the number of days he spent in Pakistan beyond December 31, 2024
would fall under tax year 2026. Therefore, 31 days which he spent in January 2025 would
not be included in tax year 2025. As a result, Mr. Francis is a non-resident person as his
total stay in tax year 2025 is less than 183 days.

ICAP Past Papers

Q.1
On 1 January 2025 Bruce Lee was appointed by a Chinese company as a Technical Director for Pakistan.
He has provided you the following details for Tax year 2025:
Arrival in Pakistan 9 December 2024
Joined office in Pakistan 20 February 2025
Stay in Dubai on an official trip 21-30 March 2025
Stay in South Korea for vacations 12-21 April 2025
Visit to northern areas of Pakistan for personal trip 4-9 June 2025

In view of the provisions of the Income tax Ordinance, 2001 and related Rules thereunder, comment on
the residential status of Bruce Lee for the tax year 2025.
Ans.1
Since his stay in Pakistan is more than 183 days So Mr. Bruce Lee is a resident individual for the tax year
2025.
(w-1)
Month Days
December 2024 (9-12-2024 also included) 23
January 2025 31
February 2025 28
March 2025 (31-10) 21
April 2025 (30-10) 20
May 2025 31
June 2025 30
Total 184

Q.2
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder:
Discuss the residential status for tax year 2025 in each of the following situations:
(i) On 30 October 2024 Asif proceeded to Dubai to join his new job. Due to certain professional
issues with his employer in Dubai, he resigned on 2 May 2025 and came back to Pakistan. On 16
May 2025 he got a new job in Pakistan which he continued till 30 June 2025.Mr. Asif is
considered non-resident in any other country.
(ii) Sami Associates is an association of persons and provides accounting services in Dubai. On 2
January 2025, the entire management and control of its affairs was shifted from Karachi to
Dubai.

Ans.2
(i) The number of days Asif spent in Pakistan during tax year 2025 is 183 as shown
below:

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Introduction and Definitions

Month Days
July 2024 31
August 2024 31
September 2024 30
October 2024 30
May 2025 (31-1) 30
June 2025 30
Total 182
As his stay in Pakistan is equal to 182 days for the tax year 2025 that is less than
183 days but he is also not a resident taxpayer of any other country then he will be treated
as resident of Pakistan for tax year 2025.

(ii) An AOP is treated as a resident if the management and control of its affairs is
situated in Pakistan at any time during the year. Hence Sami Associates would be
considered a resident irrespective of the fact that its entire management and control
of affairs was subsequently shifted from Karachi to Dubai.

Q.3
Jean Francois, a French designer, often visits to Pakistan first time for promotion of his products. During
his last visit he stayed in Pakistan from 10 July 2024 to 25 February 2025. Determine the residential
status of Jean Francois for tax year 2025, assuming that the Commissioner has granted him permission
to use calendar year as special tax year.
Ans.3
In view of the permission granted by Commissioner-IR to Jean Francois to use special tax year, the
number of days he spent in Pakistan beyond 31 December 2024 would fall under tax year 2026. As a
result, John is a non-resident person because his total stay in tax year 2025 is 175 days (i.e. from 10 July
2024 to 31 December 2024) which is less than 183 days.

20.Income:
Sec 2(29), Income includes;
• Any amount chargeable to tax under the Income Tax Ordinance, 2001 (e.g. income from
salary)
• Any amount subject to collection or deduction of tax under final tax regime
• Any amount treated as income under any provision of the Ordinance (e.g. dividends,
royalty, profit on debt etc.), and
• Any loss of income
Sec 2(63), “Tax” means any tax imposed under Chapter II (i-e. Charge of Tax), and includes
any penalty, fee or other charge or any sum or amount leviable or payable under this Ordinance

21. Heads of income:

For the purposes of the imposition of tax and the computation of total income, all incomes shall
be classified under the following heads, namely:
 Salary;
 Income from property;
 Income from business;
 Capital gains; and
 Income from other sources.

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Introduction and Definitions

The income of a person under a head of income for a tax year shall be the total of the amounts
derived by the person in that tax year that are chargeable to tax under the head as reduced by
the total deductions, if any, allowed under the Ordinance to the person for that year under that
head.

22. Scope of Total Income for Resident:

In case of a resident all income, from whatever source derived, shall be included in the total
income if during the tax year the income is:
1. Received in Pakistan;
2. Deemed to be received In Pakistan;
3. Accrued or arisen In Pakistan;
4. Deemed to accrue or arise in Pakistan; and
5. Accrued or arisen outside Pakistan.
From the above it is construed that a resident person’s total income has two components, which
are;
i. Pakistan source Income; and
ii. Foreign Source Income

23. Scope of Total Income for Non- Resident:

In the case of non-resident, the following incomes shall be included in the total income.
1. An income which Is received in Pakistan;
2. An Income which is deemed to be received In Pakistan;
3. An income which accrues or arises in Pakistan; and
4. An income which is deemed to accrue or arise in Pakistan.
From the above it is construed that a non-resident person’s total income shall comprises on
Pakistan-source income only.

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24.Total income (Sec 10)

 The total income of a person for a tax year shall be the sum of the Person’s income under
all heads of income for that tax year; and
 Person’s income exempts from tax for that tax year under any of the provisions of Income
Tax Ordinance, 2001.

25.Taxable income (Sec 9)

The taxable income of a person for a tax year shall be the total income other than exempt income of the
person for the year reduced (but not below zero) by the sum of any deductible allowances of the person for
that tax year

26. Tax
Tax means any tax imposed under the Ordinance and includes any penalty, fee or other
charge or any sum or amount leviable or payable under the Income Tax Ordinance, 2001
27. Tax payer:
Taxpayer means any person
 derives an amount chargeable to tax under the Income Tax Ordinance, 2001;
 may be a representative of a person who derives an amount chargeable to tax;
 is required to deduct or collect tax under Part V of Chapter X and Chapter XII of the
Ordinance; or
 is required to furnish a return of income or pay tax under the Ordinance;

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Introduction and Definitions

Deductible allowances
(Sec 60, 60A, 60B, 60D)

Deductible allowances:
Sec 2(16), “deductible allowance” means an allowance that is deductible from total income under
Part IX (i-e. deductible allowances) of Chapter III (i-e. Tax on taxable income);

28. Zakat (Sec 60)

A person is entitled to a deductible allowance for the amount of any Zakat paid by the person in a
tax year under the Zakat and Ushr Ordinance, 1980.
Where the Zakat has been deducted out of the profit on debt (which is chargeable under the
head “income from other sources”), such Zakat shall not be deducted out of the total income,
rather, it shall be allowed as a deduction while computing income from other sources.

Where the amount of Zakat is more than total income, the excess amount shall not be refunded
or carried forward or carried back.

29. Worker’s welfare fund (Sec 60A)

A person shall be entitled to a deductible allowance for the amount of any Workers’ Welfare Fund
(WWF) paid by the person in the tax year under Workers’ Welfare Fund Ordinance, 1971 or under
any law relating to the Workers’ Welfare Fund enacted by Provinces after the Eighteenth
Constitutional Amendment Act, 2010. However, no deductible allowance will be allowed where any
amount is paid to provinces by trans-provincial organizations (a person having operations in more
than one province).

30. Worker’s participation fund (Sec 60B)

A person shall be entitled to a deductible allowance for the amount of any Workers’ Participation
Fund paid by the person in a tax year in accordance with the provisions of the Companies Profit
(Workers’ Participation) Act, 1968 under any law relating to the Workers’ profit participation Fund
enacted by Provinces after the eighteenth Constitutional Amendment Act, 2010. However, no
deductible allowance will be allowed where any amount is paid to provinces by trans-provincial
organizations (a company having operations in more than one province).

31.Deductible allowance for education expenses (Sec 60D)

 Every individual shall be entitled to a deductible allowance in respect of tuition fee paid by
the individual in a tax year provided that the taxable income of the individual is less than Rs.
1,500,000.
 The amount of an individual’s deductible allowance allowed for a tax year shall not exceed
the lesser of —
a) 5% of the total tuition fee paid by the individual in the year;
b) 25% of the person ‘s taxable income for the year; and
c) an amount computed by multiplying Rs. 60,000 with number of children of the
individual.
 Any allowance or part of an allowance for a tax year that is not able to be deducted for the
year shall not be carried forward to a subsequent tax year.

 Allowance shall be allowed against the tax liability of either of the parents making payment
of the fee on furnishing national tax number (NTN) or name of the educational institution.

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Introduction and Definitions

 Allowance shall not be taken into account for computation of tax deduction from Salary
under section 149.
Q.1 [Autumn 2018 Q.2(c)]

Determine the amount of deductible allowance that a resident individual can claim on
account of education expenses, if his taxable income for the year was Rs. 800,000 and
he paid monthly fee of Rs. 6,000 per child for his three children.

Answer.1
The amount allowed as educational expense should be the lesser of:
Rs.
(i) 5 % of the total tuition fee paid (6,000×12×3×5%) 10,800
(ii) 25% of the person’s taxable income (800,000×25%) 200,000
(iii) An amount equal to 60,000 × 3 children 180,000

Therefore, the amount allowed is Rs. 10,800.

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Introduction and Definitions

Income tax authorities

The income tax law provides a complete organizational set up for levy and recovery of income
tax which are described in section 207 as under:

(a) Federal Board of Revenue;

(b) Chief Commissioner Inland Revenue;

(c) Commissioner Inland Revenue;

(d) Commissioner Inland Revenue (Appeals);

(e) Officer of Inland Revenue i.e.

(i) Additional Commissioner Inland Revenue;

(ii) Deputy Commissioner Inland Revenue;

(iii) Assistant Commissioner Inland Revenue;

(iv) Special audit panel;

(v) Inland Revenue Officer;

(vi) Inland Revenue Audit Officer or any other Officer;

(f) District Taxation officer;

(g) Assistant Director Audit

(h) Superintendent Inland Revenue;

(i) Inspector Inland Revenue; and

(j) Auditor Inland Revenue.

This section is out of syllabus and is not examinable. This organizational setup is being given to
provide better understanding while students studying other examinable sections of the
Ordinance where these authorities have been mentioned.

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Computation of tax liability and tax rates (Sec 4 read with First Schedule)

Tax rates for salaried individual Where the income of an individual chargeable under the head
“salary” exceeds 75% of his taxable income, the rates of tax to be applied shall be as set out in
the following table, namely: —

S. No. Taxable Income Rate of Tax

1 Where the taxable income does not exceed Rs. 0%
600,000
2 Where the taxable income exceeds Rs. 600,000 but 5% of the amount exceeding Rs.
does not exceed Rs.1,200,000 600,000
3 Where the taxable income exceeds Rs. 1,200,000 Rs. 30,000 +15% of the amount
but does not exceed Rs. 2,200,000 exceeding Rs. 1,200,000
4 Where the taxable income exceeds Rs.2,200,000 Rs. 180,000 +25% of the amount
but does not exceed Rs. 3,200,000 exceeding Rs. 2,200,000
5 Where the taxable income exceeds Rs. 3,200,000 Rs.430,000 + 30% of the amount
but does not exceed Rs.4,100,000 Exceeding Rs.3,200,000
6 Where the taxable income exceeds Rs. 4,100,000 Rs. 700,000 + 35% of the amount
exceeding Rs. 4,100,000
SLAB RATES FOR NON-SALARIED PERSON & AOP:

Where the income of an individual chargeable under the head “salary” does not exceeds 75% of
his taxable income, the rates of tax to be applied are as follows:

S. No. Income Slabs Rate of Tax Proposed

1 Where taxable income does not exceed Rs. 0%

600,000

2 Where taxable income exceeds Rs. 600,000 but does 15% of the amount exceeding
not exceed Rs. 1,200,000. Rs. 600,000.

3 Where taxable income exceeds Rs. 1,200,000 but Rs. 90,000 plus 20% of the amount
does not exceed Rs. 1,600,000 exceeding Rs. 1,200,000

4 Where taxable income exceeds Rs. 1,600,000 but Rs. 170,000 plus 30% of the amount
does not exceed Rs. 3,200,000 exceeding Rs. 1,600,000

5 Where taxable income exceeds Rs. 3,200,000 but Rs. 650,000 plus 40% of the
does not exceed Rs. 5,600,000 amount exceeding Rs. 3,200,000

6 Where taxable income exceeds Rs. 5,600,000 Rs. 1,610,000 plus 45% of the
amount exceeding Rs. 5,600,000

Provided that in the case of an association of persons that is a professional firm prohibited from
incorporating by any law or the rules of the body regulating their profession, the 45% rate of tax
mentioned against serial number 6 of the Table shall be 40%.

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Surcharge for High Earners: 10% on Gross Tax Liability for Income Exceeding Rs. 10 Million
A surcharge shall also be payable by every individual (including salaried) and Association of
person (AOP) @ 10% of the Gross tax liability where taxable income exceeds Rs.10 million.

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 2

CHAPTER
Income from Salary

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Income from Salary

Income from Salary

INTRODUCTION:
In order to render an income chargeable under the head "Salary" the relationship of the
employee and the employer must exist between the payer and the payee. The employer may
be past, present or prospective.

EMPLOYMENT is the rendering of services by an employee against the remuneration

receivable from the employer. It includes: [2(22)]
 A directorship or any other office involved in the management of a company;
 A position which entitles its holder to a fixed or ascertainable remuneration; or
 The holding or acting in any public office.

EMPLOYEE means an individual who is engaged in an employment. [2(20)]

EMPLOYER means any person who engages and remunerates an employee. [2(21)]

SALARY [12(2)]
Salary is a reward or recompense of services performed. In a more limited sense, a fixed
periodical compensation paid by an employer for the services rendered by an employee is
termed as salary. For the purpose of Income Tax, "Salary" means any amount received by an
employee from any employment. It includes any:
1. Pay
2. Wages
3. Leave pay;
4. Overtime;
5. Bonus;
6. Gratuity;
7. Work conditions supplements (i.e., additional pay for unpleasant or dangerous work)
8. Fees
9. Commission;
10. Allowances;
Note: Any allowance solely expended in the performance of employee’s duty does
not include:
(a) allowance which is paid in monthly salary on fixed basis or percentage of salary;
or
(b) allowance which is not wholly, exclusively, necessarily or actually spent on behalf
of the employer
11. Perquisites;
12. Profit in lieu of or in addition to the salary or wages; and
13. Any other benefit provided by the employer to his employee.

SLAB RATES FOR SALARIED PERSON:

Tax rates for salaried individual Where the income of an individual chargeable under the head
“salary” exceeds 75% of his taxable income, the rates of tax to be applied shall be as set out in the
following table, namely: —
S. No. Taxable Income Rate of Tax
1 Where the taxable income does not exceed Rs. 0%
600,000
2 Where the taxable income exceeds Rs. 600,000 but 5% of the amount exceeding Rs.
does not exceed Rs.1,200,000 600,000
3 Where the taxable income exceeds Rs. 1,200,000 Rs. 30,000 +15% of the amount
but does not exceed Rs. 2,200,000 exceeding Rs. 1,200,000

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4 Where the taxable income exceeds Rs.2,200,000 Rs. 180,000 +25% of the amount
but does not exceed Rs. 3,200,000 exceeding Rs. 2,200,000
5 Where the taxable income exceeds Rs. 3,200,000 Rs.430,000 + 30% of the amount
but does not exceed Rs.4,100,000 Exceeding Rs.3,200,000
6 Where the taxable income exceeds Rs. 4,100,000 Rs. 700,000 + 35% of the amount
exceeding Rs. 4,100,000

Surcharge for High Earners: 10% on Gross Tax Liability for Income Exceeding Rs. 10 Million
A surcharge shall also be payable by every individual (including salaried) and Association of person
(AOP) @ 10% of the Gross tax liability where taxable income exceeds Rs.10 million.

PERQUISITES [13]
Law Dictionary defines the perquisites as "emoluments, fringe benefits or incidental profits or
benefits attaching to an office or position". 'Under the Income Tax Law -perquisites" includes:
1. Value of rent free accommodation.
2. The value of any concession in rent of any accommodation.
3. Any payment by the employer for the benefit of the employee, his spouse or.
Dependent child. Such as:
i) Payment of life insurance, and
ii) Payment towards a contract of annuity
4. The value of any benefit provided free of cost
5. The value of any benefit provided at a concessional rate
6. Any sum paid by an employer in respect of any obligation of an employee
7. Any facility of motor vehicle provided by an employer to an employee wholly or partly
for private use of an employee

PROFITS IN LIEU OF OR IN ADDITION TO SALARY:

1. Any amount received as consideration for an agreement to enter into an employment
relationship.
2. Any amount received as consideration for an employee’s agreement to any conditions
of employment or any change therein.
3. Any amount received as consideration for termination of employment. It includes any
compensation for redundancy or loss of employment and golden handshake payment.
4. Any amount received from any fund (e.g. provident fund. etc.) constituted by an
employer to the extent to which the amount is not a repayment of contribution made
by an employee to the fund.
5. Any amount received as consideration for an employee’s agreement for a restrictive
covenant in respect of any past, present or prospective employment.
6. Any pension or annuity or any supplement to a pension or annuity; and
7. Any amount chargeable to tax on account of employee share option under section 14
SALARY INCOME
The following incomes are chargeable to tax under the head “salary”;
1. Any salary received during the year. The receipt may be on account of current salary,
arrears or advance ;and
2. Valuation of perquisites, allowances and benefits

BASIS OF CHARGEABILITY: [Section 12(1)]

Salary is taxable on receipt basis i.e. any salary received by an employee in a tax year shall
be chargeable to tax.

NOTE: A person shall be treated as having received an amount, benefit, or perquisite if it is

i) Actually, received by the person

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ii) Applied on behalf of the person, at the instruction of the person or under any law
made available to the person.

EXCEPTION TO THE RULE:

There are two exceptions to the general rule which are
1. In case of an employee of a private limited company the CIR may opt the accrual
basis for taxation of salary income if he has reasonable ground to believe that
payment of salary was deliberately deferred for tax avoidance.
2. Where the employee has opted that his income be charged to tax on accrual basis.it
is permitted in the case where the tax payer has receive salary in arrears resulting in
the application of higher rate of tax in the year of receipt of arrears.

NOTE: An employee’s salary income, wherever received is taxed in Pakistan to the extent it
relates to employment exercised in Pakistan. However, salary received by Pakistan
Government employee is taxable in Pakistan whether employment is exercised in Pakistan or
abroad.

NOTE: An amount or perquisite shall be treated as received by an employee whether it is

paid or provided by the employer (including present, past or prospective), an associate of his
employer or a third party on behalf of his employer; or To him, to his associate or to a third
party on his behalf.[12(5)]

Amount or Perquisite when treated received [Sec 12(5)]

An amount or perquisite shall be treated as received by an employee from any employment
regardless of whether the amount or perquisite is paid or provided:
(i) By the employee’s employer, an associate of the employer, or by a third party
under an arrangement with the employer or an associate of the employer;
(ii) By a past employer or a prospective employer; or
(iii) To the employee or to an associate of the employee or to a third party under an
agreement with the employee or an associate of the employee.

DEDUCTIONS NOT ALLOWED [Section 12(4)]

In computing the income under the head salary, no deduction shall be allowed for expenses
incurred by the employee in earning such income

MINIMUM OF TIME SCALE (MTS):

Minimum of time scale is the amount from where the salary scale of a particular employee
starts e.g. (49,000-8,000-85,000) means salary of the employee starts with Rs. 49,000 with
increment of Rs. 8,000 per annum etc. subject to maximum increased salary up to Rs.
85,000.
TAX YEAR MTS BASIC SALARY
2021 49,000 49,000
2022 49,000 57,000
2023 49,000 65,000

EXERCISE:
Mr. Bilal, a citizen of Pakistan, is working with PMX (Pvt.) Limited as their head of treasury for
the last 15 years. He has provided you with the following information for the year ended June
30, 2025.
i) His salary was Rs. 300,000 per month (inclusive of all allowances) till June
30, 2024, this was increased to Rs. 400,000 per month effective from 01 July 2024.
ii) Salary and allowances are deposited into each employee’s bank account on the 8th
working day of the following month.

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iii) On 31 December 2024, Bilal opted for early retirement and final settlement was also
made on next tax year.
REQUIRED:
Compute Mr. Bilal’s taxable income for the tax year 2025.

ANSWER:
Mr. BILAL
COMPUTATION OF TAXABLE INCOME
INCOME YEAR ENDED ON 30-06-2025
TAX YEAR 2025
Salary for month of June received on 08 July 300,000
Six-month salary from July 2024 to December 2024 (400000 x 6) 2,400,000
Total taxable salary 2,700,000

NOTE:
Salary is taxed on receipt basis. As salary is transferred on the 8th working day following the
end of the month, salary for the month of June 2024 will be taxable in the tax year 2025.

EXERCISE:
Mr. Asad join ABC (pvt.) Ltd on July 1,2023 with an MTS of 700,000-100,000-1,300,000 the
salary was received on the 5th of every month

REQUIRED:
Calculate the taxable income for the tax year 2025.

EXERCISE:
Miss Katrina has joined diamond ltd on 1st July 2021 her MTS 150,000-15,000-240,000. The
salary was received on 10th of every month.
 Dearness allowance 7 % of MTS for whole year
 Cost of living allowance 5 % of basic salary received during the year
 Bonus of 1 month salary of last month of relevant tax year
 Leave encashment Rs.45000
 Over time Rs, 78000
Miss Katrina left the job on June 1, 2025 with one-month notice to her employer
REQUIRED:
Calculate the taxable income for the tax year 2025.

PERQUISITES, ALLOWANCES AND BENEFITS [Section 13 & Rule-3]

The term ‘perquisites’ refers to the non-cash benefits’ provided by an employer to an
employee Section 13 of the Ordinance contains provisions relating to determination of value
of perquisites. The said provisions describe the methods for determination of value of
perquisites in the following manner:

SERVICES OF DOMESTIC SERVANTS [13(5)]

The total amount of salary paid by the employer to the domestic servants of an employee
(e.g., housekeeper. driver, gardener or other domestic servants) shall be included in the
salary income of the employee for the tax year in which the services are rendered.

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EXERCISE:
Mr. Raza is an officer in an autonomous corporation. He is in pay scale of 15,000-
1,000-25,000. During the tax year he received Rs. 240,000 as basic salary. Further, he
was also paid the following amounts:
1 Dearness allowance Rs. 18.000
2 Cost of living allowance 24,000
3 Bonus 20,000
4 Commission 30,000
The Employer of Mr. Raza has also provided the services of a driver and housekeeper. The
Corporation paid Rs. 4,000 p.m. to each of these employees.
REQUIRED:
Compute the taxable income and tax liability of Mr. Raza.

ANSWER:
Taxable Income Rs.
Basic salary 240,000
Dearness allowance 18,000
Cost of living allowance 24,000
Bonus 20,000
Commission 30,000
Salaries of domestic servants:
Driver (Rs. 4,000 x 12) = 48,000
Housekeeper (Rs. 4,000 x 12) = 48,000 96,000
Taxable Income 428,000

WAIVER OF AN AMOUNT PAYABLE BY EMPLOYEE [13(9)]

Any amount waived of by the employer out of the amount payable by the employee shall be
included in the income of the employee.

OBLIGATION OF AN EMPLOYEE PAID BY THE EMPLOYER [13(10)]

Any payment by the employer to another person on account of an obligation of the
employee (e.g... insurance premium, etc.,) shall be included in the salary income of the
employee.
TRANSFER OF PROPERTY OR PROVISION OF SERVICES TO EMPLOYEE [13(11)]
Where an employer transfers his property or provides services to the employee, the amount
calculated as below shall be included in the income of the employee:
Fair market value of the property, etc. XXX
Less: Payment made by the employee, if any . (XXX)
Amount to be included in the salary income XXX

ANY OTHER PERQUISITE [13(13)]

The amount calculated as below shall be included in the income of the employee:
Fair market value of the perquisite. XXX
Less: Payment made by the employee. If any. (XXX)
Amount to be included in the salary income

UTILITIES TO EMPLOYEE [13(6)]

Where the employer has provided any facility to his employee in the form of utilities, the
salary income of the employee shall be determined as below:
Fair market value of the utilities provided XXX
Less: Any amount paid by the employee for utilities (XXX)

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Amount to be included in the salary income XXX

Utilities includes the following facilities:
a. Electricity:
b. Gas:
c. Water; and
d. Telephone.
Utilities may be in the form of a free or concessional facility or a utility allowance
receivable in cash. Under both the cases any benefit provided by an employer to an
employee on account of utilities shall be taxable and included in salary income of the
employee.
PENSION:
Pension is fully exempt irrespective of the age limit subject to two conditions:
 If an employee works for the same employer or any of its associates after retirement
then pension shall be taxable.
 If a person receives more than one pension then exemption shall apply only to the
higher of such pension received.

NOTE: These two conditions are not applicable for a person over 60 years of age.
GRATUITY AND COMMUTATION OF PENSION:
(i) Government employees Fully exempt
(ii) Approved Gratuity Fund by the Fully exempt
Commissioner Inland Revenue
(iii) Approved Gratuity Scheme by board Exempt up to Rs. 300,000
(iv) Other Cases: Exempt up to 75,000 or 50% of the
 Unapproved Gratuity amount receivable whichever is lower
 Unapproved Commutation of
pension

Exemption in respect of unapproved gratuity and Unapproved Commutation of pension

shall not apply in the following cases:
i) Any payment not received in Pakistan.
ii) Any payment received by a director of a company who is not a regular employee of
such company.
iii) Any payment received by a non-resident.
iv) Any gratuity received by an employee who has already received any gratuity from the
same or other employer.

SPECIAL ALLOWANCE:
Any Allowance or benefit (other than in the nature of conveyance or entertainment allowance)
specially granted to meet expenses wholly and necessarily incurred in the performance of
office duties e.g., Travelling allowance and Daily allowance (TA/DA) for an office trip.
Note: Any allowance solely expended in the performance of employee’s duty does
not include:
(a) allowance which is paid in monthly salary on fixed basis or percentage of salary;
or
(b) allowance which is not wholly, exclusively, necessarily or actually spent on behalf
of the employer

Special allowance as above is exempt but if the employer pays any special pay (e.g. any
additional amount for any particular extra responsibility) then the special pay shall be taxable

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MEDICAL FACILITY/ MEDICAL ALLOWANCE:

Tax treatment of medical allowance and medical facilities are as under,
a) Medical Facility or
reimbursement of medical
expenses:
 In Accordance with Fully Exempt If National Tax Number (NTN) of medical
terms of practitioner and employer’s attestation are available.
employment
Taxable
 Not In Accordance
with terms of
employment Notes for students:
(1) CNIC shall be used as NTN from the tax years
2015 onward—section 181
(2) Reimbursement of medical bills by the
insurance company under group insurance
policy arranged by the employer is not taxable
as well subject to NTN + employer’s attestation.
In this case, insurance premier paid by the
employer to the insurance company is not part
of salary income of the employees.
(3) If employer is a hospital or clinic then NTN and
attestation are not required as it will be covered
in clause 53A of 2nd Schedule where no such
requirement is mentioned

B) Medical Allowance Exempt up to 10% of basic salary.

However, medical allowance is fully taxable if it is in

addition to medical facility or reimbursement in
accordance with terms of employment.

Summary:
(i) Only medical allowance:
Exempt up to 10% of basic salary
(ii) medical allowance + medical facility or
reimbursement in accordance with terms of
employment
Medical allowance is fully taxable and medical facility
or reimbursement is exempt If NTN of medical
practitioner and employer’s attestation are available.
If NTN of medical practitioner or employer’s attestation
is not available then both the figures are fully taxable.
(iii) medical allowance + medical facility or
reimbursement Not in accordance with terms of
employment
Medical allowance is exempt up to 10% of the basic
salary and medical facility or reimbursement is fully
taxable.

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VALUATION OF CONVEYANCE [13(3) & Rule-5]

Where an employer has provided a conveyance to an employee, the value to be included in
salary income of the employee shall be determined as per the table given below:
Use of Motor Vehicle Amount to be Included in Salary
Only for private use 10% of the cost to the employer for acquiring the motor
of the Employee vehicle or the fair market value of the vehicle at the
commencement of lease, if it is taken on lease.

Partly for private use 5% of the cost to the employer for acquiring the motor
of the employee and vehicle or the fair market value of the vehicle at the
partly for official use commencement of lease, if it is taken on lease.

VALUATION OF ACCOMMODATION [13(12) & Rule-4]

Accommodation Facility in respect of housing may either be in the form of house rent
allowance or an accommodation provided by the employer. House rent allowance receivable
in cash by an employee is totally taxable.
If an employer has provided an accommodation to his employee, the value of such
accommodation shall be the amount that would have been paid by the employee if the
accommodation was not provided to him. This amount shall be included in the salary income
the employee. However, the value shall not be taken less than forty-five percent (45%) of his
minimum time scale of the basic salary (MTS) or the basic salary if the time scale is not
provided.
In other words the value to be included in salary income on account of accommodation
provided by an employer shall be an amount which is higher of the following amounts:
Fair market rent of the accommodation; or Forty-five percent (45%) of MTS or basic salary.

ACCOMODATION IN SMALL CITIES:

In small cities house rent allowance is allowed @ 30% of MTS or basic salary. If
accommodation is provided in those areas where rate for house rent allowance is 30% then
value taken for the accommodation shall not be less than 30% of MTS or the basic salary.
Under this case the amount to be included in salary income will be higher of the:
Fair market rent of the accommodation; or 30% of the MTS or the basic salary.

EXERCISE:
CASE NO 1
(1) Minimum time scale 25,000-2,500-45,000
(2) Basic salary 40,000 pm
(3) Bonus 10,000 pa
Free accommodation whose rental value is Rs 100,000
Determine taxable Income

ANSWER:
Value under Rule 4
= 135,000 [i.e. 25,000 x 12 x 45%] or Rs. 100,000 whichever is higher.
His taxable income will be:
Basic salary 480,000
Bonus 10,000
Addition under rule 4 135,000
Taxable income 625,000

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CASE NO 2
(i) Basic Salary 60,000 pm
(ii) Accommodation [annual rental value Rs. 120,000]
(iii) Bonus 20,000 pa
(iv) Dearness allowance 10,000 pm
Determine taxable income
ANSWER:
Value of perquisite under Rule 4
=Rs. 324,000 [i.e. 60,000 x12 x 45%]
Total income chargeable under section 12
Basic salary 720,000
Addition under Rule 4 [higher of Rs.120,000 or Rs.324,000] 324,000
Bonus 20,000
Dearness allowance 120,000
Total 1,184,000

CASE NO 3
Mr. X, an employee of ABC Ltd. was residing in a rented house at monthly rent of Rs.
20,000/-. On 1st July 20XA his employer agreed to pay Rs.15,000/- for his rent and
converted it into an accommodation. All his other emoluments remained same which are as
under:
Basic salary 360,000 pa
Bonus 30,000 pa
Conveyance allowance 3,600 pa
What will be his taxable salary
ANSWER:
Value of accommodation
[Rs. 360,000 x 45% = 162,000 or Rs. 180,000 whichever is higher]
His taxable salary would be as under
Basic salary 360,000
Bonus 30,000
Value of accommodation 180,000
Conveyance allowance 3600
Taxable salary 573,600

PROVIDENT FUND:
Provident fund is categorized into the following three categories:
i) Government provident fund
ii) Recognized provident fund
iii) Unrecognized provident fund
Provisions regarding taxability in respect of employer/employee contribution, interest credited
and accumulated balance thereon is as follows:

EVENT GOVERNMENT PF RECOGNIZED PF UNRECOGNIZED PF

Employee’s No treatment No treatment No treatment

Contribution
Employer’s Exempt Exempt Limit on No treatment

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Contribution employer’s yearly

contribution is
Rs.150,000 or
1/10th of (basic salary
+ dearness
allowance) whichever
is lower
Interest credited during Exempt Yearly interest is No treatment
the year exempt higher of:
--16% interest rate on
accumulated balance;
or
--1/3rd of (basics salary
+dearness allowance).

Payment of Exempt Exempt Only the employer’s

accumulated contribution and
balances interest on
accumulated balance
is taxable in the year of
receipt.

NOTE: Salary for the purpose of provident fund includes basic salary + dearness allowance.
All other allowances are excluded.

NOTE: There is no treatment of employee contribution as the amount is paid from salary and
the same is already included in his salary.

EXERCISE:
Mr. Asad and Mr. Alamgir are close friends and working in two reputed companies. During
the year, the detail of their income is as under:

Particulars Mr. Asad Mr. Alamgir

Salary 240,000 320,000
Recognised Provident Fund Contribution by The Employer 35,000 36,000
Interest Credited to Provident Fund 100,000 45,000

Interest rate for the income credited to the Provident Fund is 16% in case of Mr.Asad and
20% in case of Mr. Alamgir. Mr. Asad is expecting his retirement in 2026 whereas Mr.
Alamgir is expecting his retirement in 2027.
Compute the taxable income of the employees for the year 2025.

ANSWER:
Computation of Taxable Income
Particulars Mr. Asad Mr. Alamgir
Salary 240,000 320,000
Provident Fund Contribution By The Employer
[35,000 – 24,000 (i.e. 240,000 x 10% ) 11,000
[36,000 – 32,000 (i.e. 320,000 x 10% ) 4,000
Interest Credited to P Fund in case of Mr Asad
[35,000 –higher of Rs. 100,000 or Rs. 80,000
(i.e. 240,000 x 1/3)
and in case of Mr. Alamgir
[45,000 – higher of Rs. 36,000

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(i.e. 45,000/20% x 16%) or Rs. 106,667 (i.e. 320,000 x 1/3)]

Taxable income 251,000 324,000

Provident Fund Contribution exceeding one tenth of the salary is taxable. Interest credited is
exempt up to 16% interest rate on accumulated balance or 1/3rd of salary (basic salary +
dearness allowance) is higher.

BENEVOLENT FUND:
Any benevolent grant paid from a Benevolent Fund to employees or members of their
families in accordance with the provisions of the Central Employee Benevolent Fund and
Group Insurance Act, 1969 is exempt from tax. (Clause 24 Part I of the Second Schedule)

OTHER BENEFITS:
Certain Perquisites without by virtue of employment: (Clause 53A Part I of 2nd Sch.)
The following perquisites received by an employee by virtue of his employment are exempt
from tax.
i) Free or subsidized food provided by hotels and restaurants to its employees during
duty hours
ii) Free or subsidized education provided by an educational institution to the children of
employees
iii) Free or subsidized medical treatment provided by a hospital or clinic to its employees
iv) Any other perquisite for which the employer does not have to bear any marginal cost,
as notified by the Board.
Leave Encashment (Clause 19 Part I of 2nd Sch.)
Any amount received on encashment of leave preparatory to retirement is exempt, if it is
received by a government employee & member of Armed Forces of Pakistan). For other it is
taxable.

Worker’s Profit Participation Fund (WPPF) (Clause 26 Part I of 2nd Sch.)

Amount received from WPPF as worker is fully exempt. Commutation of pension (Clause 12
Part I of 2nd Sch.)

Reduction in tax liability (Clause 2 Part III of 2nd Schedule) Full time teacher or
researcher
The tax payable by a full-time teacher or a researcher, employed in a non-profit education or
research institution duly recognized by Higher Education Commission, a Board of Education
or a University recognized by the Higher Education Commission, including government
training and research institution, shall be reduced by an amount equal to 25% of tax payable
on his income from salary.

Salary earned outside Pakistan by citizen of Pakistan [Sec 51(2)]

Where a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that
tax year, any salary income earned by him outside Pakistan (only during that tax year) shall
be exempt from tax.

Foreign source salary (Sec 102)

Foreign source salary received by a resident shall be exempt if the individual has paid foreign
income tax in respect of that salary i.e. the employer has withheld income tax in respect of
foreign source salary and has paid the same to the revenue authority of that foreign country
in which the employment was exercised.

TAX FREE SALARY TO EMPLOYEE [12(3)].

According to section where an employer agrees to pay the tax chargeable on an employee's
salary then employee's taxable salary shall include grossed up amount of tax payable by the

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employer on behalf of the employee.

Definition of perquisites includes any obligation of an employee to another person paid by the
employer. Therefore, if an employer pays employee's tax liability in addition to normal salary
then the tax paid or payable by the employer shall become a taxable perquisite and the tax
liability will increase accordingly.
EXAMPLE:
Basic salary Rs. 1,318,000
House rent allowance Rs. 127,200
Company maintained car for office & personal use (cost of the car Rs. 900,000)
Medical allowance Rs.31,800
Tax is to be borne by the company

SOLUTION: Rs.
Basic salary 1,318,000
House rent allowance 127,200
Company maintained car: 5% of Rs.900,000 45,000
Medical allowance 31,800
Less: 10% of basic salary 131,800 nil
Taxable salary excluding tax borne by the employer 1,490,200
Tax liability (salaried case)
[30,000 +Tax @ 15% on (Rs,1,490,200 – 1,200,000)] 73,530
Grossed up amount is Rs.73,530 / 85% 86,506

Computation of taxable income and tax liability

Taxable salary excluding tax borne by the company 1,490,200
Tax borne by the company 86,506
Taxable income 1,576,706

Tax liability (salaried case)

[30,000 + Tax @ 15% on (Rs,1,576,706- 1,200,000) 86,506

EXAMPLE# 2 Rs.
Basic salary 1,540,000
House rent allowance 216,000
Company maintained car for both use (cost of the car) 1,000,000
Medical allowance 52,500
Tax is to be borne by the company
SOLUTION:
Tax borne by the company Rs. 142,235

EXAMPLE #3:

Basic salary Rs.3,000,000

Leave encashment Rs.200,000
Company maintain car for both purposes (cost of car Rs. 1,800,000)
Medical allowance Rs.300,000
Tax is borne by the company

SOLUTION:
Tax borne by the company Rs. 652,857

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TAX ON AMOUNTS RECEIVED ON TERMINATION OF EMPLOYMENT [12(2) (e)

(iii) & 12(6)]

The amount of any profit in lieu of or in addition to salary (i.e... compensation for redundancy
or loss of employment. Golden handshake payments, etc.) may at the option of the
employee. be taxed in any of the following ways:
1. It may be included in total income of the employee for the tax year in which it is
received; or
2. It may be taxed as a separate block. The rate of tax applicable to such amount shall
be computed in accordance with the following formula:
A/B%
Where:
A = is total tax paid or payable by the employee on his total taxable income for the three
preceding tax years; and
B = is the employee's total taxable income for the three preceding tax years.

NOTE: In the above formula total taxable income has been used, which depicts that while
computing the applicable tax rate, income of the employee from all sources taxable under
NTR shall be taken into account.

EXAMPLE:
Mr. Hanif has a taxable salary income of Rs. 750,000 during the tax year. At the end of the
year he opted to retire under a scheme announced by his employer and received Rs.
2,500,000 as a golden handshake payment. The taxable incomes and tax liabilities of
Mr. Hanif for the three immediately preceding tax years were as below:
Year Taxable income Tax Liability
Rs. Rs.
1 500,000 4,000
2 600,000 5,000
3 900,000 12,000
REQUIRED: Compute the tax liability for the current tax year assuming that he opted that:
1. The golden handshake payment be taxed as a separate block; and
2. The golden handshake payment be taxed together with salary income.
ANSWER:
1. Golden handshake taxable as a Separate Bock of Income
Rs.
Income taxable as per normal rate 750,000
Income taxable at a special rate (i.e., golden handshake payment) 2,500,000
Total income for the year 3,250,000
Total Tax Liability
Tax on taxable income (Rs. 750,000) 7,500
(5% of the amount exceeding 600,000)
Tax on golden handshake payment = Rs. 2,500,000 @ 1.05% [N-1] 26,250
Total tax liability for the year 33,750

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N-1
Tax Rate applicable to Golden Handshake Payments
Year Taxable income Tax Liability
1 500,000 4,000
2 600,000 5,000
3 900,000 12,000
Total: 2,000,000 21,000
Average Rate = Tax of last 3 years ÷ Taxable income of last 3 years X 100
= 21,000/2,000,000 X 100 = 1.05%

2. Golden Handshake Payment Taxable together with Salary Income for the Year
Salary received during the year 750,000
Amount received on account of Golden Handshake 2,500,000
Total income taxable under the head "Salary" 3,250,000
Total Tax Liability on Rs. 3,200,000 430,000
Tax on Rs. 50,000 @ 30% 15,000 445,000

As the tax liability is lesser in a case where the golden handshake payment is treated as a
separate block, the taxpayer should opt the same.

NOTE: The option should be exercised by the due date of furnishing return of income

EXERCISE:
MFD Ltd paid a sum of Rs. 500,000 under the Golden Hand shake scheme to Mr. X in
addition to the taxable salary of Rs. 1,600,000 in the tax year 200Z. The past three years
assessed tax results of his assessment are as under:
Tax year Taxable Income Tax Liability (Say)
20Y 1,450,000 159,500
20X 1,200,000 120,000
20W 800,000 60,000
Total 3,450,000 339,500

REQUIRED:
Mr. X is interested to know the options available to him for taxation of Golden Hand shake
scheme for the tax year 200Z.

ANSWER:
Option I
Particulars Amount is Rs
Taxable Salary Rs. 1,600,000
Sum received under Golden Hand shake Scheme Rs. 500,000
Taxable Income Rs. 2,100,000
Total Tax liability of Rs 2,100,000
30,000 +[2,100,000-1,200,000] X 15% Rs. 165,000
Taxation under section 12(6)
Option II
Particulars Amount
Taxable income as computed aforesaid Rs.1,600,000
[30,000 + [1,600,000-1,200,000] X 15 % 90,000
Tax on Rs. 500,000 x (339,500/3,450,000) 49,203
Total Tax 139,203

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NOTE: As tax under Option II is lower than the tax option I, therefore, it is better to exercise
this option under section 12(6) of the Income Tax Ordinance, 2001

SALARY RECEIVED IN ARREARS :( Section 12(7)(8))

In case of receipt of amount under salary which is paid in arrears and is expected to be
charged at rate higher than the rate which would have been charged if the amount was
received in its relevant tax year, the employee may by a notice to the Commissioner elect for
tax rate applicable in the tax year in which such salary was earned.
 It means that salary is received on receipt basis but however,
 Arrears of salary may be taxed on accrual basis at the option of taxpayer in writing to
a commissioner on or before the due date for filing the return of income. Or
 Such later date as may be extended by the Commissioner.

EXERCISE:
Mr. A join a golden ltd at a basic salary of Rs. 900,000 per year. The increment was due in
2022 Rs.200,000 but not paid due to some dispute. Increment of Rs. 350,000 for 2023 &
Rs.600,000 for 2024 was also due because dispute still continue. In 2025 dispute settled and
all the arrears Rs. 1,150,000 received Salary received in 2025 is Rs. 1,700,000.

Calculate the tax payable of Mr. A for the tax year 2025

SOLUTION
A) If the arrear of salary taxed on receipt basis.
Salary received 1,700,000
Arrear received 1,150,000
Total taxable income 2,850,000
Total Tax liability
Tax on 2,200,000 180,000
Tax @25% (2,850,000-2,200,000) 162,500 342,500
B) If arrear of salary taxed on accrual basis.
Note: For the purpose of uniformity in calculations, the tax liability is calculated on the
basis of the rates applicable to the Tax Year 2025.

Tax Salary Salary to Difference Tax on Tax on Tax

year received be received salary salary to be Payable
received received
2021 900,000 1,100,000 200,000 15,000 25,000 10,000
2022 900,000 1,250,000 350,000 15,000 37,500 22,500
2023 900,000 1,500,000 600,000 15,000 75,000 60,000
2024 1,700,000 1,700,000 --------- 105,000
Total 197,500

NOTE: As the tax liability is lesser in a case where the salary received in arrear taxed on
accrual basis, the taxpayer should opt the same.

LOAN FROM EMPLOYER [13(7)]

Where a loan is received from an employer (whether interest bearing or otherwise) than
any one the following two amounts shall be added to the salary income of the employee.
1. The amount of interest/profit computed at the benchmark rate, if no interest/profit is
payable by the employee; or
2. The amount computed at the 'benchmark rate' less the actual amount of interest /
profit paid by an employee, if lower rate is applicable on the loan.
NOTES:
The above provision is applicable to loans made on or after 01-07-2002.

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This benefit shall not be taxable

 if the loan amount is up to Rs.1,000,000

 Where such benefit is extended by the employer due to waiver of interest by such
employee on his accounts maintained with the employer e.g., Provident Fund etc.

Benchmark rate means

1. For the tax year commencing on the first day of July, 2002 (i.e., tax year 2003) , a
rate of five percent (5%) per annum; and
2. For the tax years next following the tax year referred above, the rate for each
successive year taken at one percent (1%) above the rate applicable for the
immediately preceding tax year but not exceeding 10% per annum.
3. For tax year 2013 onwards it will be 10% p.a.
Example: Mr. Raza obtained a loan of Rs.1,200,000 on the first day of Tax year Which
Remained unpaid till the end of the tax Year. Taxable income of Mr. Raza for the year is
Rs.760,000 which does not include loan related adjustment. Compute taxable income in each
of the following Situations:
1. The Loan was interest-free;
2. The Employer charged interest at a rate of 8%;
3. The Employer charged interest at a rate of 15%.
ANSWER:
1. Interest-Free Loan
Rs.
Income given in the Question 760,000
Add; Taxable benefit on account of interest –Free loan 120,000
(1,200,000 X Benchmark Rate 10%)
880,000
2. Interest Charged @ 8 %
Rs.
Income given in the Question 760,000
Add; Taxable benefit on account of Lower Interest rate
Interest at Bench mark Rate 120,000
Less: Interest at 8% (96,000) 24,000
784,000

Interest Charged @ 15%

As the employer has charged the interest at a rate, which is higher than the
benchmark rate thus nothing will be included in the income of Mr. Raza. His taxable
income and the tax liability shall remain the same as given.
LOAN FROM EMPLOYER USED FOR ACQUISITION OF AN ASSET [13(8)]
Where an employee has utilized a loan obtained from his employer for the acquisition of any
asset or property the income of which is chargeable to tax under any head of income then the

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amount of interest on such loan (whether paid to the employer or / and treated as perquisite)
shall be allowed as deduction against income from such asset. The amount to be allowed as
deduction shall be determined as below:
1. Interest-Free Loan or Mark-up up to Benchmark Rate
An amount equal to the "Benchmark Rate" shall be allowed as deduction under any of
the following cases:

a. Where the employer has not charged interest on the loan; or

b. Where the employer has charged the interest but the interest rate does not
exceed the "Benchmark Rate"?
2. Interest at a Rate Higher than Benchmark Rate
Where the interest charged by the employer is higher than the "benchmark rate", the
whole amount paid by the employee shall be allowed as deduction.

EMPLOYEE SHARE SCHEME [14]

 Definition
 Taxability at grant of right or option
 Taxability at issue of shares
 Taxability at issue of shares subject to restriction on transfer
 Taxability at disposal of right or option
 Cost of shares

DEFINITION:
"Employee Share Scheme" means an agreement or arrangement under which a company
issues shares to the following persons:
1. An employee of the company;
2. An employee of an associated company; or
3. The trustee of a trust. Under such a situation, the trustee may transfer the shares to
the employee of the company or an employee of an associated company.
Where a company implements employee share scheme it provides a benefit to its
employees which may be dealt with as follows.
1. The value of any right or option to acquire shares (in it) is not chargeable to tax.
2. The right or option may be given to an employee without receiving any amount for
it or The Company may receive some amount in addition to the consideration
received against the shares.
The amount to be included in the salary income of an employee shall be computed as
Below:
Fair market value of shares at the date of issue XXX
Less: Consideration given by employee for shares XXX
Amount paid for the right or option, if any XXX (XXX)
Amount chargeable to tax under "Salary" XXX

COST OF SHARE:
After an amount has been charged to tax under the head salary. The cost of shares acquired
under the employees share scheme, shall be computed in the following manner:

Consideration paid for shares XXX

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Add:
Consideration paid for the grant of any right or option XXX

Taxable amount representing gain calculated on the

Issue of shares by company to employee under
Employees share scheme XXX

Cost of shares (generally for the purpose of computing

Tax credit / capital gain at the time of onward disposal) XXX
EXAMPLE:
On 14th August 200A, Sindh Limited has issued a scheme under which every employee of
the company is entitled to acquire 2,000 ordinary shares of the company. Considering the
following information, compute the amount to be included in "Salary income" of Mr. Riaz who
is one of the employees of the company:
Face value of each share Rs. 10
Value of the right Rs. 4
Price to be paid to the company for each share Rs. 20
Market value of the shares Rs. 35
Also determine the value of shares in the hands of Mr Riaz assuming that:
A. The company has not charged any amount for granting the right / option to
purchase shares; or
B. An employee has to pay Rs. 2 per share as a price for obtaining the right to
purchase shares
ANSWER:
Amount to be included in Salary Income
(A) Where The Right to Purchase Share is Granted Free of Cost
Rs.
Fair Market Value of the shares (2,000 x Rs. 35) 70,000
Less: Amount paid for Purchase of Shares (2,000 x Rs. 20) (40,000)
Taxable as salary income 30,000

(B) Where Amount is Payable For Acquiring The Right

Rs.
Fair Market Value of the shares (2,000 x Rs. 35) 70,000
Less: Amount paid for Purchase of Shares (2,000 x Rs. 20) 40,000
Amount paid for acquiring the right (2,000 x Rs. 2) 4,000 (44,000)
Taxable as Salary income 26,000

Cost of the Share:

A) Where Right is Acquired Free of Cost

Amount paid for purchase of shares 40,000

Amount taxable as "Salary Income" 30 000
Total cost of shares 70,000
Cost per share (70,000/2,000) Rs. 35

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(B) Where Some Amount is Payable for Acquiring the Right

Amount paid for purchase of Shares 40,000
Amount paid for acquiring the right 4,000
Amount taxable as "Salary Income" 26,000
Total cost of shares 70,000
Cost per share (Rs. 70,000/2,000) Rs. 35

NOTES: The face value of the shares has no concern with the amount to be determined
under the Income Tax Ordinance. It is the fair market value and the price paid for acquiring
or/and exercising the right/option to purchase shares, which determines the amount to be
included in income of the employee.

NOTES: Under both options, the fair market value of the shares shall be the total cost of the
shares acquired by an employee.

NOTES: Where the shares are issued with a restriction on their transfer then no amount shall
be included in an employee's income until the earlier of the date when he has a free right to
transfer the shares or the employee has actually disposed of the shares. Under such a case
the amount to be included shall be determined as below:

Fair market value at time the employee has free right to transfer or XXX
has actually disposed of the shares
Less: Consideration given for shares XXX
Amount paid for right or option, if any XXX (xxx)
Amount chargeable to tax XXX

EXERCISE:
Using the data of example above, compute the amount to be included in salary income of Mr.
Riaz if the company has imposed a restriction that the employees will not be entitled to
dispose of the shares within one year of the issue of shares, i.e. 14th August, 200B.
The fair market value on 14-08-200B is Rs. 37 per share.
ANSWER:

A) Where Right is given Free of Cost

Fair market value on 14-08-200B (2,000 x Rs. 37) 74,000
Less: Consideration paid for shares (2,000 x Rs. 20) 40,000
Taxable as Salary income 34,000

B) Where An Amount is Received for Granting Right

Fair market value of shares on 14-08-200B (2,000 x Rs. 37) 74,000
Less: Price paid for right (2,000 x Rs. 2) 4,000
Consideration for shares (2,000 x Rs. 20) 40,000 44,000
Taxable as salary income 30,000

EXAMPLE:
Assume that Mr. Riaz, with the permission of the company, disposed of the shares on 23rd
March 200B, when the fair market price was Rs. 32 per Share. Compute the amount to be
included in salary income of Mr. Riaz by using the data of example above.

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ANSWER:
A) Where Right is Given Free of Cost
Fair market value as on 23-03-200B (2,000 x Rs. 32) 64,000
Less: Consideration for shares (2,000 x Rs. 20) 40,000
Taxable as salary income 24,000

B) Where an Amount is Received for Granting Right

Fair market value of Shares on 23-03-200B(2,000 x Rs. 32) 64.000
Less: Price paid for right (2,000 x Rs. 2) 4,000
Consideration for shares (2.000 x Rs. 20) 40,000 44,000
Taxable as salary income 20,000

NOTE: Where an employee, instead of obtaining shares against a right or option, disposes
of the right. then an amount calculated as below shall be included in his salary income:
Consideration received against disposal of the right XXX
Less: Any cost incurred in respect of the right (XXX) XXX

EXAMPLE:
Compute the amount to be included in salary income of Mr. Riaz if he, instead of exercising
his right to purchase the shares. sells the right at the fair market value (i.e. Rs. 4 per share)
assuming that
 The right is given free of cost; and
 The company has received Rs. 2 for granting right to purchase one share.

ANSWER:
Where the Right is Given Free of Cost
Consideration received on disposal of the right (2,000 x Rs. 4) 8,000
Less: Cost incurred for obtaining right Nil
Taxable salary income 8,000

Where an Amount is Received for Granting Right

Consideration received on disposal of the right (2,000 x Rs. 4) 8,000
Less: Cost incurred for obtaining right (2,000 x Rs. 2) 4,000
Taxable salary income 4,000

EXAMPLE:
Mr. Ahsan has been the Chief Financial Officer of XYZ Limited for the last 5 years. He was
offered 5,000 shares on 01 June 2023 by XYZ Limited at a price of $ 1 per share. The market
value on that date was $5 per share. The shares were transferrable on completion of one
year of service, from the date of issue of shares.
The market price of the shares as on 01 June 2024 was $8 per share. On 17 September
2024, Mr. Ahsan sold all shares at $9. He also paid a commission of $10 to the brokerage
house.

The relevant exchange rates are as follows:

01 June 2023 $1=100
01 June 2024 $1=101
17 September 2025 $1=102

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REQUIRED:
Calculate the amount to be included in the taxable income of Mr. Ahsan for tax years 2023,
2024 and 2025. Also specify the head of income under which the income would be classified.

ANSWER:

Tax Year 2023:

As Mr. Ahsan did not have any right to transfer the shares in tax year 2023, therefore,
nothing will be included in the income of Mr. Ahsan under the head salary.

Tax Year 2024:

Following will be included in the income of the Mr. Ahsan under the head Salary Market value
on removal of restriction on transfer of shares (5000x 8x101) 4,040,000
Less cost of shares: amount paid by Mr. Ahsan (5,000 x 1 x100) (500,000)
Amount to be included under the head salary 3,540,000

Tax Year 2025:

Following will be included in the income of Mr. Ahsan under the head capital gain
Consideration received on sale of shares (5,000 x 102 x 9) 4,590,000
Less cost of shares (500,000 + 3,540,000) (4,040,000)
Less commission (10 x 102) (1,020)
Capital gain 548,980

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Practice Exercises

Q.1

Being a tax consultant, you are required to explain the tax implications/taxable income under the
appropriate head in respect of each of the following independent situations:

(i) As part of remuneration package, a company provides for reimbursement of telephone costs on
actual basis to its employees.
(ii) Actual expenditure incurred by an employee in relation to travelling and daily allowances is less
than the amount of allowances paid by the employer.

(iii) Mr. Hamid, a citizen of Pakistan was working with Zee (Pvt.) Ltd for last 15 years when he opted
for early retirement on 31 October 2024. He was due Rs. 5 million as a gratuity under the
gratuity scheme of Zee (Pvt.) Limited. The scheme was not approved by the FBR. Due to cash
constraints, the gratuity though due to Hamid on 31 October 2024 was not paid to Hamid. 0n 30
April 2025 at the request of Zee (Pvt.) Limited, Kee (Pvt.) Ltd- an associated company of Zee
(Pvt.) Ltd transferred the equivalent of Rs. 5million in US Dollars into Hamid's US dollar account
in UAE in lieu of gratuity due from Zee (Pvt.) Limited.

(iv) A company has taken health insurance cover for its employees. The insurance company
reimburses employees for actual cost of medical services for themselves and their dependents.
(v) ABC Ltd has provided scholarship to one of his employees for higher studies abroad.

(vi) Mr. A has leased a car and pays for its lease rentals from his own sources. He uses the car for
employment purpose. What will be the treatment of lease rentals paid and expenditure incurred
on vehicle running and maintenance?
(vii) A partner in a firm is entitled to a fixed remuneration each month. Would this constitute his
salary income?

(viii) Mr. Azhar is 65 years old and his taxable salary for the tax year is Rs. 943,000. Mr. Azhar
has obtained a housing loan from a local bank. How the tax reduction for senior citizenship and
deductible allowance for mark-up paid on loan will be calculated.

(ix) Mr. Aslam is 67 year old and employed as research scholar in a recognized nonprofit institution.
His taxable salary for the tax year is Rs. 654,000. Azhar is of the view that he is entitled to both
reductions i.e. in respect of senior citizen allowance as well as for full time teacher allowance.

(x) Mr. Sarmad has purchased a generator amounting to Rs. 1,000,000 from an interest free loan
taken from his employer. He rented the generator at an annual rental value of Rs. 250,000. Total
expense of Rs. 25,000 was expanded on repair, transport and maintenance of the generator.

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Ans.1

(i) Reimbursements of telephone expenses by the company will be treated as

taxable benefits of employees in case the facility is used for private purposes.
There will be no tax consequences to the extent the facility is used for official
purpose.

(ii) Travelling and daily allowance spent to the extent for performance of duty will be
exempt provided it is not paid with monthly salary or on fixed basis. Any amount
given in excess of actual spending will be fully taxable.

(iii) Since gratuity scheme is not approved, amount exempt from tax should be
50% of the amount received or Rs. 75,000 whichever is less. However since
the payment is received outside Pakistan, the said exemption is not available.
The whole amount is chargeable to tax. (Ref. Proviso to Clause 13(iv) of part 1)

(iv) Reimbursement of actual medical expenditure by an employer is tax exempt.

(Clause 139 Part I of 2nd Schedule). On a similar basis, there will be no tax
implications on reimbursement by the insurance company on behalf of the
employer, or any tax consequences for the employees on payment of health
insurance premium by the employer.

(v) Scholarship granted to the employee will be exempt from tax provided the
employer and the employee are not associates (Ref: Sec 47, discussed in chapter
11 as well)

(vi) Expenditure incurred by an employee to earn salary income including

travelling expenses and lease rental payments is not tax deductible. (Ref: Sec
12(4))

(vii) The remuneration paid by a firm to a partner is considered his share in the firm’s
profit as partner is not an employee of the firm.

(viii) Mr. Azhar is not entitled to deductible allowance relating to housing loan. Further
the tax reduction for senior citizen is also no more available

(ix) Yes, Mr. Aslam will be entitled to 25% tax reduction for full time teacher or
researcher will be applied on the amount of tax liability attributable to his salary
income only. Further the tax reduction for senior citizen is no more available.

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(x)
Annual rental 250,000
Less: Repair, transport and maintenance 25,000

Taxable income from other source 225,000

Note
N-1 Loan amount is Rs. 1,000,000, so no amount will be added in salary for interest on loan
received from employer. Hence, no deduction is allowed against income as such.

Q.2

Mr. Mobeen is a chartered accountant and working as finance manager of XYZ (PVT)
Limited. During the financial year 2025, his emolument package includes followings:

 Pay Rs. 100,000 p.m.

 Bonus Rs. 100,000.

 Leave encashment Rs. 50,000.

 Mr. Mobeen is provided with a car of 1,300cc. The said car was purchased in
the last year for a consideration of Rs. 1,000,000. Running and maintenance
cost of the said vehicle is borne by employer. The said vehicle is being used
partly for the private and partly for business use.

 Mr. Mobeen is provided with a furnished accommodation of 1000 square

yards in Lahore and company bears rent of Rs. 60,000 p.m. of the said
accommodation.

 The company also bears the cost of utility bills of Mr. Mobeen home. The
sum of total bills of electricity, gas and water aggregates to Rs. 200,000.

 The salary paid in respect of the cook and guard appointed on the
residence of Mr. Mobeen aggregates to Rs. 10,000 p.m.

 According to the terms of employment, the company bears all the medical
expenses of Mr. Mobeen. Total expenses incurred on this account aggregates to
Rs. 75,000.

 The company also provided air tickets and other expenses worth Rs. 85,000
for Mr. Mobeen and his family trip to UAE for summer leaves.

 During the year, Mr. Mobeen was deputed to Islamabad for the month of
December, 2024 in order to resolve certain administrative issues. He was
paid a fixed relocation allowance of Rs. 35,000 in addition to his normal
salary.

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 The company granted Mr. Mobeen an interest free loan for a sum of Rs.
1,500,000 on 1 January, 2024.

 In July 2021, Mr. Mobeen was granted an option to acquire 1000 shares of
Alpa (Pvt.) Limited (Parent Company of his employer). The option was
exercisable on completion of three years‟ employment with the Company. He
paid an amount equivalent of Rs. 100,000 to acquire the option whereas the
fair market value of such option at that time was Rs. 150,000. On July 4,
2024 he paid a sum equivalent of Rs. 200,000 to acquire the said shares which
were issued to him on July 21, 2024 when the market value of the shares
was equivalent of Rs. 350 per share. Mr. Mobeen disposed off the shares
on June 21, 2025. The sales proceeds received amounted to Rs. 375,000.

 Mr. Mobeen tendered his resignation to the company on June 29, 2025 and he
was paid a sum of Rs. 120,000 on account of gratuity from the unapproved
gratuity fund on the said date.

 Mr. Mobeen accepted the offer of M/S ABC (Pvt.) Limited to join that
organisation and he received a sum of Rs. 75,000 as inducement
allowance on account of leaving the past employer.

Required:

Compute the taxable income and tax liability of Mr. Mobeen for the tax year 2025.

Ans.2

MR. MOBEEN
COMPUTATION OF TAXABLE INCOME & TAX LIABILITY
Resident
Individual Tax
year 2025

Particulars Gross Exempt Taxable Remarks

Pay 1,200,000 0 1,200,000

Bonus 100,000 0 100,000

Leave encashment 50,000 0 50,000

Car 1,300cc 50,000 0 50,000 5% of 1,000,000

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Accommodation 720,000 0 720,000 720,000 or 45% of

the basic salary
whichever is higher

Utilities 200,000 0 200,000

Cook and Guard 120,000 0 120,000

Medical 75,000 75,000 0

Leave fare 85,000 0 85,000

assistance

Relocation Allowance 35,000 0 35000 If it is fixed than fully

taxable

Mark up on interest free 75,000 0 75,000 10% x 6/12 x

loan 1,500,000

Employee share scheme 50,000 0 50,000 350,000-200,000-

100,000

Gratuity 120,000 60,000 60,000 Lesser of 75,000

or 50% is exempt

Inducement 75,000 0 75,000

Allowance

Taxable Salary income 2,955,000 135,000 2,820,000

Capital gain 25,000 25,000

(Rs.375,000-
350,000)

Total taxable income 2,845,000

Tax on Rs. 2,845,000 (Rs.180,000 + 25% of 341,250

(Rs.2,845,000 - 2,200,000)

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Q.3
Mr. Arshad is an employee of a public listed company. He submitted the following data for
computation of his taxable income for the tax year 2025:

Basic pay per annum 480,000

Bonus 240,000

Dearness allowance 50,000

Rent Free unfurnished accommodation 75,000

Watchman wages paid by employer 36,000

Gardner wages paid by employer 24,000

Sweeper wages paid by employer 6,000

Employer’s contribution towards recognised provident fund 24,000

Interest on Provident fund balance @ 18% 18,000

Company maintained car for official and private use 1300CC. The said car was acquired three
years earlier. The cost of acquisition of vehicle was Rs. 850,000.

Reimbursement of medical expenditure 50,000

Utilities bills paid by the company

Telephone 12,000
Electricity bills paid by employer 15,000
Gas Bills paid by employer 6,000
Water bills paid by employer 9,000

Leave fare assistance (for the first time) 50,000

Commission income for securing a contract paid by the employer 30,000

Due to some health issue, he resigned from the job and following further sums were paid to
him:
Provident Fund recognised 150,000

Gratuity Fund unrecognised 70,000

Another company car has also been handed over to Mr. Arshad for a consideration of
Rs.285,000 whereas the book value of the said car was Rs.435,200. He immediately
sold the car at Rs.600,000.
Required:
Compute the taxable income of Mr. Arshad for the tax year 2025.

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Ans.3
MR ARSHAD

COMPUTATION OF TAXABLE
INCOME TAX YEAR 2025

Exempt/Not
Nature of Receipt Gross amount Taxable
taxable
Basic Pay 480,000 0 480,000
Bonus 240,000 0 240,000
Dearness allowance 50,000 0 50,000

Rent Free unfurnished 216,000 0 216,000

Accommodation [actual rent is lowed
than 45% of basic so higher value of
45% of basic is adopted]

Watchman salary 36,000 0 36,000

Gardner salary 24,000 0 24,000
Sweeper salary 6,000 0 6,000

Employer contribution to PF 24,000 24,000 0

Interest on PF Higher of: 1/3rd of 18,000 18,000 0

salary or income up to 16%

Company maintained car (850,000 x 42,500 0 42,500

5%)

Re-imbursement of medical 50,000 50,000 0

expenses
Utilities bills [electricity, gas and 30,000 30,000
water]

Telephone bills 12,000 12,000

Leave fare assistance 50,000 0 50,000

Commission 30,000 0 30,000
Provident fund Recognised 150,000 150,000 0
Gratuity fund 70,000 35,000 35,000

Sale of car (600,000-285,000) 315,000 315,000

Taxable income = 1,566,500

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Short Notes of Income from Salary

Tax rates for salaried individual Where the income of an individual chargeable under the head
“salary” exceeds 75% of his taxable income, the rates of tax to be applied shall be as set out in the
following table, namely: —
S. No. Taxable Income Rate of Tax
1 Where the taxable income does not exceed Rs. 0%
600,000
2 Where the taxable income exceeds Rs. 600,000 but 5% of the amount exceeding Rs.
does not exceed Rs.1,200,000 600,000
3 Where the taxable income exceeds Rs. 1,200,000 but Rs. 30,000 +15% of the amount
does not exceed Rs. 2,200,000 exceeding Rs. 1,200,000
4 Where the taxable income exceeds Rs.2,200,000 but Rs. 180,000 +25% of the amount
does not exceed Rs. 3,200,000 exceeding Rs. 2,200,000
5 Where the taxable income exceeds Rs. 3,200,000 but Rs.430,000 + 30% of the amount
does not exceed Rs.4,100,000 Exceeding Rs.3,200,000
6 Where the taxable income exceeds Rs. 4,100,000 Rs. 700,000 + 35% of the amount
exceeding Rs. 4,100,000

Surcharge for High Earners: 10% on Gross Tax Liability for Income Exceeding Rs. 10 Million
A surcharge shall also be payable by every individual (including salaried) and Association of person
(AOP) @ 10% of the Gross tax liability where taxable income exceeds Rs.10 million.

SALARY
Pay Fully taxable
Wages Fully taxable
Leave encashment for private employees Fully taxable
Leave encashment for government employees & member of Armed forces Fully exempt
Overtime Fully taxable
Bonus Fully taxable
Fees Fully taxable
Commission Fully taxable
Allowances Fully taxable
Perquisites Fully taxable
Work conditions supplements Fully taxable
Profit in lieu of or in addition to the salary Fully taxable
Any other benefit provided by the employer to his employee Fully taxable

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PENSION:
Fully exempt subject to two conditions.

GRATUITY AND COMMUTATION OF PENSION:

1 Government employees Fully exempt
2 Approved Gratuity Fund by the Fully exempt
Commissioner Inland Revenue
3 Approved Gratuity Scheme by board Exempt up to Rs. 300,000
4 Other Cases: Exempt up to 75,000 or 50% of the
• Unapproved Gratuity amount receivable whichever is lower
• Unapproved Commutation of
pension

MEDICAL FACILITY/ MEDICAL ALLOWANCE:

Tax treatment of medical allowance and medical facilities are as under,
a) Medical Facility or Fully Exempt If National Tax Number (NTN) of medical practitioner and
reimbursement of employer’s attestation are available.
medical Taxable
expenses: Notes for students:
➢ In Accordance with (1) CNIC shall be used as NTN from the tax years 2015 onward—section
terms of employment 181
➢ Not in accordance (2) Reimbursement of medical bills by the insurance company under
with terms of group insurance policy arranged by the employer is not taxable
employment as well subject to NTN + employer’s attestation. In this case, insurance
premier paid by the employer to the insurance company is not part of
salary income of the employees.
(3) If employer is a hospital or clinic then NTN and attestation is not
required as it will be covered in clause 53A of 2nd Schedule where no
such requirement is mentioned
b) Medical Allowance Exempt up to 10% of basic salary.
However, medical allowance is fully taxable if it is in addition to medical
facility or reimbursement in accordance with terms of employment.

VALUATION OF CONVEYANCE
Value to be included in salary income when employer has provided a conveyance to employee shall be
determined as per the table given below:
Use of Motor Vehicle Amount to be Included in Salary
Only for private use 10% of the cost to the employer for acquiring the motor vehicle or the fair
of the Employee market value of the vehicle at the commencement of lease, if it is taken
on lease.
Partly for private use 5% of the cost to the employer for acquiring the motor vehicle or the fair
of the employee and market value of the vehicle at the commencement of lease, if it is taken
partly for official use on lease.

VALUATION OF ACCOMMODATION
Higher of the 45% of the MTS or the basic salary if the time scale is not provided.

ACCOMODATION IN SMALL CITIES:

Higher of the fair market rent of the accommodation; or 30% of the MTS or the basic salary.

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PROVIDENT FUND:
Provisions regarding taxability in respect of employer/employee contribution, interest credited and
accumulated balance thereon is as follows:
EVENT GOVERNMENT PF RECOGNIZED PF UNRECOGNIZED
PF
Employee’s No treatment No treatment No treatment
Contribution
Employer’s Exempt Exempt Limit on No treatment
Contribution employer’s yearly
contribution is Rs.
150,000 or 1/10th of
(basic salary + dearness
allowance) whichever is
lower
Interest credited during Exempt Yearly interest is No treatment
the year exempt higher of:
--16% interest rate on
accumulated balance;
or
--1/3rd of (basics salary
+dearness allowance).
Payment of Exempt Exempt Only the employer’s
accumulated contribution and
balances interest on
accumulated balance
is taxable in the year of
receipt.

Loan
 Up to Rs. 1 million = No treatment
 More than Rs. 1 million = Loan amount x (10% - interest paid by employee)
Assets like TV, Ac fridge etc.
 Given Temporary = Tax depreciation or rent is added in salary.
 Permanently Transfer = FMV of asset – Payment by employer = added in salary
BENEVOLENT FUND:
Exempt from tax.

OTHER BENEFITS:

Food provided by hotels and restaurants to its employees during duty hours Exempt
Education provided by an educational institution to the children of employees Exempt
Medical treatment provided by a hospital or clinic to its employees. Exempt

Any other perquisite for which the employer does not have to bear any marginal Exempt
cost

Worker’s Profit Participation Fund (WPPF)

Fully exempt if received by workers.

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Reduction in tax liability: Full time teacher or researcher

Reduced by an amount equal to 25% of tax payable on his income from salary.

Salary earned outside Pakistan by citizen of Pakistan

Exempt from tax if he leaves Pakistan and remains abroad during that tax year.

Foreign source salary

Exempt from tax if foreign income tax has been paid.

Employee Share scheme

Issues
1. Acquisition of options
2. Sale of option
3. Acquisition of shares
4. Disposal of Share

1. Acquisition of Options
No Tax treatment

2. Sale of option
Gain = Sale price – Cost of option if any
To be added in salary

3.(i) Acquisition of shares without restriction:

Gain = FMV – Total cost = To be added in salary
FMV means value at the date of acquisition
Total Cost = Cost of option if any + cost of shares

3.(ii) Acquisition of shares with restriction:

Lapse of restriction
Gain = FMV – Total Cost = to be added in salary
FMV means value at time of lapsed of period.
Total Cost = Cost of option if any + cost of shares

Disposal with restrictions:

Gain = sale price – Total Cost = to be added in salary
Total Cost = Cost of option if any + cost of shares

4. Disposal of Shares Without Restrictions:

Gain = Sale price / FMV (whichever is higher) – Total Cost
Total Cost = Cost of option if any + cost of shares + Amount already taxed in Salary

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Tax Free Salary (Tax on Tax):

 If employer agrees to pay the tax on employee’s salary, then the tax paid by the employer
shall be treated as an additional benefit to the employee.
 Salary income of the employee shall be grossed up by the amount of tax payable by the
employer.

Loss:
 Loss cannot arise in salary.
 Salary shall not be reduced by losses of other heads.

Termination of Employment:
 Amount received on termination of employment (paid voluntarily or under an agreement)
including compensation for redundancy or loss of employment and golden handshake
payments can be taxed at following rate:

Total tax paid or payable for three preceding tax years x100
Total taxable income for three preceding tax years

 Above option shall be exercised (by notice in writing to CIR)

 by due date for furnishing the employee ‘s return of income or employer
certificate; or
 by such later date as CIR may allow.

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Question Bank
1 MR. A
Mr. A is an employee of a multinational company incorporated in Pakistan. His remuneration during the
year was as follows -
Rupees
(1) Basic salary 1,117,245
(2) Reward 22,062
(3) Bonus 300,000
(4) House rent allowance 643,514
(5) Utility allowance 111,724

The Company has provided him a car for personal and business use. The cost of the car was Rs.1,100,000.
During the year, Mr. A has been paid an interest free loan for construction of a house amounting to
Rs.1,150,000.
In addition to the above, Mr. A was granted Stock Option of 2500 shares by the Head Office of the
Company at US$ 36 per shares. Out of the above stock option, 1250 shares vested to him during the year
were immediately exercised by him. The price of the share at the time of exercise was US$ 41 per share.
The exchange rate between US$ and Pak Rupee on the date on which Mr. A exercised his option was
US$ 1 = Rs.103.
Required:
During the year, the company has withheld tax from his salary amounting to Rs. 295,000. You are required
to compute his taxable income and tax thereon for the Tax Year 2025.

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2 MR. MUSHTAQ
Mr. Mushtaq has provided you with the following data for the computation of his total income and tax
thereon for the tax year 2025.
Rupees
Basic salary 1,225,000
Bonus 50,000
Conveyance allowance 50,000
House rent allowance 101,250
Leave fare assistance 60,000
Cash paid to a non-profit organization by way of donation 20,000

Motor vehicle valuing Rs. 400,000 provided by employer and used partly for personal
and partly for business purpose.
Running cost borne by employee 30,000
At the start of the tax year Mr. Mushtaq was issued 5,000 shares under an employee share option scheme
whereby he was offered shares at 25% discount to the market value. The market value of shares is Rs.11
per share. House loan taken by Mr. Mushtaq amounted to Rs.200,000 and interest paid on such loan
during the year amounted to Rs.6,000.
Required:
You are required to compute his taxable income and tax thereon for the tax year 2025. Show all
computations and assumptions, as necessary.

3 MR. BASHIR AHMED

Mr. Bashir Ahmed is an employee who had joined his current employment during the tax year 2025. His
details of salary, allowance and perquisites received from company “A” his previous employer and
company “B” his present employer are as follows:
Particulars Company A Company B
Basic salary 714,158 572,572
Bonus 150,000 71,800
House rent allowance 258,663 222,746
Utility allowance 71,415 57,257
Conveyance provided by Company B partly used for business and
private use. Cost of the car purchased by the company Rs.1,100,000
Leave encashment 77,783 -
Medical reimbursement as per the terms of employment 35,000 25,000
Ex-gratia payment received under golden handshake scheme 2,048,300 -
The detail of assessed income and assessed tax in respect of past three years is as follows:
Rs. Rs.
2022 1,309,570 269,902
2023 1,545,850 371,255
2024 2,264,940 557,633
During the year Company “A” had deducted tax under section 149 amounting to Rs.270,000 and
Company “B” had deducted tax under section 149 amounting to Rs.300,000 from payments made to Mr.
Bashir.
Required:
Compute the taxable income and tax liability of Mr. Bashir based on the data provided above for the tax
year 2025.

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4 MR. HAYAT
Mr. Hayat, Chief Engineer in Mega Limited, had received 6,000 shares of the company in July 2022, under
an employee share scheme. Mr. Hayat had the option to transfer the shares in tax year 2024 or thereafter.
The market value of shares at the time of issue was Rs. 12 per share. In tax year 2024 the share attained a
market value of Rs. 20; however, Mr. Hayat sold the shares in May 2025 when the share price was Rs.
35 per share.
Required:
(i) With reference to above, briefly explain the relevant provisions of the income tax Ordinance, 2001
relating to employee share scheme.
(ii) Compute the amount to be included in the taxable income of Mr. Hayat for each tax year.

5 MR. AINUDDIN KHAN

Mr. Ainuddin Khan, a retired civil servant has joined a listed company during the year and provides you
the following information relevant to the tax year 2025 related to the income year ended June 30, 2025:
(a) Payroll Rupees
(i) Monthly payroll 220,000
(ii) Bonus (to the extent of 20% of annual payroll) -
(iii) House rent allowance receivable in cash with monthly payroll 50,000
(iv) The company maintained 1000 CC. car valuing Rs 1,800,000
for personal and official use, on which total expenditure
incurred by the company 80,000
(b) Other payments made by company on vouchers
(i) Residential electricity 200,000
(ii) Petrol for residential generator 5,000
(iii) Gas bills of residence 6,000
(iv) Telephone bills of residence including withholding
tax of Rs. 100 13,885
(v) Club bills 4,000
(vi) Internet usage reimbursement 9,000
(c) Mr. Ainuddin Khan also received the following sums:
(I) Pension from government 80,000
(ii) Dividends from investment in WAPDA Bonds (net of tax) 70,000
Required:
Compute total income of Mr. Khan for tax year 2025.

6 MR. MATEEN (attempt the question after study all heads of income)
Mr. Mateen was employed with Melody Limited (ML) as an event organizer. On June 30, 2024 he resigned
from his employment without completion of notice period. On July 01, 2024 he joined another company
Rock Star Limited (RSL) as a senior event organizer. Following information is available relating to his
assessment for the tax year 2025:
(a) On July 01, 2024 RSL paid Rs. 280,000 to ML as compensation in lieu of un-served notice period
by Mr. Mateen.
(b) On July 15, 2024 Mr. Mateen received a gratuity of Rs. 350,000 from an unrecognized gratuity
fund maintained by ML. He also received Rs. 150,000 as leave encashment.
(c) In accordance with the terms of his employment with RSL, Mr. Mateen was provided with the
following emoluments / benefits during the tax year 2025:

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(i) Basic salary of Rs. 245,000 per month and utility allowance of Rs. 21,000 per month.
(ii) A reimbursement of personal medical expenses, upto 15% of the annual basic salary and
Rs.250,000 on account of hospitalization charges for his daughter were made after procuring
hospital bills showing the national tax number of the hospital. These bills were also attested
and certified by RSL.
(iii) For the first two months of his employment, a pick and drop facility was provided to
Mr.Mateen at a monthly rent of Rs. 25,000. On September 01, 2024, RSL provided a
company maintained 1300 CC., Honda City which was partly used for private purposes. The
cost of the car was Rs. 2,500,000.
(iv) Monthly salary of Rs. 6,000 was paid to Mr. Mateen’s house keeper by RSL. Mr. Mateen
however, reimbursed 20% of the house keeper’s salary to RSL.
(v) A special allowance of Rs. 50,000 was paid to meet expenses necessarily to be incurred in
the performance of his official duties. Actual expenditure was Rs. 50,000.
(vi) On January 01, 2025, he was provided an interest free loan of Rs. 1,500,000. The prescribed
benchmark rate is 10% per annum.
(vii) A commission of Rs. 500,000 was paid for introducing new clients to the company.
Withholding tax was deducted by RSL at the rate of 12% from such payments.
(viii) The tax deducted at source from his salary by RSL for the tax year 2025 amounted to
Rs.550,000.
(d) Apart from his employment with RSL, Mr. Mateen also organized events for private clients. He
received a total of Rs. 1,000,000 from such clients. No tax was deducted from such receipts.
However, he incurred an overall loss of Rs. 350,000 on organizing these events.
(e) On May 31, 2025 he received Rs. 2,980,000 from Mr. Ali as consideration for vacating his bungalow.
(f) He also received a share of profit from a business in Malaysia equivalent to Rs. 185,000. He paid
Rs. 40,000 in taxes in Malaysia on such income.
(g) Mr. Mateen acquired 10,000 shares of a listed company from the Privatization Commission of
Pakistan at a price of Rs.10 per share on May 31, 2024. On May 20, 2025 he sold all the shares
for Rs. 1,000,000.
(h) He paid Zakat of Rs. 250,000 to an approved organization, through cash and not according to
Zakat & Usher Ordinance, 1980.
Required:
Compute the taxable income, tax liability and tax payable / refundable, if any, by Mr. Mateen for the tax
year 2025.

7 MR. ASLAM
Mr. Aslam has been appointed by Grace University of Commerce (GUC) on 01 December 2024, as its
full time teacher to teach ‘Taxation’. Mr. Aslam is experience teacher for 35 years and currently he is 62
years old. The break-up of his monthly salary from the employer is given below:
(Rupees)
Basic salary 100,000
Utilities allowance 10,000
House rent allowance 30,000
Further, he has also received following amounts from the GUC:
Re-imbursement of children’s education fee 25,000
Bonus 24,000
GUC agreed to bear Rs. 5,000 monthly on account of tax chargeable on Mr. Aslam’s salary. He was also
provided with a motor vehicle having cost of Rs.1,500,000. The vehicle was to be used partly for official
use. Medical re-imbursements in terms of employment amounted to Rs. 110,000.

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On 1st January 2025, Mr. Aslam was granted an option to acquire 1,000 shares under the employee share
scheme. Option was acquired at a cost of Rs. 5,000 whereas the exercise price was Rs.30 per share. Mr.
Aslam sold half of the option at Rs. 4,000 and exercised the remaining option on 31st January 2025 when
the fair market value of shares was Rs. 50 per share. These shares were, however, subject to restriction
on transfer till 31st March 2025 On this date, the fair market value had climbed to Rs. 60 per share. GUC
deducted tax at Rs. 5,000 per month out of Mr. Aslam’s salary.
Required
On the basis of foregoing, compute Mr. Aslam’s taxable income and tax liability for tax year 2025.

8 MR. AKRAM (attempt after study Capital Gain)

Mr. Akram is an employee of Royal Brands Ltd. (a listed Co). In tax year 2025, his basic salary aggregated
to Rs. 1,500,000. The company offered him shares option for acquiring 5,000 shares under employee
share scheme. Cost of option amounted to Rs. 1,000. He exercised the option @ Rs. 50/share on
1st September, 2024. Fair market value (FMV) at the time of exercise of shares was Rs. 70/share. After
holding the shares for a period of 202 days, he disposed them off at:
a) Rs 90 / share
b) Rs 40 / share

Required
In each of the above scenarios, compute Mr. Akram’s taxable income and tax liability for tax year 2025.

9 MR. AKBER
Mr. Akber was employed on 1st August 2024 at ABC Limited in the monthly Basic Pay Scale of
Rs.160,000 - 10,000 - 175,000. His monthly emoluments during the year ended 30th June 2025 were as
follows:
(Rupees)
Basic Salary 160,000
Travelling allowance 12,000
Medical allowance 18,000
Mr. Akber was offered to either avail a monthly house rent allowance of Rs.50,000 or rent free
accommodation. He opted for the accommodation. Mr. Aslam has been provided free utilities with a
maximum limit of Rs. 10,000 per month. However, he generally consumed utilities worth Rs. 15,000 a
month.
Mr. Akber has also been provided with a motor vehicle for official as well as private use. The vehicle was
acquired by ABC Ltd on lease. The fair market value of vehicle was Rs. 1,500,000 at the inception of
lease. However, under the lease agreement, ABC Ltd. was required to pay a total sum of Rs.2,000,000
over the lease term.
During the month of December 2024, the employer waived a Rs. 100,000 loan due from Mr. Akber.
Further, the employer also re-imbursed children education expenses amounting to Rs.46,000. Tax
deducted by employer at Rs. 7,000 per month out of Mr. Akber’s salary.
Mr. Akber left the job as well as Pakistan on 30th April 2025 and joined a new job at UAE on a monthly
salary of AED 12,000 effective from 1st June, 2025. Conversion rate Rs.40/AED
Required
Compute Mr. Akber’s taxable income and tax liability for tax year 2025.

10 SAEED
Saeed, a citizen of Pakistan, was working on a foreign vessel belonging to Delta Shipping Company
(DSL) based in Spain for the past three years. His monthly salary was USD 15,000 which was remitted
to his Pakistani bank account through normal banking channel. The amount received during the tax year
2025 was converted to Pak Rupees at an average exchange rate of USD 1 = PKR 170.

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On 1 October 2024, he resigned from DSL and joined Haris Pharma Limited (HPL) in Pakistan as a
General Manager. He was offered following monthly salary and allowance in HPL:

Rupees

Basic salary 600,000

Medical allowance 66,000

In addition to the above, he was also provided the following:

i. Bonus equal to two monthly basic salaries. However, bonus amount was adjusted in proportion to
the duration of his stay in the company. The bonus amount was paid to him on 5 July 2025.
ii. Two company-maintained cars. Both cars were purchased on 1 October 2023. The car costing
Rs.3,500,000 was used for official purposes whereas the car costing Rs. 2,111,120 was used for
personal purposes.
iii. Free lunch from the restaurant owned by one of HPL’s directors. The fair market value of food
provided to him during the year was Rs. 125,000.
iv. A fixed special allowance of Rs. 30,185 per month to meet expenses wholly and necessarily
incurred in the performance of his official duties. Actual expenses incurred by him during the year
were Rs.150,000.
v. Provident fund contribution of Rs. 60,000 per month. An equal amount per month was also contributed
by Saeed to the fund.
Other information relevant to tax year 2025 is as under:
i. On 1 December 2024, Saeed obtained a loan of Rs. 25 million from a scheduled bank at 15% mark-
up per annum to acquire a residential house.
ii. During the year, he received dividends of Rs. 575,000 from a listed company. The amount was net
of withholding income tax at the rate of 15% and Zakat of Rs. 62,500 deducted under the Zakat and
Usher Ordinance, 1980.
iii. Withholding tax deducted by HPL from Saeed’s salary during the tax year 2025 amounted to
Rs.1,300,000.
Required:

Under the provisions of the Income Tax Ordinance, 2001 and Rules made there under, compute under
the appropriate head of income, the total income, taxable income and net tax payable by or refundable
to Saeed for the tax year 2025.

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1 MR.A
Residential status: Resident individual
TAX YEAR 2025
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY
Gross Taxable
Particulars income Exempt (Rs.) Income
(Rs.) (Rs.)
Basic salary 1,117,245 - 1,117,245
Rewards 22,062 - 22,062
Bonus 300,000 - 300,000
House rent allowance 643,514 - 643,514
Utilities allowance 111,724 - 111,724
Company maintained Car (1,100,000 x 5%) 55,000 - 55,000
Interest free loan (1,150,000 x 10%) 115,000 - 115,000
Stock options exercised (1,250 x US$5 x 103) 643,750 - 643,750
Taxable Income 3,008,295
Computation of Tax liability (for a salaried individual)
Tax on Rs. 3,008,295 [Rs. 180,000 + (3,008,295 – 2,200,000) x 25%) 382,074
Less: Tax already deducted (295,000)
Balance tax Payable 87,074

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2 MR.MUSHTAQ
COMPUTATION OF TAXABLE INCOME
Residential Status: Resident individual
TAX YEAR 2025
Gross Taxable
Particulars income Exempt (Rs.) Income
(Rs.) (Rs.)
Basic salary 1,225,000 - 1,225,000
Bonus 50,000 - 50,000
Conveyance allowance 50,000 - 50,000
House Rent Allowance 101,250 - 101,250
Leave fare assistance 60,000 - 60,000
Conveyance provided by the employer 20,000 - 20,000
(Rs. 400,000 x 5%)
Employee share scheme (5,000 x Rs. 11 x 25%) 13,750 - 13,750
Taxable Income 1,520,000
Computation of tax liability (for salaried individual)
Tax on Rs.1,520,000 [{Rs. 30,000 + (1,520,000 – 1,200,000)} x 15% 78,000
Assumptions / Basis:
(i) Tax credit on Donation is not available as the said amount has been paid in cash.
(ii) Interest is not computed as the said loan is less than Rs.1,000,000.
(iii) Running cost is not considered.

3 Mr. BASHIR AHMED

COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY
TAX YEAR 2025

Particulars CO. A CO. B Total Exempt Taxable

Basic Pay 714,158 572,572 1,286,730 - 1,286,730
Bonus 150,000 71,800 221,800 - 221,800
House Rent Allowance 258,663 222,746 481,409 - 481,409
Utility Allowance 71,415 57,257 128,672 - 128,672
Co maintained car [1,100,000x5%] - 55,000 55,000 - 55,000
Leave Encashment 77,783 - 77,783 - 77,783
Medical Reimbursements 35,000 25,000 60,000 60,000 0
EX Gratia Payments 2,048,300 - 2,048,300 - 2,048,300
Taxable Income 4,299,694

Computation of tax liability (for salaried individuals)

There are two options available with the taxpayer for taxation of his income including Ex-gratia
Payments i.e.
Option 1- Ex-gratia will be part of the taxable income in the current tax year as per applicable tax rates.
Option 2 Taxable income will be taxed as per applicable tax rates whereas Ex-gratia will at taxed at
average rate of tax of last three years. Taxpayer may choose the less tax liability under any of the two
mentioned options. Tax liability under two options is as under:

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Option 1
Tax on Rs. 4,299,694 [700,000 + (4,299,694 – 4,100,000) x 35%] 769,893
Option 2
Tax on income excluding ex gratia 2,251,394
[Rs.180,000 + (2,251,394 – 2,200,000) x 25%)] 192,849
Tax on Ex gratia Rs. 2,048,300 @ *23.41%
(*1,198,790 / 5,120,360 x 100) 479,507
Total Tax 672,356
Tax payable as per Option 2 is less than Option 1
672,356
Less Tax payments
Deduction of tax by Co A 270,000
Deduction of tax by Co B 300,000
Total deductions (570,000)
Balance tax Payable 102,356

4 MR. HAYAT
(i) Employee share scheme:
Where shares issued to an employee under an employee share scheme are subject to a restriction
on the transfer of the shares -
 No amount shall be chargeable to tax to the employee under the heading “Salary” until the
earlier of:
 the time the employee has a free right to transfer the shares; or
 the time the employee disposes of the shares; and
 The amount chargeable to tax to the employee shall be the fair market value of the shares
prevailing:
 at the time the employee has a free right to transfer the shares or
 disposes of the shares
 The said amount chargeable to tax will be reduced by any consideration given by the
employee for the shares including any amount given as consideration for the grant of a right
or option to acquire the shares.
 The cost of the shares to the employee shall be the sum of:
 The consideration, if any, given by the employee for the shares;
 The consideration, if any, given by the employee for the grant of any right or option to
acquire the shares; and
 The amount chargeable to tax under the heading “Salary”.
Capital gain
Subsequently when these shares are disposed of, capital gain will be calculated as follows:
Sale proceed xxx
Less cost of shares as calculated above (xxx)
Capital gain xxx
In case of shares of private company, gain will be taxable under the normal tax regime, whereas
in case of shares of public company, gain will be taxable as separate block.

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(ii) Tax Year 2023:

In the tax year 2023`, no income would be added to Mr. Hayat’s salary as he did not have a right
to transfer the shares.
Tax Year 2024:
In tax year 2024, when Mr. Hayat got the option to transfer the shares, the market value was Rs.20
per share, therefore, Rs. 120,000 (6,000 x Rs.20) would be added to his income under the head
“Salary”.
Tax Year 2025:
In tax year 2025, following amount would be added to Mr. Hayat’s income.

Consideration received on sale of shares (6,000 x Rs. 35) 210,000

Less: Cost of shares (amount charged in 2023 to income) (120,000)
Gain on sale to be taxed as Capital gain 90,000

5 MR. AINUDDIN KHAN

Name: Mr. Ainuddin Khan
Tax year: 2025
Status: Resident Individual

COMPUTATION OF TAXABLE INCOME Rs.

Salary
Pay (Rs.220,000 * 12) 2,640,000
Bonus (Rs. 2,640,000 x 20%) 528,000
House rent allowance 600,000
Co. maintained car – Rs.1,800,00 @ 5% 90,000
Residential electricity 200,000

Petrol for residential generator 5,000

Gas bills 6,000

Telephone bill 13,885

Club bills 4,000
Internet usage reimbursement (note-3) 9,000
Pension Exempt -
Income from Salary 4,095,885

Income from other source

Dividend Income chargeable to tax as separate block u/s 5 (70,000/0.85) 82,353

Total income 4,178,238

Note:
(1) Pension is an exempt income; therefore, the same is not included in the total income
(2) Tax deducted from dividend income is final discharge of tax liability
(3) It is assumed that internet personal usage expenses are reimbursed by the employer.

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6 MR. MATEEN
Computation of taxable income & tax thereon
Tax Year 2025
SALARY Rupees
Income from ML

Gratuity (Rs. 350,000 – Rs. 75,000) 275,000

Leave encashment 150,000
Income from RSL
Basic salary (Rs.245,000 x 12) 2,940,000
Utility allowance (Rs.21,000 x 12) 252,000
Reimbursement of personal medical expenses [(2nd Sch. Part 1, Clause 139(a)] -
Reimbursement of hospitalization charges [(2nd Sch. Part 1, Clause 139(a)] -
Rent a car (Rs. 25,000 x 2) since in lieu of Car -
Company maintained Honda City (Rs. 2.5 million x 5% x 10/12 months) 104,167
House-keepers salary (Rs. 6,000 x 12 months x 80%) 57,600
Special allowance -
Amount in lieu of notice period paid to ML 280,000
Interest free loan (1,500,000 x 10% x 6/12) 75,000
Commission received from RSL 500,000
Total salary income 4,633,767
Income from business
Loss from private event organization (350,000)
Profit received from business in Malaysia 535,000
185,000
Capital Gain
Sale of share of a listed company (Rs. 1,000,000 – Rs. 100,000) 900,000
Income from other sources
Consideration received on vacating the bungalow (Rs. 2,980,000/10) 298,000
Total income for the year 6,016,767
Sale of share of a listed company (separate block of income) (900,000)
Less: Zakat paid - no deductible allowance -
Taxable income 5,116,767
Computation of tax liability and tax payable:
(As salary income is more than 75% of the total income so Mr. Mateen shall be treated as salaried person)

Tax on Rs. 4,100,000 700,000

Tax on balance Rs.1,016,767 @35% 355,868
Total tax payable excluding capital gain 1,055,868
Tax on capital gain Rs.900,000 @ 15% 135,000
Total tax payable including in capital gain 1,190,868
Less: foreign tax credit (W-1) (43,057)
Income tax liability 1,147,811

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Less: Tax deducted at source

On salary income (550,000)
On commission from RSL (Rs. 500,000 x 0.12)] (60,000)
Tax liability 537,811

W-1 Foreign tax credit

Lesser of: Foreign tax i.e. Rs. 40,000 or

Average Pakistan tax on foreign income i.e. (1,190,868 / 5,116,767 x 185,000) 43,057

7 MR. ASLAM
Computation of Taxable Income and Tax Liability
For the Tax Year 2025
Particulars Gross Exempt Taxable
Basic salary (Rs. 100,000 x 7) 700,000 - 700,000
Utilities allowance (Rs. 10,000 x 7) 70,000 - 70,000
House rent allowance (Rs. 30,000 x 7) 210,000 - 210,000
Children's education fee re-imbursement 25,000 - 25,000
Bonus 24,000 - 24,000
Tax borne by employer (Rs. 5,000 x 7) 35,000 - 35,000
Company maintained Car (1,500,000 x 5% x 7/12) 43,750 - 43,750
Medical re-imbursement - Note 1 110,000 (110,000) -
Income under employee share scheme - Note 2 14,000 - 14,000
Taxable Income 1,121,750
Tax Liability
Tax on Rs. 1,121,750 (Rs.1,121,750 – Rs.600,000) x 5% 26,088
Reduction in tax liability @ 25% for full time teacher (u/c (2) of Part III of 2nd Schedule) (6,522)
Less: Credit for tax deducted out of salary (Rs. 5,000 x 7) (35,000)
Tax refundable (15,434)
Note 1: Medical re-imbursements
It has been assumed that hospital bills show NTN and were duly certified by the employer
Note 2: Income under employee share scheme
- Disposal of option
Sale of option 4,000
Cost of option (Rs. 5,000 x 500/1000) (2,500) 1,500
- Exercise of option / Restriction removal
Fair market value (Rs. 60 x 500) 30,000
Less: Cost of shares (Rs. 30 x 500) 15,000
Cost of option (Rs. 5,000 x 500/1000) 2,500
(17,500) 12,500
14,000

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8 MR. AKRAM
(a) Rs 90 / share
Computation of Taxable Income and Tax Liability - Under Scenario (a)
For the Year Ended 30 June, 2025
Tax Year 2025
Particulars Gross Exempt Taxable

Basic salary 1,500,000 - 1,500,000

Income under employee share scheme - Note 1 99,000 - 99,000

Capital gain 100,000 - 100,000

Total Income 1,699,000

Less: Capital gain as separate block of income (100,000)

Taxable Income 1,599,000

Tax Liability

- On Separate block income (Rs. 100,000 @ 15%) 15,000

- On Balance taxable income

Tax on Rs.1,599,000 [Rs.30,000 + (1,599,000 –
1,200,000) x 15%] 89,850

Total Tax Payable 104,850

Note 1: Income under employee share scheme
- Exercise of option
Fair market value (Rs. 70 x 5,000) 350,000
Less: Cost of shares (Rs. 50 x 5,000) 250,000
Cost of option 1,000
(251,000)
99,000

Note 2: Capital gain on securities (Separate block income)

Consideration received (Rs. 90 x 5,000) 450,000
Less: Cost of shares (Rs. 50 x 5,000) 250,000
Cost of option 1,000
Amount already charged to salary 99,000
(350,000)
100,000
(b) Rs 40 / share
Computation of Taxable Income and Tax Liability - Under Scenario (b)
For the Year Ended 30 June, 2025
Tax Year 2025

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Income from Salary

Particulars Gross Exempt Taxable

Basic salary 1,500,000 - 1,500,000
Income under employee share scheme - Note 1 99,000 - 99,000
Capital gain / (loss) - Note 2 - - -
Taxable Income 1,599,000
Tax Liability
Tax on Rs. 1,599,000 [Rs. 30,000 + (1,599,000-
1,200,000) x 15%] 89,850
Tax Payable 89,850
Note 1: Income under employee share scheme
- Exercise of option
Fair market value (Rs. 70 x 5,000) 350,000
Less: Cost of shares (Rs. 50 x 5,000) 250,000
Cost of option 1,000
(251,000)
99,000
Note 2: Capital gain on securities (Separate block income)
Consideration received (Rs. 40 x 5,000) 200,000
Less: Cost of shares (Rs. 50 x 5,000) 250,000
Cost of option 1,000
Amount already charged to salary 99,000
(350,000)
Note: Capital loss – Cannot be set off with any other income (150,000)

9 MR. AKBER
Computation of Taxable Income and Tax Liability
For the Year Ended 30 June, 2025
Tax Year 2025
Particulars Gross Exempt Taxable
Basic salary (Rs. 160,000 x 9) 1,440,000 - 1,440,000
Travelling allowance (Rs. 12,000 x 9) 108,000 - 108,000
Medical allowance (Rs. 18,000 x 9) - Exempt upto 10%
of basic salary 162,000 (144,000) 18,000
Accommodation - Note 1 648,000 - 648,000
Utilities (Rs. 10,000 x 9) 90,000 - 90,000
Company maintained car [Rs. 1,500,000 (FMV) x 5%
(Business + Pvt. Use) x 9/12) 56,250 - 56,250
Loan waived 100,000 - 100,000
Children's education fee re-imbursement 46,000 - 46,000
Foreign source salary - Note 2 480,000 (480,000) -
Taxable Income 2,506,250

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Particulars Gross Exempt Taxable

Tax Liability

Tax [Rs. 180,000 + (2,506,250 – 2,200,000)] x 25% 256,563

Less: Credit for tax deducted out of salary (Rs. 7,000 x 9) (63,000)

Balance Tax Payable 193,563

Note 1: Value of accommodation
Offered equivalent cash amount (Rs. 50,000 x 9) 450,000

45% of Minimum of time scale (Rs. 160,000 x 9 x 45%) 648,000

Higher of the two 648,000

Note 2: Foreign source salary

Foreign source salary (AED 12,000 x Rs. 40) 480,000
Foreign source salary of a citizen leaving Pakistan and remained outside Pakistan at the end of tax year
is exempt under section 51(2) of the Income Tax Ordinance, 2001.

10 SAEED
Computation of total income, taxable income and net tax payable/refundable

For tax year 2025

Income from salary Rupees

Received from HPL

Basic salary (Rs. 600,000 × 9 months) 5,400,000

Medical allowance (Rs. 66,000 × 9 = 594,000 – 5,400,000 × 10%) 54,000

Bonus (Received after year end) -

Company maintained car for:

- office use only -

- personal use only (2,111,120×10% x 9/12) 158,334

Free food provided in lunch 125,000

Special allowance (fixed amount on monthly basis – fully taxable) 271,666

Provident fund contribution [60,000×9=540,000–150,000] (Allowed limit is 1/10 of the

basic salary or 150,000 whichever is lower) 390,000

6,399,000

Received from DSL

Salary received from DSL (From July 24 to September 24)

(US $ 15,000×3 = 45,000 @ Rs.170) 7,650,000

Total 14,049,000

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Rupees

Income from other source

Dividend income from a listed company (575,000+62,500=637,500+112,500 for
withholding tax) 750,000

Total income 14,799,000

Less:
FTR – Dividend income 1 (750,000)

14,049,000

Less: Deductible allowance

Zakat paid/deducted (62,500)

Taxable income for the year 13,986,500

Less:

Mark-up paid to sch. Bank- No deductible allowance allowed from tax year 2024
onwards

Taxable income for the year 13,986,500

Tax liability

Tax on Rs. 5,600,000 1,610,000

Tax on amount exceeding 8,000,000 [(13,986,500-5,600,000) × 45%] 3,773,925

5,383,925
As Taxable income is above Rs. 10 million so surcharge @ 10% of the taxable 538,393
income is applicable
Tax under final tax regime

Tax on dividend received 112,500

Total tax liability 6,034,818

Less: Tax already deducted

Tax on dividend income 112,500

Tax withheld from salary 1,300,000

Net tax payable 4,622,318

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ICAP Past Papers

Q.1 [Spring 2018 Q.2 (c)]
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss under correct
head of income for tax year 2025, in each of the following cases:

Hasrat has been working as Director HR in Shakir Limited (SL) for many years. During the tax year 2025 he
received basic salary of Rs. 6 million. SL also contributed Rs. 50,000 per month towards a recognized
provident fund. An equal amount was contributed by Hasrat. Interest income of Rs. 3,391,000 at the rate of
20% of accumulated balance of the fund was credited to Hasrat’s account.

(04)

Answer.1

Q.2 [Autumn 2017 Q.3 (a)]

Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the correct
head of income for tax year 2025, in each of the following cases:

Under an employee share scheme, 30,000 shares of Dawood Limited were issued to Qamar, on 1 August
2021 for Rs. 30 each. According to the scheme, he was not allowed to sell/transfer the shares before
completion of three years from the date of issue. The face value of each share is Rs. 10 per share. Fair
market value of each share on different dates was as follows:

1 August 2021 30 June 2022 31 July 2024

Rs.40 Rs.30 Rs.50

He sold 10,000 shares on 31 May 2025 for Rs. 65 per share.

(03)

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Answer.2

Taxable
Income
Share of DL - Employees share scheme Rupees
Fair market value of shares on 31 July 2024 (30,000× 50) 1,500,000
Purchase price (30000×30) 900,000
Income from salary 600,000

Share of DL - Employees share scheme Rupees

Sale proceeds of shares on 31 May 2025 (10,000×65) 650,000
Purchase price (10,000×50) 500,000
Capital Gain 150,000

Q.3 [Spring 2015 Q.3]

Munir resigned from his employment with Ali Industries Limited (AIL) with effect from 31 December 2024.
He received following amounts in final settlement:

 Rs. 150,000 as Leave Encashment.

 Rs. 4,000,000 under a Golden Handshake Scheme.

Munir had received a salary of Rs. 350,000 per month for a period of six months upto December 2024. His
taxable income and tax liability during the preceding five tax years were as under:

Tax Year 2020 2021 2022 2023 2024

Total Taxable Income (Rs.) 2,000,000 2,450,000 2,700,000 3,100,000 3,650,000
Tax Paid (Rs.) 300,000 392,000 472,500 542,500 650,000

Required:
As a tax consultant, advise Munir about the amount of income tax payable by him for the tax year 2025,
under the Income Tax Ordinance, 2001.

(06)

Answer.3

Following options are available to Munir (Salaried individual):

Option 1: By applying applicable tax rate to total taxable income

Rupees
Salary (350,000 X 6 ) 2,100,000
Leave encashment 150,000

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Golden Handshake scheme 4,000,000

Total Taxable Income 6,250,000

Tax Computation Rupees

Tax on 6,250,000
Upto 4,100,000 700,000
Tax @ 35 % on (6,250,000-4,100,000) 752,500
1,452,500

Option 2: Tax on salary at applicable rate and final settlement amount at average rate of tax

Tax computation – Salary

Rupees
Tax on 2,250,000 [ 180,000 +( 2,250,000-2,200,000) X 25%] 192,500
Tax on amount received under Golden Handshake scheme 704,762
(1,665,000/9,450,000) x 4,000,000
897,262

Munir should select option 2 as it would result in tax saving of Rs. 555,238 (1,452,500– 897,262)

Q.4 [Spring 2019 Q.1 (b) Amended]

Zain has received the following amounts from his employment with Hasan Pakistan Limited (HPL)
during the tax year 2025:

I. A monthly salary of Rs. 200,000.

II. Reimbursement of Rs. 350,000 for actual cost of medical services for him and his dependents,
from an insurance company, under the health insurance policy.

On 31 March 2025, he purchased a car from HPL for Rs. 110,800. The market value of this car on 31
March 2025 was Rs. 250,000.

Required:

Compute the total income, taxable income of Zain for the tax year 2025.

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Ans.4

Zain
Computation of the taxable income of Zain For tax year 2025
Particulars Rupees
Salary (200,000×12) 2,400,000
Reimbursement for actual cost of medical services -
Purchase of car at less than market value (250,000 – 110,800) 139,200
Taxable income 2,539,200

Q.5 [Spring 2020 Q.5 (b) Amended]

Sajid retired from Sun Chemicals Limited (SCL) as a marketing manager with effect from 31 December
2024. He received the following amounts in final settlement from SCL:

(i) Leave encashment of Rs. 600,000.

(ii) Rs. 4,000,000 from unapproved provident fund. 50% of this amount was contributed by Sajid.

(iii) Un-approved gratuity of Rs. 2,500,000.

He also acquired the vehicle, provided to him by SCL, at accounting written down value of Rs.
500,000. The market value of the vehicle at the time of retirement was Rs. 2,000,000.

Required:

Under the Income Tax Ordinance, 2001 and Rules made thereunder, discuss the tax treatment of the
above benefits received by Sajid on retirement.

Ans.5

The benefit received by Sajid on his retirement would be treated as follows:

(i) Leave encashment comes under the definition of salary and therefore it would be fully
taxable.
(ii) Since the amount was received from unapproved PF, the employer’s contribution and
interest on accumulated balance would be taxable in the year of receipt.
(iii) In the case of unapproved gratuity, exemption is available up to Rs. 75,000or 50% of the
amount receivable whichever is lower. Therefore, the amount to be included in Sajid’s
taxable income would be Rs. 2,425,000 (2,500,000‒ 75,000).
(iv) Since the market value of the vehicle was more than cost of acquisition the difference i.e.
1,500,000 would be included in his taxable income.

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 3

CHAPTER
Tax Credits

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Tax credits
Foreign source salary income of a resident person
Ordinance states that:

 Any foreign-source salary received by a resident individual shall be exempt from tax if
the individual has paid foreign income tax in respect of the salary.
 A resident individual shall be treated as having paid foreign income tax if tax has been
withheld from his foreign source salary by his employer and paid to the revenue
authority of the foreign country in which the employment was exercised.
Foreign tax credit
Any Foreign-source income of a resident taxpayer shall be chargeable to tax under The Income
Tax Ordinance, 2001. However, he shall be allowed a tax credit in respect of the foreign- source
income. The credit shall be of an amount which is lesser of the following two amounts:

 The foreign income tax paid,

 The Pakistani income tax payable in respect of net foreign source income computed at
the average rate of Pakistan Income Tax.

Formula to calculate the amount of tax at average rate of Pakistani Income is as:

Tax on taxable income/Taxable income X Foreign source income

Where the foreign income falls under different heads of income, it shall be charged to tax
under their respective heads. The tax credit shall be allowed separately for each head.

The foreign income tax must be paid within 2 years after the end of the tax year in which the
income is earned. If the payment is not made within the prescribed period, the tax credit shall
not be allowed.

Definition: Average rate of Pakistan Income Tax

 “
 Average rate of Pakistan income tax” in relation to a taxpayer for a tax year, means the
percentage that the Pakistani income tax (before allowance of the tax credit under this section)
has of the taxable income of the taxpayer for the year;
 “Foreign income tax” includes a foreign withholding tax; and
 “Net foreign-source income” in relation to a taxpayer for a tax year, means the total foreign
source income of the taxpayer charged to tax in the year, as reduced by any deductions allowed
to the taxpayer for the year that:
 relate exclusively to the derivation of the foreign-source income; and
 are reasonably apportioned to the derivation of foreign-source income in accordance
with section 67.
Note : Section 67 provides the method for apportionment of expenditure relevant to different

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sources of incomes

Illustration 1

Mr. Sheeda’s income for the tax year 2025 is as under:

Pakistani source income:

 Salary 1,000,000
 Other Sources 400,000

Foreign source income 300,000

Foreign source income is taxed @ rate of 5% (300,000X5%) 15,000

Answer:

Salary income 1,000,000

Other Sources 400,000

Foreign income 300,000

Taxable income 1,700,000

Computation of tax liability

Tax on exceeding amount (N0n-Salaries)

[170,000+(1,700,000-1,600,000) X 30%] 200,000

Less: Foreign tax credit

a) Pakistani average rate of tax

(200,000/1,700,000 X 300,000) 35,294
b) Foreign income tax paid 15,000
Whichever is lower (15,000)

Total Tax liability 185,000

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Illustration 2 (Attempt after losses)

KL is an Association of Persons having two partners, Mr. K and Mr. L sharing profit and loss equally.
During the tax year 2025, KL’s Pakistan source income amounted to Rs. 2,500,000.
Following are the details of its foreign source incomes, tax paid thereon for the tax year 2025 and
foreign losses brought forward from tax year 2024:

Answer 2.

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Gross Tax 970,000

Average tax rate
19.125% =
(765,000 /
4,000,000 x 100)
Foreign tax (A) 125,000 - 75,000 187,500
Proportionate 60,625 303,125
Pakistan Income (w-1) (w-2)
Tax on foreign
source income (B) - -
Foreign tax credit- 60,625
Lower of A or B - - 187,500 (248,125)
Net tax payable - - 721,875

Unadjusted foreign tax credit cannot be refunded, carried back to preceding year or carried forward to
the following year.
(w-1) 970,000/4,000,000 x 250,000 = 60,625
(w-2) 970,000/4,000,000 x 1,250,000 = 303,125

Illustration 3

Saturn Law, an AOP, is engaged in the manufacture and sale of Talc both locally and in
international markets. SL has two overseas branches located in Korea and China. Following
information has been extracted from the records for the year ended 31 March 2025:

Pakistan Overseas Branches

Operation
Local Korea China
------------ Amount in Rupees -----------
Sales 10,000,000 6,000,000 8,000,000
Profit before taxation 4,000,000 800,000 1,000,000
Taxes paid during the year 500,000 250,000 400,000

SL’s net profit from local operation includes the following:

(i) Profit on debt amounting to Rs. 1,000,000 paid by SL to a Swiss bank against short term loan
obtained to meet the working capital requirements of its China branch.

(ii) Rs. 100,000 written backs on account of excess provision for bad debts, made last year.

An Expense of Rs. 600,000 has been erroneously excluded from the computation of income.

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Required:

Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax
payable / refundable for the tax year 2025. Give brief reasons for the treatment of the items
excluded from computation or for which no expense deduction is allowed.

Answer:

Saturn Law
Computation of taxable income and income tax liability
For the tax year 2025
Particulars Pakistan Source Forign Source income Total
Income
Local Korea China
Income from Business
Profit before taxation 4,000,000 800,000 1,000,000 5,800,000
Add/(less): Inadmissible expenses/(income)
Profit on debt 1,000,000 (1,000,000) -
Excess provision written back admissible as (100,000) (100,000)
Straight deduction
Taxable income for the period 4,900,000 800,000 - 5,700,000
Less: Expense (600,000) (600,000)
Taxable income 4,300,000 800,000 - 5,100,000

Tax liability 1,410,000

Less: Foreign tax credit (lesser of foreign tax (221,176) (221,176)
Paid or pakistan tax payableon such income)
(1,410,000 /5,100,000 X 800,000= 221,176
Or 250,000 tax already paid

Less: Taxes paid during the year (500,000) (500,000)

Net tax payable/(Refundable) 688,824
OTHER PROVISIONS WITH RESPECT TO FOREIGN SOURCE INCOME
Foreign source income of short-term resident individuals
1) Income Tax Ordinance states that: Foreign source income of an individual shall be exempt
from tax in Pakistan if he is:
a resident individual solely by reason of the individual’s employment; and
present in Pakistan for a period or periods not exceeding three years,
2) The above exemption shall not apply to:
any income derived from a business of the person established in Pakistan; or
any foreign-source income brought into or received in Pakistan by the person.

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Foreign source income of returning expatriates

the Income Tax Ordinance, 2001 states that:
Any foreign source income derived by a citizen of Pakistan in a tax year who was not a
resident individual in any of the four tax years preceding the tax year in which the individual
became a resident shall be exempt from tax in the tax year in which he became a resident
individual and in the following tax year.
If a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that
tax year, any foreign source salary earned by him outside Pakistan during that tax year shall be
exempt from tax.

Foreign source salary income of a resident person

the Ordinance states that:
Any foreign-source salary received by a resident individual shall be exempt from tax if the
individual has paid foreign income tax in respect of the salary.
A resident individual shall be treated as having paid foreign income tax if tax has been
withheld from his foreign source salary by his employer and paid to the revenue authority of the
foreign country in which the employment was exercised.

Exemptions to certain foreign residents or foreign source income of residents

Following exemptions are available to foreigners or the foreign source income of residents
which are discussed in detail later.
Diplomatic and United Nations exemptions.
Foreign government officials
Exemption under international agreements

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Exercise
Mr. Akhtar has served in South Africa (SA) for last five years. He was Chief Engineer at a multinational
Company in SA. He returned to Pakistan in September 2024. Detail of his income for the tax year 2025 is
as under:
1. His emoluments for the last July to September converted into Pak Rupees are as under:

2. Mr. Akhtar spent his whole income for personal expenses and balance amount was invested in a
Consultancy business. He was a member in an engineering consulting AOP in of South Africa. His
investment in the firm still exists and during the tax year 2025, he earned income equivalent to
Rs. 750,000 after paying tax of Rs. 125,000. He has not drawn any sum from the share of his
profit.
3. Mr. Akhtar also received rent in Pakistan of his apartment situated in SA. The rental income
earned and received aggregates to Rs. 1,200,000. In SA the rental income is taxed as separate
block of income and tax on the rental income paid by Mr. Akhtar was Rs. 120,000. Mr. Akhtar
paid a sum of Rs. 12,000 to the banker for rent collection.
4. Mr. Akhtar received pension amounting to Rs. 250,000 during the year from his employer at SA.
This pension was paid to his son in South Africa to meet his educational expenses.
5. Mr. Akhtar deposited his cumulative pension in the SA special bonds and earned profit on debt
amounting to Rs. 325,000 during the year from the said investment. Mr. Akhtar opted to invest
the profit in the said bonds in order to avoid reduction in interest rates which are applicable on
fresh investments.
6. In Pakistan, Mr. Akhtar joined Gatron International Limited on 1O October 2024 and received
following salary income from the company:

7. South African Revenue Authorities raised a tax demand against Mr. Akhtar equivalent to Rs.
25,000 on the rental income in view of claim of inadmissible expenses there against and Mr.
Akhtar paid this demand in August 2025.
You are required to compute Pakistan tax liability of Mr. Akhtar for the tax year 2025. It is worthwhile to
mention here that the nationality of Mr. Akhtar is not confirmed, therefore, it is desired that the
Pakistan tax of Mr. Akhtar

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should be worked out considering that:

(a) Mr. Akhtar is Pakistani National
(b) Mr. Akhtar is SA National

Answer:

Tax (Rs. 170,000 + 30% of the amount exceeding Rs. 1,600,000) 614,000

Tax Liability

Tax (Rs. 650,000 + 40% of the amount exceeding Rs. 3,200,000) 1,082,000

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Tax credit for donation for charitable purposes (Sec 61)

A tax credit at the average rate of tax shall be allowed to a taxpayer if he has made any
donation during the tax year. A tax credit shall be allowed only if the following conditions are
fulfilled:

1. The donations are made during the tax year.

2. The taxpayer possesses evidence in respect of the donation made by him.
3. The donations may be made in kind or in cash. The payment of an amount should be
through a crossed cheque.
4. A donation has been given to the following institutions:
I. A recognized board of education or a university in Pakistan established under a
Federal or Provincial law Any of the following institutions established or run by
Government:
a. An educational institution,
b. A hospital,
c. A relief fund, or
II. Any non-profit organization,
III. any non-profit organization or any person eligible for tax credit under section 100C of
the ITO, 2001
Note: No deductible allowance is now allowed on donation paid to any second schedule
institution. All those institutions previously mentioned in second schedule have now
been consolidated in new schedule namely thirteenth (13th) schedule. Donation made
to these entities would now entitle the donor for a tax credit.
5. The Tax credit for donation is restricted up to the lesser of the following amounts:
I. Total amount of donations including the fair market value of any property given;
or
II. Thirty percent (30%) of taxable income for the year, if the person is an individual
or AOP.
III. a company, 20% of the taxable income of the person for the year.

Provided that where any sum is paid or any property is given to an associate by a donor,
clause (b) of component C shall be, in the case of—
i. an individual or association of persons, 15% of the taxable income of the
person for the year; or
ii. a company, 10% of the taxable income of the person for the year

Formula to calculate the Amount admissible for tax credit is as follow:

Tax on taxable income/Taxable Income X Amount admissible for tax credit

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Note: No deductible allowance is now allowed on donation paid to any second schedule institution. All
those institutions previously mentioned in second schedule have now been consolidated in new
schedule namely thirteenth (13th) schedule. Donation made to these entities would now entitle the
donor for a tax credit.

Exercise:

Mr. Hamza made a total contribution of Rs. 150,000 as donation to approved institution mentioned in
13th schedule. His total income from business during the tax year 2025 is Rs. 1,800,000. Calculate
Hamza’s taxable income and tax liability.

Solution:

Answer
(a)
In this case donation will be allowed as tax credit:
Taxable income 1,800,000
Tax liability
Rs.170,000 + [(1,800,000 – 1,600,000) x 30%] 230,000
Gross Tax 230,000 A
Eligible amount for tax credit- W-1 (Rs.150,000)
Tax credit (230,000/1,800,000 x 150,000) (19,167) B
Tax liability for the year 210,833 A-B
W-1
Amount of charitable donations (1) 150,000
30% of taxable income (2) 495,000
Eligible amount lower of 1 or 2 150,000

Value of Donation in kind

Value of items donated in kind shall be taken as shown in summary below:

a. Imported items: value for the purpose of custom duty along with all duties and charges
paid by the donor
b. Items manufactured in Pakistan: Purchase price along with duties and charges paid by
the donor
c. Used depreciable items: Tax Written down value i.e., cost – tax depreciation
d. Motor vehicles:
I. New vehicles imported by the donor shall be valued at cost plus all duties and
charges till their registration.
II. New vehicles locally purchased shall be valued at price paid by the donor plus all
duties and charges till their registration.

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III. Used vehicles imported by the donor shall be valued at the import price adopted
by the custom authorities plus all charges till their registration.
IV. Value adopted in the first year shall be reduced by 10% of the said value for each
successive year up to a maximum of 5 years.
V. Used vehicles locally purchased shall be valued as:
If vehicles imported are up to 5 years old, value shall be originals coast as
reduced by 10% for every year following the year in which it was
imported or purchased.
If vehicles are more than 5 years old, value shall be purchase price paid
by the donor for the used car or 50% of the original value whichever is
higher

Tax credit for contribution to approved Pension fund (Sec 63)

A tax credit at the average rate of tax shall be allowed to an eligible pension respect of any
contribution or premium paid by him in the tax year in approved pension fund. In order to avail
this tax credit, following conditions should be satisfied:

1. The Pension fund should have been approved under the voluntary pension system
Rules, 2005.
2. The person is deriving income which is chargeable to tax under the head salary or
Income from business.
3. The tax credit is allowed for such payment which is lesser of the following amounts:
I. Total contribution paid; or
II. 20% of taxable income of the eligible person for the relevant tax year
4. Amount of tax credit shall be computed by applying the average rate of tax to the
contribution on which it is allowed.

Formula to calculate the Amount admissible for tax credit is as follow:

Tax on taxable income/Taxable Income X Amount admissible for tax credit

Note:

A. Where an eligible person joins the pension fund and his age at the time joining is
more than forty years than he shall be allowed an additional contribution of 2 % per
annum for each year of exceeding forty years. It shall be allowed for a period up to
30-06-2019. Provided further that the total contribution allowed to such person shall
not exceed 50% of the total taxable income of the preceding year.

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B. The additional contribution of 2% per annum shall not exceed 30% of the total
taxable income of the preceding year.

Eligible Person

It means an individual who fulfills the following conditions:

1. Ha is a Pakistani; and
2. Ha holds a valid NTN on computerized National Identity card or National Identity card
for overseas Pakistanis issued by the National database and Registration Authority.

Note: The transfer by the members of approved employment pension or annuity scheme or
approved occupational saving scheme of their existing balance to their individual pension
accounts maintained with one or more pension fund managers shall not qualify for tax credit
under this section.

Miscellaneous provisions and tax credits for members of AOP (Sec 65)
 Where the above-mentioned tax credits are allowed to a person who is also a member
of an association of persons who is chargeable to tax u/s 92(1), the amount of taxable
income shall include the share of person in the profit of the AOP (which is otherwise
exempt) and tax payable shall be an amount payable on taxable income including shares
in the profit of AOP.
 If any tax credit as mentioned above, is not fully credited due to the credit being in
excess of tax payable, the excess amount shall not be refunded, carried forward to a
subsequent tax year or carried back to a preceding tax year
 However, if the person is the member of an AOP the amount of tax credit which cannot
be applied as above by the member, can be claimed by the association of which he is
member, in the same year. For this purpose, a copy of written agreement between the
member and the association shall be furnished along with the return of association.

Final tax and minimum taxes shall be determined after deducting tax credits undersections 65B,
65D and 65E of the Income Tax Ordinance, 2001.

Tax credit for point-of-sale machine (Sec 64D)

All Tier 1 retailers are required to integrate with Board's Point of Sale online real time reporting system.
In order to encourage integration with point-of-sale real time reporting system of FBR, tax credit for POS
machines has been introduced through introduction of new section 64D. As per section 64D, a person
who is required to integrate with FBR’s computerized system for real time reporting of sale or receipt is
entitled to a tax credit in respect of the amount invested in purchase of point-of-sale machine. The tax
credit will be allowed for the tax year in which the point-of-sale machine is installed, integrated and
configured with the FBR’s computerized system, at the lower of
i. amount actually invested in purchase of point-of-sale machine; or
ii. PKR 150,000/ machine

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the term ‘point of sale machine’ is defined as a machine meant for processing and recording the sale
transactions for goods or services, either in cash or through credit and debit cards or online payments in
an internet enabled environment.
(i) Tax credit for certain persons (Sec 65F)
Income of the following taxpayers shall be allowed a tax credit equal to one hundred per cent of the tax
payable including minimum tax and final taxes upon fulfilment of certain conditions/limitations:
I. Persons engaged in coal mining projects in Sindh supplying coal exclusively to
power generation projects;
II. (A startup as defined in Clause (62A) of Section 2 for the tax year in which the
startup is certified by the Pakistan Software Export Board and for the following
two years;
[Explanation. – For the removal of doubt it is clarified that tax credit under clause (a) shall
only be available to the income derived from the operations of coal mining projects in Sindh
supplying coal to power generation projects.]

It may be noted that the above persons were provided exemption from tax under the
Second Schedule, however, by virtue of Section 65F, they are now entitled to tax credit
subject to the following conditions:
i. Annual return of income has been filed:
ii. Tax required to be deducted or collected has been deducted or
collected and deposited in the government treasury;
iii. Withholding tax statements for the relevant tax year have been
filed, where the person is a withholding agent; and
iv. Monthly sales tax returns for the tax periods corresponding to
the relevant tax year have been filed.
(ii) Tax credit for specified industrial undertakings (Sec 65G)

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Sequence of Tax Credit.

If a taxpayer is allowed more than one tax credit for a year, the credits shall be applied in the
following order:
a. Any foreign tax credit; then
b. Any tax credit allowed for,
i. Charitable donations (Sec 61)
ii. Contribution to approved pension fund (Sec 63)
iii. Point of sale machine (Sec 64D)
iv. Certain person (Sec 65F)
v. Specified industrial undertakings (Sec 65G)
vi. Trust / Welfare Institution / Non-Profit Organization (Sec 100C)
vii. Any tax reduction.
Step to solve the question:

 Calculation of Total income that includes:

Income from salary (If any)

Property (If any)

Capital gain (If any)

Business (If any)

Other source (If any)

Foreign source income

 Less: deductible allowances to calculate taxable income (Note-1)

 At the end add AOP share for rate purpose (A)
 Calculate tax liability (B)
 Less AOP tax credit B/A X share from AOP
 Less teacher reduction in tax liability (C)C
 Net tax liability (D)
 Less tax credit in the following order:
Foreign tax credit E = (B-C)/A X foreign source income
Donation to approved / charitable institute (Note-2)

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Contribution to approved pension fund (Note-2)

Point of sale machine (Sec 64D)
Certain person (Sec 65F)
Specified industrial undertakings (Sec 65G)
Trust / Welfare Institution / Non-Profit Organization (Sec 100C)

 Less tax deducted by the employer

 Net tax payable

Note-1
This figure is used for calculating maximum amount of tax credit.

Note-2

(B-C-E)/A X eligible Amount

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Practice Question 1
Mr. Cheeta requested you to calculate his tax liability from the following particulars
1. Taxable salary Rs. 1,200,000 as a full-time teacher from an approved non-profit
educational institution.
2. Taxable other source Rs. 100,000
3. Taxable foreign business income Rs. 150,000 where Mr. Z paid income tax of Rs. 7,500.
There is no tax treaty with that foreign country.
4. Mr. Z visited that foreign country for 182 days during the year and that was his only
foreign traveling. Age of Mr. Z was 55 years of age at the end of the relevant tax year.
5. Zakat was deducted at source Rs. 50,000.
6. Donation was paid by him Rs. 11,000 to a private approved charitable institution in cash
for which he has a proper receipt
7. He donated his household furniture to a government hospital. FMV is estimated at Rs.
105,000.
8. He purchases the following shares during the year:
I. Shares of RS.65,000 of a private company as an original allottee
II. Shares of RS.184,800 of a listed company as an original allottee
III. Shares of RS.25,000 of a listed company from his relatives

Solution-1
Particulars Rs.
Salary 1,200,000
Other sources 100,000
Foreign income 150,000
Total income 1,450,000
Less: Zakat
(50,000)
Taxable income 1,400,000
Tax liability (Salaried)
Up to 1,200,000 30,000
Tax on amount exceeding 1,200,000 30,000

60,000
Less: full time teacher (as per working 1) (7,500)
52,500
Less: foreign tax credit
a) Tax paid 7,500
b) 52,500/1,400,000 X 150,000 5,625
Whichever is lower (5,625)
Less: Rebate on donation
(52500-5,625)/1,400,000 X 105,000 3,516 (3,516)
Tax liability 43,359

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(W-1)

Working of full-time teacher

Salary income 1,200,000

Up to 1,200,000 30,000

Fulltime teacher allowance @ 25% 7,500

Practice Question 2
Mr. Y requested you to calculate his tax liability from the following information:

1. Taxable salary as full-time teacher from recognized non-profit educational institution Rs.
1,880,000.
2. Other sources income Rs. 510,000
3. Zakat deducted Rs.79,200
4. He made the following donations:
a) Donation to private organization in cash Rs. 12,000
b) Donation to Govt. Educational institution through cheque Rs. 8,000
c) Donation to a private charitable approved institution through cheque Rs.
120,000
5. He purchased the following shares:
a) Shares of a listed company as an original allottee Rs. 42,000
b) Shares of a private company as an original allottee Rs. 9,000
c) Shares of a private company through privatization commission of Pakistan Rs.
15,000
6. He joined an approved pension fund during the year and contributed Rs. 285,000
towards pension fund when his age was 40 years
7. His taxable income for the last year was Rs. 520,000.

Solution 2
Particulars Rs.
Salary 1,880,000
Other sources 510,000
Total income 2,390,000
Less: Zakat

(79,200)
Taxable income 2,310,800
Computation of tax liability

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Up to 2,200,000 180,000
Tax on amount exceeding 2,200,000 @ 25 % 27,700
207,700
Less: Full time teacher allowance (w-1) (33,000)
Tax liability 174,700
Less: Rebate on donation
174,700 / 2,310,800 X 128,000 9,677
Rebate on APF
174,700 / 2,310,800 X 285,000 21,546

(31,223)
Tax liability 143,477

(w-1)

Working of Full-time teacher

Salary income 1,880,000

Tax on amount 1,880,000[30,000+(15% of 680,000)] 132,000

Full time teacher allowance @ 25% 33,000

Practice Question 3
Mr. Ahad requested you to calculate his taxable income and tax liability from the following
information:

1. Taxable salary Rs. 1,820,000 as a full-time teacher from an approved non-profit

educational institution.
2. Income from other Source = 100,000
3. Zakat paid = 120,000
4. Donation to approved =100,000
5. Pension Fund =30,000
6. Tax deducted by the employer = 30,000
7. Mr. Jawad received foreign source business income Rs. 200,000 on which he paid tax @ 8% .
8. Share from AOP Rs. 100,000

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Solution 3
Mr. Ahad
NTN-345621-7
Residential Status- Resident
Tax Year 2025
Computation of Total Income, Taxable Income and Tax Liability
Particulars RS.
Income from Salary
Salary 1,820,000
Income from other source 100,000
Foreign source income 200,000
Total Income 2,120,000
Less: Zakat (120,000)
Taxable Income 2,000,000
Taxable Income under NTR 2,000,000
Add; share from AOP for rate purpose 100,000
Taxable Income for rate purpose 2,100,000

Calculation of Tax Liability

Particulars Rs.
Up to 1,200,000 30,000
Tax on amount exceeding 1,200,000 (2,100,000 – 1,200,000) X 15% 135,000
Tax 165,000
Less: AOP Tax credit (165,000 / 2,100,000) X 100,000 (7,857)
Teacher Reduction (W-1) (30,750)
Foreign tax credit
Lower of
(12,786)
(i) Foreign tax paid = (200,000 X 8%) = 16,000
(ii) At average rate = 12,786
(165,000-30,750/ 2,100,000) X 200,000
Tax credit for donation to approved institution
(165,000-30,750-12,786/ 2,100,000) X 100,000
*
(5,784)
* Lower of
(i) Actual = 100,000
(ii) 30% of taxable income (2,000,000 X 30%) = 600,000
Tax credit for contribution in pension fund
(165,000-30,750-12,786/ 2,100,000) X 30,000
* (1,735)

* Lower of

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(i) Actual = 30,000

(ii) 20% of taxable income (2,000,000 X 20%) = 400,000

Tax liability after tax credit 106,088

Less: Tax Deducted by the Employer (30,000)
Tax Payable 76,088

W-1

Teacher reduction:

Salary: 1,820,000

Tax on salary = 123,000

Reduction @ 25 % of the liability: 123,000 X 25% = 30,750

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 4

CHAPTER
Income from Property

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INCOME FROM PROPERTY

The 'rent ' received or receivable by a person for a tax year is taxable under the head 'Income from
Property'. However, any rent which is exempt from tax under any provision of the Income Tax Ordinance
shall be ignored while computing the "Rent Chargeable to Tax" (RCT) under this head.
RENT:
"Rent" means any amount received or receivable by the owner of the land or the building for its use or
occupation by some other person.
Generally, the amount received or receivable is taken as rent. However, where the ' fair market rent ' (FMR) is
more than the actual rent, then the fair market rent shall be taken as rent. [15(4)]
For the purposes of the Income Tax, following amounts are also included in "Rent Chargeable to Tax”:

1. Any forfeited deposit received under a contract for the sale of land or a building.

EXAMPLE # 1
Mr. Junaid is the owner of a property, which is rented out at a monthly rent of Rs. 15,000. During the month of June,
he contracted with Mr. Javed for sale of the property and received Rs. 50,000 as token money. Thereafter, Mr. Javed
breaches the contract and as per terms of agreement token money is forfeited.
Amount of RCT for the year shall be: by Mr. Junaid.
I) Rent received (Rs. 15,000 x 12) 180,000
ii) Token money forfeited 50,000
Rent Chargeable to Tax 230,000
2. Any obligation of the owner (e.g., property tax, etc.,) paid by the tenant.
3. Any amount received by the owner from his tenant as advance, which is not adjustable against rent. (Amount
determined as per section 16 of the Income Tax Ordinance shall be included in RCT. Generally, one-tenth of
such advance is charged to tax every year.)
SUMMARY:
'Rent Chargeable to Tax (RCT)" shall include the following amounts:
1. Higher of the rent received/receivable or the fair market rent for the period for which the property was actually
rented out;
2. Forfeited deposit received under a contract for the sale of land or a building;
3. Any obligation of the owner paid by the tenant; and
4. One-tenth (1/10) of the advance not adjustable against rent
EXAMPLE # 2
A person has rented out his house @ Rs. 20,000 p.m. As per rent deed he has received an amount of Rs. 50.000 as
Advance which is not adjustable against rent further, the tenant has agreed to pay the property tax of Rs. 10,000 per
annum. Compute the amount of Rent Chargeable Tax under the following cases:
A) Where the FMR is Rs. 200,000. And
B) Where the FMR is Rs. 300.000

ANSWER: A B
Annual rent 240,000 300,000
Add: 1/10th of advance not adjustable against rent (Rs. 50,000) 5,000 5,000
Property tax paid by tenant Rent chargeable to tax 10,000 10,000
Annual rent is taken as higher of the actual rent or the FMR 255,000 315,000

RENT OF PROPERTIES NOT TAXABLE AS "INCOME FROM PROPERTY"

Rental income of the following properties shall not be chargeable to tax under the head "Income from Property":
1. Any building which is let out together with the plant and machinery installed therein shall not be taxable under
this head. Rather, it shall be taxable under "Income from Other Sources". Examples of such buildings are
cotton ginning factories, ghee mills, etc. [ 15(3) & 39( 1)(f)]
2. Any agricultural building whose income is treated as agricultural income. [41(2)(c)]
3. Any property which is sublet by the tenant

NOTE: Only the rental income of the owner is taxable under this head and the income of the tenant from subletting the
property is chargeable to tax as "Income from Other Sources"

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Exercise:
In respect of each of the independent situations mentioned below, Calculate the amount which will be
treated as rent chargeable to tax under the head “Income from Property” for the tax year 2025.
(i) Mr. Bilal received rent of Rs. 50,000 per month during the tax year 2025 when the fair market rent of
the property was Rs. 60,000 per month.

(ii) 0n August 2024 Mr. Islam received Rs. 345,000 as rent for leasing out factory, land, building and
machinery

(iii) ABC Limited owns a residential house and has provided the same to one of its employees for no rent.
Fair market value of the rent was Rs. 1,000,000.

(iv) On 1 July 2024 Mr. Hamza received two years advance rent of Rs. 1,500,000

(v) Mr. Usman owns 75 acres of agriculture land in Mirpur. He did not cultivate the land himself and during
the tax year 2025 received annual rent of Rs. 2,500,000 from the tenant cultivating the land.

Answer:

(i) Where rent received or receivable is less than fair market rent for the property, the person shall be
treated as having received the fair market rent (FMR) for the period the property is let on rent in the tax
year. Therefore, income from property will be (Rs. 60,000 x 12 months)

(ii) It will be chargeable to tax under the head “income from other source”

(iii) Employee
 The fair market rent or 45% of MTS or basic salary whichever is higher will be added to
employee’s Taxable salary.
Employer (ABC Ltd)
 The employer will not be considered to have earned any rental income from this property
and accordingly there will be no tax consequences for him.

(iv) Rent relating to a tax year, whether received or receivable, is chargeable to tax in that tax year.
Therefore, rent received in advance amounting to Rs. 750,000 (Rs. 1,500,000/2) will be charged to tax in
the tax year (TY 2026) to which it relates.

(v) Land is used for agriculture purpose. Any rent received by the owner of such land is treated as
agriculture income and exempt from tax. To claim the exemption, it is not essential that the land should
be used for agriculture purpose by the owner himself.

ADVANCES AGAINST A RENTED BUILDINGS [16]

Generally, the owner of a building receives two types of advances at the time of letting out the property to a tenant
these are:
1. The advance which is adjustable against the rent. After the expiry of a certain period this amount will become
zero as being fully adjustable against the rent payable by the tenant.
2. The advance which is not adjustable against the rent this may further fall into:
(i) Security, or
(ii) Pugree.
Both types of above-stated advances are treated separately under the Income Tax Ordinance. The legal
provisions in this regard are discussed below.

ADVANCE ADJUSTABLE AGAINST RENT:

Where, as per rent agreement. the advance given by the tenant is adjustable against the rent payable by him to the
owner of the building then the amount of advance is totally ignored while computing the RCT The amount of rent (as
agreed between the parties) is taken as actual rent for the period.

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EXAMPLE # 3
Mr. Abid rented out his house at a monthly rent of Rs. 20.000. Further, he also received an advance of Rs. 60.000
from his tenant as per agreement this amount is adjustable against rent @ Rs. 2,500 p.m. Compute RCT for the tax
year 200A
ANSWER:
RCT for the tax year (Rs. 20,000 x 12) 240 000

NOTE: There will be no treatment for the advance received from the tenant. It should be noted that tax treatment of
adjustable advance shall be the same whether it is adjustable at the start of the tenancy or during or at the end of the
tenancy.

ADVANCE NOT ADJUSTABLE AGAINST RENT: (Only Applicable on Buildings not on Land)
Where an advance is not adjustable against rent it is treated as income which requires a special treatment (notional
income). The provisions of the law in this regard are summarized below:
1. Any amount received as advance not adjustable against rent is divided by ten (10) and the resultant figure is
added in the RCT of the property in the tax year in which it is received and nine (9) tax years next following
that year [16(1)].
2. If the tenant has vacated the building and the amount of advance has been refunded before the expiry of ten
(10) years, nothing shall be added in the RCT of the property in the year of refund and subsequent tax years
[16(2)]
3. Where the same building is rented out to another tenant the amount to be included in the RCT shall be
calculated as follows [16(3)]

Amount of advance received from new tenant XXX

Less: Amount already charged to tax out of advance from previous tenants (XXX)
The balance to be charged to tax during 10 years XXX
Note: If advance that is not adjustable against rent is received for Land than nothing will be added in income.

EXAMPLE # 4
A building was rented out to Mr. A at a rent of Rs. 15,000 per month and an amount of Rs. 60,000 was also received
as advance not adjustable against rent.
After four (4) years Mr. A vacated the building and another Mr. B acquired the same at a monthly rent of Rs. 16,500
and paid an advance of Rs. 80,000. Calculate the amount of RCT for the fifth year.
ANSWER: Rs.
Rent Chargeable to Tax for Fifth Year 198,000
Rent (Rs 16,500 x 12)

Portion of advance received deemed as rent

A–B = 80.000 - (60,000 x 4)
10 10
10 5,600
Total RCT 203,600
A = Amount of new advance
B = Portion of old advance already charged to tax

EXAMPLE # 5
A building was rented out to Mr. lftikhar at a monthly rent of Rs. 15,000. An amount of Rs. 60,000 was received as
security. He occupied the building for a period of six (6) months. During the second half of the year the building was
rented out to Mr. Junaid at a rent of Rs. 16,000 per month and an amount of Rs. 80,000 was received as security.
Required:
Calculate the amount of RCT for the year as security.
ANSWER:
Rent Chargeable to Tax for the Year
Actual Rent
From Mr. Iftikhar (15,000 X 6) 90,000
From Mr. Junaid (16,000 X 6) 96,000 186,000
Portion of security deemed as rent (80,000 / 10) 8,000
Total RCT 194,000

NOTE: Security received from Mr. lftikhar will be refunded to him at the time of vacating the building. At the end of the
tax year an amount of Rs. 80,000 shall be standing as an advance which is not adjustable against rent. So, one-tenth
of the same shall be taken at the time of computing RCT.

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EXAMPLE # 6
Considering the data of Example 5 compute the amount of RCT under each of the following situations:
1. Fair market rent (FMR) of the building is Rs. 180,000; or
2. FMR of the building is Rs, 200,000.

ANSWER:
1. Rent Chargeable to Tax Where FMR is Rs. 180,000
Rent-Higher of actual rent or FMR (i.e., 186,000 or 180,000) 186,000
One-tenth of security deemed as rent (i.e., 80,000 I 10) 8,000
Total RCT 194,000

2. Rent Chargeable to Tax Where FMR is Rs. 200,000

Rent-Higher of actual rent or FMR (i.e., 186,000 or 200,000) 200,000
One-tenth of security deemed as rent (i.e., 80,000 I 10) 8,000
Total RCT 208,000

DEDUCTIONS IN COMPUTING INCOME CHARGEABLE UNDER THE HEAD

“INCOME FROM PROPERTY” [SECTION 15A]

Income from property is chargeable to tax under the Normal Tax Regime (NTR) in case of individual and AOP. In
computing the income of a person chargeable to tax under the head “Income from Property” for a tax year, a
deduction shall be allowed for the following expenditures or allowances, namely: -
 In respect of repairs to a building, an allowance equal to one-fifth of the rent chargeable to tax in respect of the
building for the year, computed before any deduction allowed under this section;
 any premium paid or payable by the person in the year to insure the building against the risk of damage or
destruction;
 any local rate, tax, charge or cess in respect of the property or the rent from the property paid or payable by
the person to any local authority or government in the year, not being any tax payable under this Ordinance;
 any ground rent paid or payable by the person in the year in respect of the property;
 any profit paid or payable by the person in the year on any money borrowed including by way of mortgage, to
acquire, construct, renovate, extend or reconstruct the property;
 where the property has been acquired, constructed, renovated, extended, or reconstructed by the person with
capital contributed by the House Building Finance Corporation or a scheduled bank under a scheme of
investment in property on the basis of sharing the rent made by the Corporation or bank, the share in rent and
share towards appreciation in the value of property (excluding the return of capital, if any) from the property
paid or payable by the person to the said Corporation or the bank in the year under that scheme;
 where the property is subject to mortgage or other capital charge, the amount of profit or interest paid on such
mortgage or charge;
 any expenditure, not exceeding four per cent of the rent chargeable to tax in respect of the property for the
year computed before any deduction allowed under this section, paid or payable by the person in the year
wholly and exclusively for the purpose of deriving rent chargeable to tax under the head, “Income from
Property” including administration and collection charges;
 any expenditure paid or payable by the person in the tax year for legal services acquired to defend the
person’s title to the property or any suit connected with the property in a court; and
 where there are reasonable grounds for believing that any unpaid rent in respect of the property is
irrecoverable, an allowance equal to the unpaid rent where—
(i) the tenancy was bona fide; the defaulting tenant has vacated the property the defaulting tenant is not
in occupation of any other property of the person;
(ii) the person has taken all reasonable steps to institute legal proceedings for the recovery of the
unpaid rent or has reasonable grounds to believe that legal proceedings would be useless; and
(iii) the unpaid rent has been included in the income of the person chargeable to tax under the head
“Income from Property” for the tax year in which the rent was due and tax has been duly paid on
such income.
 Where any unpaid rent allowed as a deduction is wholly or partly recovered, the amount recovered shall be
chargeable to tax in the tax year in which it is recovered.
 Where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to tax
under the head “Income from Property” and the person has not paid the liability or a part of the liability to
which the deduction relates within three years of the end of the tax year in which the deduction was allowed,

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the unpaid amount of the liability shall be chargeable to tax under the head “Income from Property” in the first
tax year following the end of the three years.
 Where an unpaid liability is chargeable to tax as a result of the application of above sub-section and the
person subsequently pays the liability or a part of the liability, the person shall be allowed a deduction for the
amount paid in the tax year in which the payment is made.
 Any expenditure allowed to a person under this section as a deduction shall not be allowed as a deduction in
computing the income of the person chargeable to tax under any other head of income.
The provisions of Income from business relating to deduction allowed shall apply in the same manner as they apply in
determining the deductions allowed in computing the income of a person chargeable to tax under the head “Income
from Business”.

LIABILITY IN CASE OF CO-OWNERS [66]

(i) Multiple ownership with shares individually ascertainable
Where two or more persons jointly own a property and their respective shares in the property are definite and
ascertainable, such property shall not be taxed as association of persons (AOP). Rather, share of each person shall
be included in his total income.

EXAMPLE #
Asif and Kashif are co-owners of a building, which is rented at a monthly rent of Rs. 25,000. The following expenses
were paid during the year:

Compute the amount which is to be included in each person's income if the ratio of their ownership is 60:40,
respectively.

Answer: Rs.
Annual Rent (25,000 x 12) 300,000
Share of the Owners:
Asif (300,000 x 60%) 180,000
Kashif (300,000 x 40%) 120,000

(ii) Multiple ownership with shares not individually ascertainable

Where any property chargeable under section 15 is owned by two or more persons and their respective
shares in that property are not definite and ascertainable, the property will be considered as being jointly
owned by an association of persons (AOP) and taxable income and tax payable thereon will be computed as
per the principles of taxation for AOP.
Note: Same concept will applicable in all other heads except income from business.
RENT INCLUSIVE OF UTILITIES [15(3A)]
Where the rent includes charges for utilities (e.g. electricity, gas, water, air-conditioning, sanitation, lift, security, etc.),
the whole amount received from the tenants shall not be charged to tax under the head 'Income from Property'. Under
such a case the amount received for utilities shall be taxed under the head 'Income from Other Sources'. The balance
amount of rent shall be taxed as income from property.
NOTE:
While computing the taxable income for services rendered, the actual expenditure (including the depreciation)
incurred by the owner shall be allowed as deduction.

SELF-HIRING OF A PROPERTY
Where an employee or his spouse is the owner of any such building (i.e., house, flat or apartment) that is given on rent
to the employer and the employer has provided the same building to the employee against his entitlement for a rent-
free accommodation, then it will have two-fold effect under the Income Tax Law. The same is discussed below.
1. Property Income
Receipt of rent of building is chargeable to tax under the head "Income from Property". Any rent received by
the employee or his spouse shall be a property income of the recipient and be treated accordingly.

2. Salary Income
The building is provided by the employer to his employee as a rent-fee accommodation. It will be a perquisite
and will be included in the 'salary income' of the employee as per Income Tax Rules.

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Short Notes

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Losses:
 Loss under the head IFP can be set off against income of other heads except Salary.
 Loss under the head IFP cannot be carried forward
 IFP can adjust losses of other heads of income.

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Practice Question 1:

Mr. Mobeen owns a property at Gulberg, Lahore. The said property was rented out to Mr. Asad at a rent of Rs.
175,000 per month. Mr. Asad left the premises on 31 January 2025. Mr. Asad had paid a sum of Rs. 300,000 as un-
adjustable advance in tax year 2022. Mr. Mobeen returned the said advance on his departure. The said property
remained vacant in the month of February, 2025. Thereafter Mr. Gulzar has taken the possession of the said
property at a monthly rent of Rs. 220,000. New tenant has paid a sum of Rs. 350,000 as security. Mr. Mobeen
incurred following expenses in connection with the said rented property.

Description Amount in Rs
Insurance premium paid 180,000
Property tax paid 80,000
Salary of employee appointed for collection of rent 60,000
Bank charges in connection with collection of rent 20,000
Fee to lawyer for the execution of rent agreements 50,000
His income from salary is Rs 500,000 and from business is Rs. 100,000. He paid Zakat of Rs. 45,600 during the year under
Zakat Ordinance. You are required to compute the taxable income of Mr. Mobeen for tax year 2025.

ANSWER 1:

Tax on Income:

Upto 1,600,000 170,000

Exceeding 1,600,000 (1,919,800-1,600,000) x 30% 95,940

Tax liability 265,940

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Note 1: Computation of rental Income

Particulars Mr. Asad Mr. Gulzar Total Remarks

Rent 1,225,000 880,000 2,105,000 Advance of Rs. 30,000
Un-adjustable 26,000 26,000 per year for three
Advance rent years has already
(350,000- been declared by
90,000)/10 Mr. Mubeen, hence new
proportion is worked for
Total 1,225,000 909,000 2,131,000 the next 10 years after
adjusting the
Rs. 90,000.

Practice Question 2:

Mr. B rented out his shop to Mr. Z @ RS.150,000 per month with effect from 1.1.2025 and received Rs.2,000,000
as deposit not adjustable against rent payable. Previously the shop was given on rent to Mr. Y in the tax year 2022
@ Rs.100,000 per month and received deposit of Rs.1,400,000 from Mr. Y who vacated the shop on 30.9.2024
and the deposit of Rs.1,400,000 was duly refunded to him.
In the month of November 2024 Mr. B entered into an agreement to sell the shop with Mr. X and received
Rs.200,000 as token money (Biyana). Mr. X backed out resulting into forfeiture of the said token money.
Admin expenses were Rs.380,000 including repairs and maintenance of the shop Rs.80,000.

Required: calculate property income of Mr. B for the year ended 30.6.2025 (tax year 2025) and tax liability thereon, if
any

Answer 2:

Particulars Rs. Rs.

Rent of shop
1.7.2024 - 30.9.2024 @ RS.100,000 per month 300,000
1.1.2025 - 30.6.2025 @ Rs.150,000 per month 900,000 1,200,000
Forfeited deposit / token money under an agreement to sell 200,000

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Un-adjustable advance
Amount received from the new tenant 2,000,000
Less: Amount already taxed:
In the tax year 2022 Rs.140,000 (420,000)
In the tax year 2023 Rs.140,000 1,580,000
In the tax year 2024 Rs.140,000
1/10 of Rs.1,580,000 is included 'in the chargeable rent. 158,000
Total Rent 1,558,000
Less: Expenses
Repairs allowance 1/5th of the chargeable rent (1,558,000X1/5) 311,600 (373,920)
Expenses other than repairs 62,320
Actual = 300,000
4% of 1,558,000 = 62,320
Whichever is lower
Net Taxable Income from Property 1,184,080

Calculation of Tax liability: (non-Salaried)

Tax Up to 600,000 -
Above 600,000 @ 15% 87,612
Tax Liability 87,612
Practice Question 3:

Bashir and Jamel jointly own a house in Karachi. Bashir has 75% share ·in the house. On 1.9.2024, the house was let
out at an annual rental value of Rs.6,500,000. This amount includes Rs.186,000 per month for utilities, cleaning and
security. .,

During the tax year 2025, the owners incurred the following expenditures in relation to the extra services

Particulars Rs.
Utilities, cleaning and security 650,000
Repairs and maintenance 810,000
Insurance premium 240,000
Collection charges 25,400
Mark-up on amount borrowed for renovation of the house 840,000
Bashir and Jamel have no other source of income. All the above expenses were incurred by them jointly.

Required:

Calculate taxable income of Bashir and Jamel under appropriate heads of income for the tax year 2025.

Answer 3:

Income from Property

Rent for 10 months 6.5m / 12 x 10 5,416,667

Less: utilities taxable under other source 1,860,000
Chargeable rent 3,556,667

Less: Admissible Deduction:

711,333
Repair allowance (1,816,733)
240,000
Insurance

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840,000
Mark up
M
Collection Charges
Lower of
25,400
(i) Actual = 25,400
(ii) 4% of RCT = 142,267

1,739,934

Income from other sources

Utilities from tenants 1,860,000
Less: utilities expenses 650.000 1.210.000

Total taxable income 2,949,934

Taxable income of Bashir and Jamel

Bashir Jamel
Total 75% share 25% share
Income from:
Property 1,739,934 1,304,950 434,984
Other sources 1,210,000 907,500 302.500
Taxable income 2,212,450 737,484

Practice Question 4:

Shahzaib owns a building which is 30% occupied for its business and the rest 70% is on rent. The following
information is available:

Particulars Rs. (000)

Annual letting value of the property owned 2000
Rent Received 1800
Depreciation on building 400
Property Tax 100
Municipal Government taxes (Paid by Tenant) 100
General and administration charges related to property 200
Rent received includes Rs. 600,000 for the three years commencing from July 01 of the current year. Shahzaib follow
accrual basis of accounting and its income tax year is 2025.

Required:

Compute the income of shazaib under the head income from property for tax year 2025.

Answer 4:

Particulars Rs.
Rent Chargeable (W-1) 1,500,000
Less: Expenses
Repair allowance 1/5 of 1,500,000 (300,000)
70 % of property Tax (70,000)
70 % of municipal taxes (70,000)
Other Expenses (administration) 70% of 200,000 = 140,000 (60,000)
Or 4% of the rent chargeable =60,000

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Whichever is lower
Taxable property Income 1,000,000

(W-1)

Particulars Rs. (000)

Rent Received 1800
Less: Amount pertain to next two years (400)
Actual Rent 1400
Higher of total actual rent or 70% of ALV = 1400
1400,000
Whichever is higher
Municipal Taxes paid by tenant 100
Total Actual Rent 1500

Practice Question 5:

On 1 June 2024 Dawood and Dewan jointly purchased a bungalow for Rs. 35 million. Share is not Ascertained. To
arrange funds for the deal, Dawood borrowed Rs. 3,000,000 from Shameem who is in the business of lending money.
The rate of interest is agreed @ 20% per annum.
On 1 July 2024, the house was let out to a person at annual rent of Rs. 4,500,000 inclusive of an amount of Rs.
75,000 per month for utilities, cleaning and security. For providing these services Dawood and Dewan paid Rs.
35,000 per month. During the tax year 2025 they also paid Rs. 10,000 as collection charges and Rs. 230,000 for
administering the property.

Required:
Compute taxable income of Dawood and Dewan under appropriate heads of income for the tax year 2025.
Answer 5.

Income from Property

Rent (4500,000 – (75000 X 12)) 3,600,000

Less: Admissible Deduction:
Repair Allowance (1/5 of the rent) 720,000

Admin and collection charges

(230,000+10000) =240, 000
144,000
4% of the rent = 144,000 (1,464,000)

600,000
Markup (3,000,000 X 20%)
2,136,000

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Income from other sources

Utilities from tenants
900,000
Less: utilities expenses (420,000) 480,000

Total taxable income 2,616,000

Tax Liability (170,000 + 30% of 1,016,000) 474,800

Question Bank

6 MR. ASAD
Mr. Asad owns some buildings which are given on rent. The following information is available:
Rupees
Annual rent received from tenants 1,800,000
Depreciation on building under the tax laws 400,000
Property tax 100,000
Municipal/local government taxes 100,000(Agreement with tenants provide that tenants should pay the
Taxes)
General and administration expenses 200,000
Rent received includes Rs. 600,000 for three years commencing from July 01 of the current tax year. Mr. Asad
follow accrual basis of accounting and its income year is July-June 2025.
Required:
Compute the income of Mr. Asad under the heading „income from property‟ for the tax year 2025.

7 MR. AKMAL
Mr. Akmal purchased four same-sized similar flats at top floor of an apartment block in Karachi in June 2024. He let
out two flats at fair market rent of Rs.25,000/- (per month) from the next month onwards. He also received security
deposit at Rs. 200,000/- in connection with each of these two flats. Mr. Akmal entered into an agreement to sale of
third flat and received Rs.100,000/- as token money on 25/06/2024, the rest of the proceeds amount was to be paid
in 15 days‟ time. However, the buyer failed to make the payment by the due date and the amount of token money
was forfeited by Mr. Akmal. The said flat was then rented to his cousin at monthly rent of Rs.15, 000/- on
01/08/2024 with a security deposit of Rs. 50,000/-. Fourth flat was used by Mr. Akmal for his own residential
purposes. Mr. Akmal paid property tax at Rs. 20,000/- in connection with each of his four flats.
Required:
You are required to compute Mr. Akmal’s taxable income and tax liability for Tax Year 2025.

8 FARRUKH
On 1 July 2024 Farrukh borrowed Rs. 8,000,000 from star Bank Limited and acquired a plot of land in hub
industrial zone of Rs. 6,500,000. He invested the rest of the loan in a business venture with his friend. The
above loan carries mark-up at a rate of 12% per annum and is repayable in eight equal quarterly installments
starting from 1 July 2025. On 1 August 2024 Farrukh decided to sell the plot of land to Zufiqar Motors for Rs.
10,000,000 and received a deposit of Rs. 500,000 form them. On 15 August 2024 Farrukh forfeited the deposit
on refusal of Zulfiqar Motors to purchases the plot of land.

On 1 September 2024 Farrukh let out the plot of land to his friend Atif at a monthly rent of Rs. 150,000. He received
an un-adjustable deposit of Rs. 200,000 from Atif and paid Rs. 80,000 for leveling the ground, Rs.50,000 as
ground rent, Rs. 12,000 as insurance premium against the risk of damage or destruction by water logging and
Rs.140,000 against rent collection charges. Farrukh had paid Rs. 25,000 to a firm of professional valuers which
determined the annual rental value of the plot of land at Rs. 2,160,000.

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Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under the head of
income from property, taxable income of Farrukh of tax year 2025.

9 Mr. Amjad (attempt after study Income from other Sources and Capital Gain)

(a) Explain the term ‘Rent’ with relation to ‘Income from property’.

(b) During the tax year 2025, Amjad carried out the following transactions in respect of his properties:

(i) On 1 July 2024, Amjad purchased a factory building in Sukkur along with the installed machinery at
the price of Rs. 9 million and Rs. 3 million respectively. To manage the shortage of funds of Rs.
2,000,000, he borrowed the same on 1 July 2024 from his friend Shamshad through a crossed
cheque. The loan carries interest at the rate of 18% per annum.

On 1 January 2025, he let out this building along with the machinery to Basit at a monthly rent of
Rs. 500,000 payable in advance.
(ii) On 1 July 2024, Amjad let out his residential property situated in DHA Karachi to Mirza Limited at a
monthly rent of Rs. 300,000. Rent for the two years was received in advance on 1 August 2024.
(iii) On 1 July 2024, Amjad also entered into an agreement with Zeeshan for the sale of his plot situated
in Quetta for Rs. 50 million. The plot had been purchased for Rs. 40 million in 2017. Under the
terms of sale agreement, he received Rs. 5 million at the time of signing the agreement and the
balance was to be received on 30 September 2024. However, due to financial difficulties, Zeeshan
failed to pay the balance amount on the due date and consequently, Amjad forfeited the advance
in accordance with the terms of the agreement.
On 10 April 2025, he finally sold the plot to Jamshed for Rs. 65 million.
(iv) Following expenditures were incurred by Amjad in respect of his properties in Sukkur and Karachi:

Property situated in
Details of expenditures
Sukkur Karachi

Repair & maintenance – building 270,000 70,000

- machinery 50,000 -

Ground rent 50,000 10,000

Insurance – building 150,000 20,000

Total 520,000 100,000

Required:
In view of the provisions of the Income Tax Ordinance, 2001 compute under appropriate head of income,
taxable income of Amjad for the tax year 2025.

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Ans.6

MR. ASAD
COMPUTATION OF TAXABLE INCOME
TAX YEAR 2025

Ans.7 Computation of Taxable Income and Tax Liability

Tax Year 2025

Particulars Flat 1 Flat 2 Flat 3 Total

Rent - Higher of actual rent or fair market rent 300,000 300,000 275,000 875,000
Un-adjustable advance - (1/10 of deposit) 20,000 20,000 5,000 45,000
Forfeited deposit (From first buyer) - - 100,000 100,000
Rent chargeable to tax 320,000 320,000 380,000 1,020,000
Less deductions:
Repair allowance (204,000)

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Property tax (60,000)

Net property income 756,000
Tax Liability
Tax on Rs. 756,000 [ (756,000 – 600,000) x 15%] 23,400
Balance Tax Payable 23,400
Ans.8

Name of Taxpayer: Farrukh

Tax Year: 2025
Personal Status: Individual
INCOME FROM PROPERTY U/S 15 Rupees Rupees

Forfeited deposit 500,000

Rent received from tenants Higher of actual rent 1,800,000
(Rs. 150,000 x 10) or fair market rent Rs.2,160,000 x 10/12
Un-adjustable advance - nothing to be added in case of plot

Gross rent chargeable to tax 2,300,000

Less deductions:
Repair allowance - not allowed in case of open land / plot
Ground rent (50,000)
Insurance premium -----------
Collection & admin charges - upto 4% (92,000)
Markup on loan Rs.6,500,000 x 12% x 10/12 (650,000)
Net property income 1,508,000
Insurance premium paid or payable is not allowed as expense in case of land.

Ans.9

(a) ‘Rent’ means any amount received or receivable by the owner of land or a building as consideration
for the use or occupation of, or the right to use or occupy, the land or building, and includes any
forfeited deposit paid under a contract for the sale of land or a building.
Where the owner of a building receives from a tenant an amount which is not adjustable against
the rent payable by the tenant, 1/10th of the amount shall be treated as rent in each year.
(b) Mr. Amjad

Computation of taxable income For tax year 2025

Income from property Rupees
(i) Residential property at DHA – Karachi (W-1) 2,850,000
(ii) Amount forfeited from Zeeshan 5,000,000
Income from other sources
(i) Factory building at Sukkur – Basit (W-1) 1,625,000

Income from capital gain

(i) Sale of plot in Quetta – Jamshed -

Since the plot was bought in 2016, therefore no tax is payable under the law as holding is
greater than 6 years

Taxable income 9,475,000

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Income from Income other

W-1: property sources
Sukkur -
DHA - Karachi Factory
Rental Income (300,000×12), (500,000×6) 3,600,000 3,000,000
Less: Admissible expenses
Repair to building (allowed upto 1/5 of the rental amount) 720,000 270,000
Repair to machinery - 50,000
Ground rent 10,000 50,000
Insurance – Building 20,000 150,000
Depreciation: Building – Normal [Rs. 9m @ 10%×6/12] - 450,000
Plant – Normal [Rs. 3m @ 15%×6/12] - 225,000
Rs. 2 million @ 18% for 6 months - 180,000
(750,000) (1,375,000)
Net income 2,850,000 1,625,000

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 5

CHAPTER
Income from Capital Gain

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CAPITAL GAINS AND CAPITAL ASSET

Capital Gain and Basis of Chargeability:
As per Section 37 of the Income Tax Ordinance 2001 a gain arising on the disposal of a
capital asset by a person in a tax year, other than a gain that is exempt from tax shall be
chargeable to tax in that year under the head “Capital Gains”.
A person maintaining his books of accounts on cash basis will generally calculate capital
gain when he will receive cash but section 37 categorically says that such income shall be
added in the taxable income of the tax year in which disposal arises (takes place). For
example, if disposal takes place in the tax year 2025 and cash is received in tax year 2026,
taxpayer will have to include the gain in the tax year 2025 although cash is received in tax
year 2026.

The understanding of aforesaid provision of law is very much linked with the knowledge of
the
following two terms:
 Capital Asset
 Disposal

Definition:
Capital Asset
This term is defined in sub-section (5) of section 37 of the Ordinance in the following
manner:

Capital Asset:
Capital asset means property of every kind held by a person, whether or not connected with
a business, but does not include:
 any stock-in-trade, consumable stores or raw materials held for the purpose of
business;
 any property with respect to which the person is entitled to a depreciation deduction
under section 22 or amortization deduction under section 24; or
 any movable property held for personal use by the person or any member of person’s
family dependent on the person excluding capital assets mentioned under section
38(5)) i.e., painting, sculpture, drawing or other work of art, jewelry, rare manuscript,
folio, book, postage stamp, first day cover, coin, medallion or an antique.

Common examples of capital assets are

 shares,
 Modaraba Certificates,
 Participation Term
 Certificates,
 Term Finance Certificates,
 Musharika, Certificates,
 PTC Vouchers, goodwill,
 patent,
 copyrights etc.

Disposal of Asset:
The legislature intentionally used the word “disposal” and avoided using the words “sale”.
The reason to use this term is that the term “disposal” has a wider connotation than sale.
The term “disposal” has been defined in section 2(18) read with section 75.

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Section 75 says that a person who holds an asset shall be treated as having made a
disposal of the asset at the time the person parts with the ownership of the asset, including
when the asset is:
 sold, exchanged, transferred or distributed; or
 cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.

The transmission of an asset by succession or under a will shall be treated as a disposal of

the asset by the deceased at the time asset is transmitted.

The application of a business asset to personal use shall be treated as a disposal of the
asset by the owner of the asset at the time the asset is so applied. Where a business asset
is discarded or ceases to be used in business, it shall be treated to have been disposed of.

A disposal shall include the disposal of a part of an asset.

It is important to note that a:
 “Business asset” means an asset held wholly or partly for use in a business,
including
stock-in-trade and a depreciable asset; and
 “Personal asset” means an asset held wholly for personal use.

Basic structure of capital gain:

There are two categories of capital asset as under:
Section 37A:
 Shares of public limited company
 Vouchers of PTCL
 Modarba certificate
 An instrument of redeemable capital as defined in the companies act 2017
 Debt securities; and
 Derivative products
Section 37:
 Capital assets (other than specified in section 37A) may include:
 Shares of private limited company
 Membership card of joint stock company
 Membership of club
 Share in partnership firm
 Immoveable properties
 Mining rights
 Certain personal assets specifically categorized as capital assets such as antique.

Computation of gain/loss on disposal of capital asset:

Capital gain arising on the disposal of a capital asset by a person shall be computed by the
formula:

Capital Gain = A – B
Where:
A is the consideration received on disposal of the asset; and
B is the cost of the asset.

Gain is taxable under the normal tax regime (NTR). Further, 100% gain will be taxable
even if capital asset has been held by a person for more than one year.

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Deduction of withholding tax on sale of shares (Sec-37(6)(10))

 Through Finance (Supplementary) Act 2023 new sub-sections (6) to (10) were
inserted in section 37 providing for deduction of tax on sale of shares transactions
other than on Securities (section 37A).

 The person acquiring a capital asset, being shares of a company (other than listed
companies shares settled through NCCPL) shall deduct advance adjustable tax at
the rate
of ten percent (10%) of the fair market value of the shares, at the time of payment or
at the
time of registration of shares by SECP/SBP whichever is earlier.

 As a result of the above provisions, deduction of tax will be required where shares
have been registered even if actual payment against the same has not been made.
The tax so deducted shall be paid to the Commissioner by way of credit to the
Federal Government, within fifteen days of the payment.

 The fair market value of shares shall be determined without deduction of liabilities as
envisaged in Rule 19H of the Income Tax Rules, 2002.

 State Bank of Pakistan must not permit the transfer or registration of repatriable
shares unless the seller provides a prescribed certificate from the Commissioner
confirming that the tax liability has been discharged. (SRO 776(I)/2023)

 The person acquiring the shares may seek certificate of exemption or reduced rate
certificate from the Commissioner holding the jurisdiction where the person considers
the transaction of sale of shares is either exempt or subject to reduced rate of tax
under any of the provisions of the Ordinance.

 A person disposing of the shares is required within 30 days to furnish to the

Commissioner
holding jurisdiction over the case, information or documents in a statement as may
be prescribed. However, Commissioner can call for the said information or
documents within less than 30 days by a notice in writing if necessitated.

 Moreover, proviso has been inserted in section 37A ousting shares of listed
companies not traded on registered stock exchange and not settled through NCCPL
from ambit of section 37A. In such cases provisions of section 37 shall apply with
respect to collection and payment of taxes. This is done to capture off market
transactions of shares of listed companies which are not traded through registered
stock and not settled by NCCPL.

Determination of cost of capital asset:

Sub sections (4) and (4A) of section 37 the Ordinance explicate the cost of capital asset in
two situations in the following manner:

 No amount shall be included in the cost of a capital asset for any expenditure
incurred by a person:
o that is deductible from income earned under any other head of income; or
o any expenditure which is not a deductible expense under section 21-
‘Deductions not allowed’.

 In case the capital asset becomes the property of the person:

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o under a gift, bequest or will;

o by succession, inheritance or devolution;
o a distribution of assets on dissolution of an association of persons; or
o on distribution of assets on liquidation of a company,

For assets acquired by gift (there is no acquisition cost for the person acquiring the asset),
the original cost of the transferor at the time of its acquisition is treated to be the cost of the
asset
Capital gains exempt from levy of tax:
Following gains are exempt from levy of income tax under Part I Second Schedule of the
Income Tax Ordinance, 2001:

 Transfer of a stock exchange membership rights

 Capital gain on sale of shares of industrial undertaking set up in an area declared by
the Federal Government to be a “Zone” within the meaning of the Export Processing
Zones Authority Ordinance, 1980 (IV of 1980)

EXAMPLE # 1
Mr. Raza purchased 10,000 shares of ABC Limited (a non-listed company) @
Rs. 15 per share. He incurred Rs. 1,000 on acquisition/transfer of shares. During the year he
disposed of all the shares @ Rs. 20 per share and paid Rs. 1,500 as commission to the
broker.
REQUIRED:
Compute the amount of capital gain of Mr. Raza

ANSWER:
Consideration received (10,000 x Rs. 20) Rs. 200,000
Less: Cost of Shares Paid on purchase of shares (10,000 x Rs. 15) 150,000
Expenses on purchase 1,000
Expenses on disposal 1,500 152,500
Gain on disposal of shares 47,500

EXAMPLE # 2
Considering the facts of the earlier example (1), assume that Mr. Raza sold the shares after
one year of the purchase. The amount of capital gain shall be as below:
Actual Capital gain (Rs. 200,000 - Rs. 152,500) 47500
Capital gain for tax purposes (47,500 x 100%) 47,500

NOTE: The above treatment shall not be applicable to the following capital assets:
1. Shares of public companies; 3. Vouchers of Pakistan
Telecommunication
Corporation;
2. Modaraba certificates; and 4. Any instrument of redeemable capital.

Section 37A of the Income Tax Ordinance, 2001 provides a separate tax treatment
for above-referred assets. The relevant assets are discussed below.

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CAPITAL GAIN ON IMMOVABLE PROPERTY [37(1A) & Division-VIII, Part-I of First

Schedule]
From the tax year 2013 immovable property has been rendered as 'capital asset'. Gain on
disposal of immovable property is taxable as a separate block of income. Gain or loss shall
be computed as below:

Disposal consideration XXX

Less: Cost of acquisition (XXX)
Gain (Loss) on disposal XXX
Tax on Capital Gain:
Capital gain on Immoveable property
A gain arising on the disposal of immoveable property (open plot or constructed property)
situated in Pakistan by a person in a tax year shall be chargeable to tax as separate block
on the basis of holding period as under:

Taxation on deemed income (Sec 7E)

 A resident person owning capital assets in Pakistan will be taxed on deemed income
arising from capital assets for tax year 2022 and onwards.
 An exclusionary definition of ‘capital asset’ has been provided, which effectively
means that such tax is leviable only in respect of ‘immovable property’ (e.g. house,
any building, manufacturing plant etc.) situated in Pakistan owned by resident
persons.
 Deemed income shall be computed as 5% of the Fair Market Value (as determined
by the FBR under section 68 i.e. FBR Value or DC Rate) of capital assets situated in
Pakistan held on the last day of the tax year.
 The rate of tax on such income is prescribed as 20%. This translates into an effective
tax at 1% of Fair Market Value of capital assets.
 For the purposes of such tax; however, following immovable properties shall stand
excluded from the scope of such tax:
I. one immovable property owned by the resident person

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II. self-owned business premises from where the business is carried out
by the persons appearing on the active taxpayers’ list at any time
during the year
III. self-owned agriculture land where agriculture activity is carried out by
person excluding farmhouse and land annexed thereto Note:
Farmhouse means a house constructed on a total minimum area of
2000 square yards with a minimum covered area of 5000 square feet
used as single dwelling unit.
I. immovable property allotted to:
a) a shaheed or dependents of a shaheed belonging to Pakistan Armed
Forces.
b) a person or dependents of the person who dies while in the service of
Pakistan armed forces or Federal or provincial government.
c) a war wounded person while in service of Pakistan armed forces or
Federal or provincial government or
d) an ex-serviceman and serving personnel of armed forces or ex-
employees or serving personnel of Federal and provincial
governments, being original allottees of the capital asset duly certified
by the allotment authority.
II. Any property from which income is chargeable to tax under the
Ordinance and tax leviable is paid thereon (for example property
subject to rental income).
III. Immovable property in the first tax year of acquisition where tax under
section 236K has been paid.
IV. Where the fair market value of the capital assets in aggregate
excluding the capital assets mentioned in clauses (i) through (vi)
above does not exceed Rs 25 million.
V. Immovable property owned by a provincial government or a local
government.
VI. Immovable property owned by a local authority, a development
authority, builders and developers for land development and
construction.

Purchase of immoveable property in cash (Sec 75A)

In case any immovable property having fair market value (FBR value or DC rate whichever is
higher) greater than five million rupees is purchased in cash, then it will have following
implications:
(i) Such amount shall not be treated as cost for computation of any gain on disposal (sale
value will be treated as capital gain)
(ii) Such person shall pay a penalty of 5% of the FBR value or DC rate whichever is higher.

Exercise
On 15 January 2025, Mr.A sold a shop situated in Karachi for Rs. 15,000,000. He had
purchased this shop in July 2024 for Rs. 19,000,000 out of which Rs. 6,000,000 was paid in
cash.

Answer
Cash exceeding Rs.5 million will not be considered as cost. Therefore, gain of Rs. 15-13= 2

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million will be chargeable to tax. Mr.A will also have to pay penalty of Rs.6 x 5%= 0.3 million.

Exercise
Mr. B purchased an open plot on 22.09.2024 which cost him Rs.2,000,000. The plot was
sold on 25.03.2025 at Rs.8,000,000. Another constructed property was acquired on
05.09.2024 at Rs.6,000,000 and sold at Rs.12,000,000 on 23.05.2025. Assuming that both
properties were acquired and sold as per value notified by the Board, the capital gain and
tax thereon will be calculated as under:

Answer
As holding period of both plot and constructed property is upto one year and both acquired
after 1 July 2024, therefore gain will be taxable @ 15%
Total capital gain Rs.6m+6m = 12,000,000
Tax liability @ 15% = 1,800,000

Exercise
Mr. Y purchased an open plot on 22.05.2023 at a cost of Rs.4,000,000. The plot is sold on
25.06.2025 at Rs.7,000,000. Another constructed property is acquired on 08.09.2023 at
Rs.9,000,000 and sold at Rs. 14,000,000 on 25.06.2025. Assuming that both properties
were acquired and sold as per value notified by the Board, the capital gain and tax thereon is
calculated as under:

Answer
Gain on sale of plot = 7,000,000 - 4,000,000 = Rs.3,000,000
As the holding period of plot is more than two but less than 3 years, it will be taxable @ 10%.
Gain on sale of constructed property = 14,000,000 - 9,000,000 = Rs.5,000,000
As the holding period of the constructed property is more than one but less than 2 years, it
will be taxable @ 10%.
Total capital gain = Rs.3,000,000 + Rs.5,000,000 = Rs.8,000,000
Tax liability @ 10% = 800,000

CAPITAL GAIN ON DISPOSAL OF SECURITIES [37A]

'Securities' is a category of 'capital assets' introduced through the Finance Act, 2010.
'Security' means the following capital assets:
1. Share of a public company ;
2. Voucher of Pakistan Telecommunication Corporation;
3. Modaraba certificate;
4. An instrument of redeemable capital;
5. Debt securities; and

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6. Derivative products (e.g., treasury bonds).

'Debt Securities' means [37A(3A)]

1. 'Corporate Debt Securities' such as Term Finance Certificates (TFCs), Sukuk
Certificates (Sharia Compliant Bonds) , Registered Bonds, Commercial Papers,
Participation Term Certificates (PTCs) and all kinds of debt instruments issued by
any Pakistani or foreign company or corporation registered in Pakistan; and

2. 'Government Debt Securities' such as treasury Bills (T-Bills), Federal Investment

Bonds (FIBs) , Pakistan Investment Bonds (PIBs), Foreign Currency Bonds,
Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt
instrument issued by Federal Government , Provincial Government , Local
Authorities and other statutory bodies.

NOTE:
The 'derivative products' include future commodity contracts entered into by the
members of Pakistan Mercantile Exchange whether or not settled by physical delivery.

'Derivatives' is a general term for financial assets that are "derived" from other financial
assets. For example , an option to buy a treasury bond, the option (one financial asset) is
derived from the bond (another financial asset). The value of the option depends on the
performance of the bond. This can be taken a stage further. For example, the value of an
option on a futures contract depends on the performance of the futures contract, which; in
turn will vary with the value of the underlying contract of security. Derivatives exist for assets
(like equities or bonds) as well as for interest rates, currency exchange rates and stock
market indices. The main advantage of derivatives is that they give investors leverage in the
market in which they are trading. This can either enhance their returns or help to hedge
risks.

Computation of Capital Gain [37A(1A)]

Capital gain I (Loss) on disposal of a security shall be computed as below:
Disposal consideration xxx
Less: Cost of acquisition (xxx)
Capital gain I (Loss) xxx

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Capital gain rate for future commodity contracts entered into by members of Pakistan
Mercantile Exchange will be 5% regardless of date of acquisition.
Gain on disposal of securities shall be treated as a separate block of income and taxable at
above respective prescribed tax rates.

 On the other hand, gain on disposal of capital assets will be added to the normal
income of the taxpayer and taxable on the basis of the tax rates applicable to such
person.
 The holding period shall reckon from the date of acquisition to the date of disposal.
 Capital gain arising on the disposal of any security shall be computed on the basis of
First in First out (FIFO) inventory accounting method. However, FIFO method shall
not apply in respect of sale of shares purchased on the same trading day. In that
case gain or loss shall be computed by applying the average method.

 Loss sustained by a person on disposal of securities shall be set off only against the
gain of the person from disposal of any other securities chargeable. Such loss from
tax year 2019 can only be carried forward upto three tax years immediately
succeeding the tax year for which the loss was first computed.

Capital loss adjustment disallowed (Rule 13 F)

Capital loss adjustment as mentioned above shall not be admissible in the following cases,
namely

Wash Sale

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Where capital loss realized on disposal of a specific security by an investor is preceded or

followed in one month’s period by purchase of the same security by the same investor or its
related parties, thus maintaining his portfolio.

Cross Trade
Where coordinated reshuffle of securities between two related accounts of the same investor
or between two related brokerage houses is undertaken and securities accumulating
unrealized losses are sold to related accounts to artificially realize capital losses in one
account without actually selling the securities to an outsider.

Tax Swap sale

Where the investor having realized loss on a particular security does not repurchase the
same security but chooses another similar security in the same sector thus not only
minimizing or eliminating altogether liability on account of tax on capital gain, but also
maintaining the portfolio broadly at the same risk return profile. The above provisions shall
not apply to a banking company or an insurance company.

Payment of tax on capital gain (Rule 13H)

Every investor shall calculate tax on capital gain arising on securities held for a period up to
six months, and above six months to one year, after the end of each tax year at the
prescribed rates. Every investor other than individual shall e-file statement of advance tax on
capital gain on the prescribed format within seven days after the end of each quarter with the
tax authority. The liability to pay the due tax on capital gain shall lie on the investor who held
the securities during the period for which tax on capital gain is to be paid.

Special provision relating to capital gain tax:

 Capital gains on disposal of listed securities and tax thereon shall be computed,
determined, collected and deposited in accordance with the provisions of section 37A
read with rules laid down in the Eighth Schedule.
 Provisions of section 37A and Eight Schedule of the Income Tax Ordinance,2001
shall not apply to the following persons, namely:
 a banking company
 an insurance company

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Short Notes

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Practice Exercise 1:
Briefly explain the income tax implications in respect of each of the following independent
situations for the tax year 2025:

(i) 1 January 2025: Ilyas entered into a contract for the sale of his 250 Square Yards
plot in Islamabad to Mr. Sohail for a consideration of Rs. 50,000,000. Sohail paid
Rs. 5,000,000 at the time of the contract for sale. However, he failed to pay the
balance of the amount by 30 April 2025 and Ilyas forfeited the Rs. 5,000,000 in
accordance with the terms of the contract. Subsequently, the plot was sold for
Rs. 49,000,000 to Mr Mumtaz on 30 June 2025. Ilyas had inherited the house on
25 June 2019, on which date the fair market value of the plot was estimated at
Rs. 49,000,000. His father had originally purchased the plot for Rs.39,000,000 in
1 July 2001.

(ii) 15 February 2025 Bilal discarded a machine which he had imported from China
for Rs. 1,000,000 on 1 January 2025 to start the business. However, the machine
was badly damaged during the shipment, rendering it unfit for use. The shipping
company paid him Rs. 850,000 as damages. The scrap value of the machine on
the date it was discarded was estimated to be Rs. 200,000. The documentation
charges incurred in connection with the claim for damages were Rs. 25,000
(iii) On March 01, 2025 Mr. Aleem sold 10,000 shares in Pakistan
Telecommunication Limited, a company listed on Karachi Stock Exchange for Rs.
300,000. He had purchased these shares on July 01, 2024 for Rs. 200,000.
Brokerage and other expenses on sale transaction were Rs. 1,500. Mr. Aleem is
a in the active taxpayers list under the Income tax Law. The disposal is made
otherwise than through registered stock exchange and which are not settled
through NCCPL.
How tax would be changed if Mr Saleem disposed these shares through
registered stock exchange and which are settled through NCCPL?

(iv) On June 15, 2025 Imran sold his personal car for Rs. 1,500,000. The car has
been originally purchased for Rs. 1,200,000 on September 13, 2022.
(v) Mr. Salman sold his antique watch for Rs. 150,000 in tax year 2025. The watch
had been gifted to him by his mother back in 2011. Its fair market value at the
time of gift was Rs. 250,000. His mother originally purchased the watch for
Rs.50,000.

Answer 1:
(i) Transaction with Mr.Sohail
The amount of Rs. 5,000,000 forfeited by Ilyas in accordance with the terms of the contract
for the sale of his plot. Sohail is to be treated as rent received [s.15(2)] and taxed under
normal tax regime.

Transaction with Mr.Mumtaz

Consideration for the sale of the plot on 30 June 2025 49,000,000
Cost on 25 June 2019, the date of inheritance by Mr.Ilyas (39,000,000)
Capital gain on disposal of immoveable property after Six years 10 m x 0 = 0

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(ii) Disposal of machine

Since Bilal was not entitled to claim depreciation on this machine, the machine falls within
the definition of a capital asset. [S.37(5)(b)] Discarding an asset is also treated as a disposal
of the asset. [S.75(3A)] The capital gain is determined as:

Consideration received 15 February 2025

Cost of the machine on 1 January 2025

Full amount of capital gain is taxable.

Sale price

The above capital gain is taxed at the rate of 15% as a separate block of income as security was acquired
after 1 July 2024.

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Practice Exercise 2:
Mr. Mobeen owns different assets. The detail of these assets along with mode and value
of acquisition and nature of transactions is as under:
 On 15 June, 2025, Mr. Mobeen sold 5,000 shares of M/s ABC (Pvt.) Limited for
a sum of Rs. 625,000. These shares were gifted to him by his friend on 13
September, 2024 on which date the fair market value of the shares was Rs
525,000. His friend has originally purchased these shares in tax year 2021 for a
sum of Rs 500,000.

 Mr. Mobeen has also 10,000 shares of XYZ Limited, a listed company, which were
transferred to him through inheritance from father date to be specified 01/07/2024.
His father was original allottee of these shares at Rs.10 per share. FMV of these
shares at the time of inheritance was Rs. 12 per share. Mr. Mobeen sold 2,000
shares out of them at Rs. 30,000 on 30 January 2025 through NCCPL. The break-
up value of these shares as per balance sheet of the company was Rs. 15 per
share; however, the price ruling in the market on the date of sale was Rs. 20 per
share. Ignore notional cost.

 Mr. Mobeen has also paid a sum of Rs. 60,000 for purchase of dining table
set on 15 January 2012 for his personal use. He sold the said set to Mr Gufran
for a sum of Rs.90,000 on 27 June, 2025.

 Mr. Mobeen also has a habit of collection of postage stamps. His collection
includes 2,000 stamps of different countries and occasions. He collected these
stamps in many years. The cost of these stamps aggregates to Rs. 275,000.
However, due to paucity of space in the home, he is not able to continue this
habit therefore he sold these stamps for a sum of Rs.740,000 in a stamp
exhibition.

You are required to compute the taxable income of Mr. Mobeen for tax year 2025.

Answer 2:
MR MOBEEN
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY
TAX YEAR 202
STATUS: RESIDENT PERSON
Particulars Consider Cost Gain Taxable Remarks
ation Gain
Capital Gains
Sales of shares 625,000 525,000 100,000 100,000 For assets acquired by gift from relatives (there is
no acquisition cost for the person acquiring the
asset), the original cost of the transferor at the
time of its acquisition is treated to be the cost of
the asset [(Ref: Sec 79 (3)(b)]. Since friends do not
fall under the category of relatives, the fair market
value should be considered, which is the same
value at which his friend was taxed during the
disposal

Sale of Inherited 40,000 20,000 20,000 20,000 U/s 37A, any gain on disposal of securities acquired after
listed shares 01 July 2024 is taxable as separate block of
income@ 15%. Assuming him as in the list of ATL under
the Income tax Law

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Sale of dining 90,000 60,000 30,000 Nil Any movable property for personal use, except for
table set painting, sculpture, drawing, jewelry, rare manuscript,
folio, book, postage stamps, first day cover, coin,
medallion or an antique, is not chargeable to tax.
Sale 740,000 275,000 465,000 465,000 No loss is recognizable on sale of stamps; however, any
consideration of gain is fully taxable.
postage stamps
Total Capital Gain 585,000
Tax on capital Nil Rs. 565,000 (585,000 – 20,000) taxable at normal tax
gain (without rates applicable to business individuals.
listed securities
taxable as
SBI)

Listed Securities 3000

CG 20,000
@ 15%

Total Tax 3000

Practice Question 3
Mr. Shahbaz, a resident individual and filer of income tax, earned Rs. 700,000 from the sale of assets
as shown below:

Required:
Discuss the treatment and the implications of each of the above transactions under the Income Tax
Ordinance, 2001. Give brief reasons to support your conclusion.

Answer.3

 This is a loss on sale of shares of a listed company sustained in tax year 2025. This can be
set off against the gain from any securities chargeable to tax in the tax year 2025. This can be
carried forward in the next three tax years.
 It is a taxable gain. Full amount will be taxable
 It is a taxable gain. Full amount will be taxable
 Loss from sales of sculpture is not allowed to be recognized.
 It is a capital loss and it can be set off against capital gains only. It can also be carried forward
for adjustment against capital gains under section 37 during the succeeding six tax years.

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Practice Question 4

Saleha is a resident person. She disposed of the following assets during the tax year 2025.

(i) A painting which she inherited from her father was sold for Rs. 1,250,000. The market value of the
painting at the time of inheritance was Rs. 1,550,000. The painting was purchased by her father for
Rs. 1,000,000.
(ii) She sold jewellery for Rs. 2,300,000 which was purchased by her husband in March 2022 for Rs.
1,300,000 and gifted to her on the same date.

(iii) She disposed off her car for Rs. 1,800,000. The car was being used for the purposes of her
business. The tax written down value of the car at the beginning of tax year 2025 was Rs. 1,600,000.
The rate of depreciation for tax purposes is 20%.

(iv) On 20 October 2024 she sold a dining table to Faheem for Rs. 18,000, which she had purchased
on 15 May 2022 for Rs. 15,000 for her personal use.

Required:
Under the provisions of the Income Tax Ordinance, 2001, discuss the taxability of each of the above
transactions in the context of capital gain/loss

Answer.4

i. Since Saleha inherited paintings from her father, the value at which her father originally purchased
the painting would be treated to be its cost. Hence, cost of the painting would be Rs. 1,000,000. And
there is a gain of Rs. 250,000

ii. The cost of the Jewellery would be Rs. 1,300,000 i.e. the value thereof at the time of gift. Therefore,
the gain of Rs. 1,000,000 should be recognized.

iii. The car sold by Saleha was being used by her for business purposes and therefore depreciation
was also being charged on it. However, depreciable assets are specifically excluded from the
definition of capital assets. Therefore, no capital gain or loss would arise on the disposal of car.
However, the gain on disposal of business used car shall be taxable under the head income from
Business under section 22(8)(a) of the Income Tax Ordinance, 2001.

iv. No capital gain/loss will arise as any moveable property held for personal use by the person is
excluded from the definition of capital assets.

Practice Question 5
a) Haris sold two of his personal vehicles during the current year and earned profit of Rs. 550,000.
Discus the taxability of profit earned by Haris in the context of capital gain/loss.

b) On 1 July 2019, Ahmed purchased two sculptures for Rs. 410,000 and Rs. 475,000 respectively.
On 30 November 2024, during the shifting of his house, he lost both the sculptures. On 15 January
2025, he received insurance claim of Rs. 940,000 in a single transaction against the loss of two
sculptures. The fair market value of both the sculptures at the time of loss was estimated at Rs.
360,000 and Rs. 540,000 respectively. Compute Ahmed’s taxable income or loss for the above
transaction.

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Answer.5

Practice Question 6
Nargis is a resident filer. During the tax year 2024, she disposed of various assets.
Relevant details of these assets are as follows:

Disposal Purchase

Cash Fair market Date of Cost of Date of

consideration value disposal purchase purchase

---- Rs. in million ---- Rs. in million

Investment in shares
of a public unlisted 2.8 3.0 01-Apr-25 2.0 01-Jun-23
company

Investment in sharesof a 3.5 3.5 01-Jul-24 2.1 30-Jun-16

listed company

Personal car 5.0 6.0 31-Dec-24 3.8 01-Jan-22

Painting 1.2 1.2 16-Sep-24 1.7 16-Feb-20

Jewelry 8.0 7.6 30-Jun-25 (see note 1) 01-May-19

Note 1: She received the jewelry as a gift from her mother in law at the time of her marriage when its
fair market value was Rs. 5.5 million and its original cost was Rs. 4.8 million.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(i) compute the amount to be chargeable to tax under the head of capital gain. Also state the reason
for ignoring gain / loss, if any.

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(ii) compute the tax liability of Nargis in respect of the capital gain computed in part -I above assuming
that she has no other source of income.

Answer 6.

Tax Liability (Non-salaried case) Rs. In million

On Rs.3.2 million 0.65
Above 3.2 million @ 40% 0.4
1.05
Capital Gain to be taxed under separate block of income
Tax on capital gain of investment in shares of a listed company 0.175
(1.4 x 12.5%)
Total tax liability 1.225

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ICAP Past Papers

Q.1 [Autumn 2017 Q.3(b)]

Zaheer sold a painting to his brother on 10 April 2025 for Rs. 2,000,000. Zaheer had
purchased this painting for his residence, in an auction on 14 August 2022 for Rs. 1,800,000.

Ans.1

Taxable
Income
Sale of painting Rupees
Consideration received 2,000,000
Less: Cost of painting (1,800,000)
Capital gain 200,000

Q.2 [Autumn 2015 Q.4]

(a)

What do you understand by the terms ‘Security’ and ‘Derivative products’ as

provided in the Income Tax Ordinance, 2001 and Rules made thereunder?

(b)

Under the provisions of the Income Tax Ordinance, 2001 compute taxable gain or loss,
under the correct head of income, in each of the following cases. Also identify, giving
reasons, whether the company is a public or private company for tax purposes:

(i) Ashiq has 5,000 shares in Rumi (Pvt.) Limited (RPL). 52% of the shares of RPL are
held by Delta Plc. which is owned by the British Government. Ashiq inherited these
shares from his father on 1 January 2024. His father had purchased these shares on
31 May 2021 at a price of Rs. 300 per share. The market value of these shares at the
time of inheritance was Rs. 250 per share. On 30 June 2025 Ashiq sold 2,500 shares
in RPL at a price of Rs. 325 per share when the break-up value of RPL was Rs. 350
per share.

(ii) What would be your answer in (i) above, if 40% of the shares of RPL were held by
the Provincial Government, 48% by the British Government and 12% by individual
investors.
Ans.2

(a)

Security:
Security means share of a public company, voucher of Pakistan Telecommunication
Corporation, Modaraba Certificate, an instrument of redeemable capital and derivative
products.

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Derivative products:
Derivative products means a financial product which derives its value from the underlying
security or other asset, may be traded on stock exchange of Pakistan and includes
deliverable future contracts, cash settled future contracts, contracts of rights and options.

(b)

Q.3 [Autumn 2017 Q.3]

Zaman is working as the Chief Executive Officer in Yasir Limited (YL). Following are the
details of sale and purchase relating to his capital assets during the tax year 2025.

(a) Under an employee share scheme, 25,000 shares of YL were allotted to Zaman, on 1
December 2022 for Rs. 25 each. According to the scheme, he was not allowed to
sell/transfer the shares before completion of two years from the date of transfer. The face
value of each share is Rs. 10 per share. Fair market value of the shares was as follows:
Rs. 40 per share on 1 December 2022
Rs. 48 per share on 30 June 2023
Rs. 55 per share on 30 November 2024
Rs. 61 per share on 30 June 2025

(b) He sold 24,000 shares of HQ (Pvt.) Limited on 30 June 2025 for Rs. 200 per share.
He had acquired these shares as follows:
18,000 shares were purchased at Rs. 55 per share on 25 June 2023.
6,000 shares were allotted as bonus shares on 28 February 2024. On that date FMV
of the share is Rs. 120 per share.

(c) A gain of Rs. 300,000 was realized on the sale of shares of Zeeshan Industries Limited
(ZIL), a public listed company, in June 2025. The shares were acquired on 02-07- 2015.

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(d) Zaman sold a painting to his brother on 23 March 2025 for Rs. 1,800,000. Zaman had
purchased this painting for his residence, in an auction for Rs. 2,000,000 on 10 July 2021.

(e) He sold his old furniture to Furqan for Rs. 285,000 on 25 June 2025. The furniture
was purchased in 2023 for Rs. 250,000.
Required:
Compute the amount to be included in the taxable income of Zaman for the tax year 2025
and specify the head of income under which the income would be classified.

Ans.3

Taxable Income
(Amount in Rs.)
(a) Share of YPL – Employees share scheme
Fair market value of shares on 30 November 2024 (25,000× 1,375,000
55)
Purchase price (25000*25) (625,000)
Income from salary A 750,000

(b) Share of HQ Limited

Sale price (24,000 × 200) 4,800,000
Purchase price (18,000 × 55) + (6000 x 120) (1,710,000)
3,090,000

(c) Share of Zeeshan Industries Limited 300,000

Capital Gain of 300,000 is charge @ rate of 12.5%

(d) Sale of painting

Consideration received of painting on 23 March 2025 1,800,000
Less : Cost of painting on July 10, 2021 (2,000,000)
------------

(e) Personal assets (not taxable) ------------

4,140,000

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 6

CHAPTER
Income from Others Sources

ces

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INCOME FROM OTHER SOURCES

Income from other sources: [U/s 39(1)]
Income of every kind received by a person in a tax year, if it is not included in any other head,
other than income exempt from tax, shall be chargeable to tax in that year under the head income
from other sources including the following namely:
(a) Dividend (FTR) 15% for Filler
(b) Royalty (NTR)
(c) Profit on debt.
(d) Additional payment on delayed refund under any tax law (NTR)
(e) Ground rent. (Charge under income from property)
(f) Rent from sub-lease of land or a building. (NTR)
(g) Income from the lease of any building together with plant or machinery. (NTR)
(h) Income from provision of amenities, utilities or any other service connected with renting of
building. (NTR)

(i) Income deemed u/s 111- unexplained assets or income;

(j) Any annuity or pension received by a person not being as an employee. (NTR)
(k) Any prize-on-prize bond or cross-word puzzle (15% for Filer and 25 % for Non-Filer), and
winning from a raffle, lottery, prize on winning a quiz, price offered by companies for promotion
of sale. (20% of Gross Amount) (FTR)
(l) Any other amount received as consideration for the provision, use or exploitation of property,
including from the grant of a right to explore for, or exploit, natural resources. (NTR)

(m) The fair market value of any benefit, whether convertible to money or not, received in
connection with the provision, use or exploitation of property; and (NTR)
(n) Any amount received by the person as consideration for vacating the possession of a building
or part thereof. It shall be taxable as follows: [U/s 39(1) and (2)] (Not Applicable for open plot of land)
Amount received for vacating the possession
Less: any amount paid on acquiring the possession
Taxable under the head other sources = Additional amount received 10 (NTR)
(o) Any amount received by a person from Approved Income Payment Plan or Approved Annuity
Plan under Voluntary Pension System Rules, 2005. (NTR)(Exempt)
(p) any amount or fair market value of any property received without consideration or received as
gift, other than gift received from: an ancestor, a descendant of any of the grandparents, or an
adopted child, of the individual, or of a spouse of the individual or a spouse of the individual or
of any person specified above.
Note: Any gift received in cash even from above persons will be taxable under IFOS
(q) Any amount received as a loan, advance, deposit for issuance of shares or gift by a person in a
tax year from another person other than a banking company or financial institution or not
through a crossed cheque drawn on a bank or a banking channel or not from a person holding
a National Tax Number. However, advance for the sale of goods or supply of services is
outside the scope of this clause
(r) Income arising to the shareholder of a company, from the issuance of bonus shares. (10%)
any profit on debt derived from National Savings Deposit Certificate including DSCs is paid to a
person in arrears and as a result his income is chargeable to higher rate of tax than would have been
applicable if the amount had been paid in the tax year to which it relates, he may by a notice in writing
to the Commissioner by the due date for furnishing persons return of income, elect for the amount to

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be taxed at the rates that would have been applicable if the amount had been paid in the tax year to
which it relates.

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Income from Other Sources
Important aspects of taxability of income from other sources
Income, which does not fall under any other heading of income, would fall within this heading of income.
Therefore, the kinds of income elaborated above from (a) to (q) if fall within any other head of income,
then the same may not be included again under this head of income. For example, sole business of the
banks is earning profit on debt and it is therefore, classified as “income from business” in their hands,
hence, the said income cannot be classified as “Income from other sources” again. Section 39(5) of the
Ordinance therefore, specifically inserted to clarify this position and the said section stipulates that:

Any income received by a person in a tax year will not be chargeable under the head income from other
sources if it is chargeable to tax under any other head of income or subject to tax under section 5
[income from dividends], 6 [income of non-resident person from technical fee or royalty] or 7 [income of
shipping and air transport].

Therefore, it is imperative to decide the classification of an income under a specific head of income after
considering the scope of activities of the taxpayer.

For example: The sole business of a company is to manage its investment in different subsidiaries of a
group. Then the ultimate income of the said company would be dividend income and capital gains from
sale of shares. The income of the company from dividends then would be chargeable to tax under the
head income from business and not under the head income from other sources. However, on the other
hand, in case a manufacturing company earns dividend income in addition to income arising from sale of
manufactured goods, then the said dividend income would be chargeable to tax under the head income
from other sources.

Example:

Which of the following incomes are covered under the head “income from other sources”
(a) Dividend received by an individual.
(b) Salary received from employer.
(c) Profit on debt received by banking company.

(d) Additional payment for delayed refund of income tax.

(e) Rent of building received from tenant.
(f) Rent from sub-lease of a property by tenant.
(g) Income from hire of factory (inclusive of plant and machinery).
(h) Amount received against sale of shares of a private limited company.
(i) Income from utilities connected with the rented premises.
(j) Received prize on prize bond.
(k) Amount of any unexplained income, investment or expenditure treated u/s 111.
(l) Any amount of loan received from friend through cash.

Solution: Income from other sources: (a), (d), (f), (g), (i), (j), (k), (l) and Income from salary: (b)
Income from property: (e) Income from business: (c) Capital gain: (h)

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Admissible Deduction under Income from other sources [U/s 40]
Where a person’s income is chargeable to tax under the head income from other sources, he shall be
allowed to deduct expenditure incurred on deriving such income. These expenditures are as under:
 A deduction shall be allowed for any expenditure (except capital expenditure) paid by the
person to the extent to which the expenditure is paid in deriving income from other sources.
 Zakat paid under the Zakat and Ushr Ordinance on profit on debt.
 Deduction for depreciation of plant, machinery or building in case of lease income from letting
out such building together with plant and machinery.
 An initial allowance for any plant or machinery.

Deductions not allowable [U/s 40(4), (5) and (6)]

 No deduction shall be allowed to a person under this section to the extent that the expenditure
is deductible in computing the income of the person under another head of income.
 The inadmissible expenses u/s 21 shall also be used under this head in the same manner as
they apply in determining the deductions allowed in computing the income under the head
income from business.
 Expenditure is of a capital nature if it has a normal useful life of more than one year
Example:
Mr. Imran let out his building together with plant and machinery to Mr. Amir. He provided you the
following information for the calculation of taxable income and tax liability:
i. Rent received Rs. 600,000
ii. Repair and maintenance of building Rs. 35,000
iii. Insurance (already claimed under the head business income) Rs. 60,000
iv. Salary to collect the rent (one month salary to employee to collect the rent paid in cash) Rs.
50,000

He also received Rs. 15,000 as additional payment on delayed refund from income tax department.
Solution:
Mr. Imran (Resident)
Tax year 2025
Computation of taxable income and tax liability:
Income from other sources: Rs.

Rent of building with plant and machinery 600,000

Less: Admissible deductions:

Repair and maintenance of building 35,000
Insurance (see note 1 below) -
Salary to collect rent (see note 2 below) -
35,000
565,000
Additional payment on delayed refund 15,000
Taxable income 580,000
Computation of tax liability:
Tax on Rs. 580,000 Nil
Note 1 The insurance has already been claimed under the head business income so the same now shall
not be allowed under the head income from other sources.

Note 2 Salary to collect rent is inadmissible as salary more than Rs.25,000 per month should be paid
through crossed cheque.

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Income from Other Sources
Example:
Mr. Hasnat Nadeem, an individual, furnishes the following particulars of his income for the year ended
30.06.2025.
Rs.
(a) Dividends from a company listed on stock exchange (gross amount) 20,000
(b) Taxable salary 135,000
(c) Prize on prize bond (gross amount before tax deduction) 20,000
(d) Income as shareholder from bonus issue 100,000
Calculate total income of Hasnat Nadeem for the tax year 2025 and tax thereon.

Solution:
Mr. Hasnat Nadeem (Resident)
Tax year 2025
Computation of taxable income and tax liability:
Income from salary: Rs.

Taxable salary 135,000

Taxable income 135,000
Computation of tax liability:
Tax on Rs. 135,000 (taxable income is below taxable limit) nil

Incomes covered under Separate block of income:

Tax on gross dividend Rs. 20,000 @ 15% 3,000

Tax on gross amount of prize on prize bond @ 15% 3,000
Tax on income as bonus issue Rs.100,000 @ 10% 10,000

Total tax liability 16,000

Less: tax deducted at source:
On dividend 3,000

On prize bond 3,000

On bonus issue 10,000
16,000
Balance tax nil

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Income from Other Sources
Example
On 13 September 2024, Azhar purchased a building which had been previously used as a factory in the
Sundar Industrial Estate for Rs. 5,000,000 and installed in the building an item of second-hand plant
previously used in Pakistan, costing Rs.3,000,000. Azhar leased the Sundar property consisting of the
building together with the plant on 01 January 2025 to Mr. Atif for a composite rent of Rs.400,000 per
month payable in advance.
Azhar is also the owner of a residential building in Gulberg which was let to Beta Limited on 1 August
2024 for a monthly rent of Rs.250,000. Rent for the two years was received in advance on 01 August
2024 after deduction of tax at the prescribed rate. Depreciation on plant and building was Rs. 500,000 and
450,000.
Following expenses were incurred by Azhar on the two properties during the tax year 2025:
Description Sundar Gulberg
Repair to building 140,000 63,000
Repair to plant 50,000 -
Ground rent 5,000 5,000
Insurance 48,000 20,000

Total 243,000 88,000

Required:
Compute the taxable income of Mr. Azhar for the tax year 2025 under appropriate heads of income.

Answer:
MR. AZHAR
COMPUTATION OF TAXABLE INCOME
TAX YEAR: 2025

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Notes:
N-1: Rent received in advance
Rent is not chargeable to tax on receipt basis. Rent relating to a tax year, whether
Received or receivable, is chargeable to tax in that tax year. Therefore, rent received in
advance amounting to Rs. 3,000,000 (250,000x 12) will be charged to tax in the tax
year (TY 2026) to which in relates.
N-2: Income from lease of building with plant
A composite rent of Rs. 2,400,000 (400,000x6) was received as consideration for the
lease of the Sundar Industrial property consisting of building together with the plant
installed in the building. Such income after permissible deductions is chargeable to tax
as "Income from Other Sources" of the Income Tax Ordinance, 2001. Further all the
Expenditure incurred in deriving such expense (along with depreciation and initial
allowance) will be allowed.
N-3: Repair expense/allowance
In case of income from other source, actual expense incurred will be allowed as
deduction, whereas in case of income from property, 1/5th repair allowance will be
allowed.
.

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Special provisions relating to different incomes covered under income

from other sources

Dividend
Dividend income is generally taxable under final tax regime in respect of all taxpayers including
companies.

Definition: Section 2(19) “Dividend” includes —

a) any distribution by a company of accumulated profits to its shareholders, whether capitalised or
not, if such distribution entails the release by the company to its shareholders of all or any part
of the assets including money of the company;

b) any distribution by a company, to its shareholders of debentures, debenture-stock or

deposit certificate in any form, whether with or without profit, to the extent to which the
company possesses accumulated profits whether capitalised or not;

c) any distribution made to the shareholders of a company on its liquidation, to the extent to
which the distribution is attributable to the accumulated profits of the company immediately
before its liquidation, whether capitalised or not;

d) any distribution by a company to its shareholders on the reduction of its capital, to the
extent to which the company possesses accumulated profits, whether such accumulated
profits have been capitalised or not;

e) any payment by a private company as defined in the Companies Ordinance, 1984 or trust
of any sum (whether as representing a part of the assets of the company or trust, or
otherwise) by way of advance or loan to a shareholder or any payment by any such
company or trust on behalf, or for the individual benefit, of any such shareholder, to the
extent to which the company or trust, in either case, possesses accumulated profits; but
does not include —
i. a distribution made in accordance with sub-clause (c) or (d) in respect of any share
for full cash consideration, or redemption of debentures or debenture stock, where
the holder of the share or debenture is not entitled in the event of liquidation to
participate in the surplus assets;
ii. any advance or loan made to a shareholder by a company in the ordinary course of
its business, where the lending of money is a substantial part of the business of the
company;
iii. any dividend paid by a company which is set off by the company against the whole
or any part of any sum previously paid by it and treated as a dividend within the
meaning of sub-clause (e) to the extent to which it is so set off; or
iv. remittance of after tax profit by a branch of Petroleum Exploration and Production
(E&P) foreign company, operating in Pakistan.

f) remittance of after tax profit of a branch of a foreign company operating in Pakistan;

Tax rates on gross amount of dividend received from a Company;

 7.5% in case of dividend paid by Independent Power Producers where such dividend is a pass
through item under an Implementation Agreement or Power Purchase Agreement or Energy
Purchase Agreement and is required to be reimbursed by Central Power Purchasing Agency
(CPPA-G) or its predecessor or successor entity

 15% in case of individuals, AOPs, mutual funds, Real Estate Investment Trusts and any other
person not covered by 7.5% and 25% categories.

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 25% in case of a person receiving dividend from a company where no tax payable by such
company, due to exemption of income or carry forward of business losses or claim of tax credits.

 Dividend received is subject to deduction of tax at source by the person making the payment of
dividend.

 Tax deducted at source is treated final tax liability of the person receiving the dividend.
 Where any advance or loan is repaid by the shareholder of a private company, he shall be entitled
to a refund of the tax paid by him as a result of such loan or advance having been treated as
dividend.

Exercise

Mr. Mobeen declared the following particulars:

 Income from salary Rs. 1,750,000.
 Received a dividend warrant of Rs. 19,500 from a listed company. The amount is
net of income tax @ 15% and Zakat of Rs. 500.

You are required to compute the taxable income and tax liability of Mr. Mobeen.

Solution:
MR. MOBEEN
COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY

Gross Tax
Particulars Taxable Remarks
amount liability
Salary 1,750,000 1,749,500 112,425 As a salaried case tax is calculated as:
income (1,750,000-500) Rs.112,425= 30,000 + 15% x

(1,749,500 -1,200,000)
Income from other source:
Dividend 23,530 23,530 3,530 Taxable income: Amount before Zakat
income deduction (19,500 + 500 = 20,000)
grossed up 20,000/85 =
23,530
Tax liability is Rs. 3,530 =15% x
23,530

Exercise:

(a) Omega (Pvt.) Limited is engaged in the business of trading and sale of fertilizers. The
Company has extended loan of Rs. 2.5 million to one of its shareholders on 30 June 2025
when the accumulated profits of the company were Rs. 1.8 million. Determine the amount
to be treated as dividend.

Required: Determine the amount to be treated as dividend.

(b) Robin Petroleum International (RPI), a company incorporated in Netherlands, is operating in

Pakistan as a branch. RPI has entered into an agreement with the Government of Pakistan
under which RPI has been given the right to explore and produce crude oil and natural gas in
specified areas of Sindh and Baluchistan.
Required: Explain the tax implications on RPI ‘s branch in Pakistan of the remittance of the
after tax profits of the branch to its head office in the Netherlands.

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Answer
(a) The amount of loan to the extent of accumulated profits will be treated as dividend i.e.
Rs. 1,800,000 [Ref: Sec 2(19)(e)

(b) Remittance of after-tax profit of a branch of a foreign company operating in Pakistan is

considered as dividend as per section 2(19)(f) of the Income Tax Ordinance, 2001.
However, remittance of after-tax profit by a branch of Petroleum Exploration and Production
(E&P) foreign company operating in Pakistan is excluded from the definition of dividend.
As the Pakistan branch of RPI is a branch of an E&P foreign company operating in Pakistan,
the remittance of the after tax profits of RPI‘s branch in Pakistan would not be considered to
be dividend income.

ICAP Past Papers

Q.1 {Autumn 2018 Q.4(a)}
On 25 August 200B, the Officer of Inland Revenue has issued a notice to Rahat Foods (Private) Limited
(RFPL) to deposit withholding income tax of Rs. 1,950,000 in respect of loan amounting to Rs.
13,000,000 given to Nadeem Ahmad, a shareholder of RFPL, by treating the amount of loan as dividend.
The notice was served to the company on 30 August 200B.

According to RFPL’s records, the loan was given to Nadeem Ahmad on 25 May 200A, when accumulated
profit of the company was Rs. 12,000,000.

In the light of the provisions of the Income Tax Ordinance, 2001 explain whether you agree with the
notice issued to RFPL by the Officer of Inland Revenue.

Answer.1
Under the Income Tax Ordinance, 2001 the definition of dividend includes any payment by a private
company by way of advance or loan to a shareholder or any payment by any such company on behalf,
or for the individual benefit, of any such shareholder, to the extent to which the company, possesses
accumulated profit.
Considering the above definition of dividend, the tax officer is correct to the extent of treating the loan
payment as dividend. However, he made error in treating the entire amount of Rs. 13 million as
dividend because the amount of accumulated profit was Rs. 12 million on that date. Therefore, only Rs.
12 million can be treated as dividend.

Profit on debt
The term profit on debt is defined in section 2(46) of the Ordinance in the following manner:

Definition: Profit on debt

 any profit, yield, interest, discount, premium or other amount, owing under a debt, other than a
return of capital; or
 any service fee or other charge in respect of a debt, including any fee or charge incurred in respect
of a credit facility which has not been utilized;

This definition not only explains the term for the recognition of income but it also gives the basis of
ascertaining the nature of profit on debt as “admissible expenditure”. the same matter is elucidated in
section 18 in the following manner:

 Any profit on debt derived by a person where the person’s business is to derive such income shall
be chargeable to tax under the head “Income from Business” and not under the head “Income from
Other Sources”.
 Where a lessor, being a scheduled bank or an investment bank or a development finance
institution or a modaraba or a leasing company has leased out any asset, whether owned by it or
not, to another person, any amount paid or payable by the said person in connection with the lease

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of said asset shall be treated as the income of the said lessor and shall be chargeable to tax under
the head “Income from Business”.
 Any amount received by a banking company or a non-banking finance company, where such
amount represents distribution by a mutual fund or a Private Equity and Venture Capital Fund out
of its income from profit on debt, shall be chargeable to tax under the head “Income from Business”
and not under the head “Income from Other Sources”.
The aforesaid provisions of law only specify head of income under which certain types of income would be
assessed and subsequently subjected to tax. However, except in case of a company, profit on debt is
covered within final tax regime as contained in section 169 read with section 151 of the Income Tax
Ordinance 2001. Such income would not be included in any head of income.

For Individuals and AOP’s

i. Profit on debt upto Rs. 5 million is taxable as separate block @ 15% under section 7B if received from
prescribed persons mentioned in section 151(1) i.e. from banks, any government, national saving
scheme etc.
ii. ii. Any profit on debt exceeding Rs. 5 million would be taxable under normal tax regime under the head
income from other source at applicable slab rates.
 The withholding agents shall deduct tax at the rate of 15% of the yield for noncorporate
taxpayers.
 Payment on account of interest on loan through loan agreement is not subject to tax deduction
and therefore the same is taxable under the normal tax regime in case of all persons
(individual, AOP, Company) under the head income from other source.
 Similarly, in case of individual, profit on debt on behbood saving certificates/pensioners benefit
account is taxable under NTR with maximum tax rate @ 5%.
A = Tax liability /Taxable Income x behbood amount.
B = behbood amount X 5%.
If A is greater than B than excess amount is deducted from tax liability.
If A is less than B than nothing will be deducted from tax liability.

The tax rate applicable of profit on deb under section 7b are;

Slab Tax Rate

Upto 5 millions (STR) 15% of the gross amount
More than 5 million NTR

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Short Notes

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 7

CHAPTER
Income from Business

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INCOME FROM BUSINESS

BUSINESS [2(9)]
'Business' is an activity undertaken with a motive to earn profits. According to the Income Tax
Ordinance, the 'business ' includes any:
1. Trade;
2. Commerce;
3. Manufacture;
4. Profession;
5. Vocation; or
6. Adventure or concern in the nature of trade, commerce, manufacture, profession or vocation.
However, it does not include an employment.
The law does not define the terms used in the definition. Under such a condition the meanings which
are generally attached to or understood from the use of such terms shall be adopted.

INCOMES CHARGEABLE UNDER BUSINESS [18(1) & (2)]

The following incomes are chargeable to tax under the head "Income from Business":
1. Profits and gains of any business carried on during the tax year.
2. Profits and gains of any business treated to have been carried on during the tax year.
3. Income from sale of goods or provision of services to its members by any trade, professional or
similar association. Examples of such associations may be Lahore Chamber of Commerce and
Industries (LCCI), All Pakistan Textile Mills Association (APTMA), ICAP and ICMAP.
4. Fair market value of any 'benefit' or perquisite arising from the past, present or prospective
business relationship. It may or may not be convertible into money.
'Benefit' includes any benefit derived by way of waiver of profit on debt or the debt itself under
the State Bank of Pakistan, Banking Policy Department's Circular No. 29 of 2002 or in any other
scheme issued by the SBP. (This circular of SBP provides guidelines on write-off of irrecoverable
loans and advances).
5. Income from the hire or lease of tangible movable property.
6. Management fee derived by a management company (e.g., modaraba management company).
7. Any profit on debt, in case of a person whose business is to lend moneys and earn' profit on
debt (e., banks, financial institutions). 'Profit on debt’ received by any other persons shall be
taxable as "Income from Other Sources".

AMOUNT RECEIVED AGAINST LEASE [18(3)]

Where a lessor has leased out any asset to any other person (lessee}, then any amount paid or payable
by the lessee in connection with the lease shall be taxable as "Income from Business". The 'lessor' may
be any of the following persons:
1. A Scheduled bank,
2. An investment bank,
3. A development finance institution,

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4. A modaraba, or
5. A leasing company.
Note: Whether or not the asset is owned by the lessor, the amount received or receivable in connection
with the leased asset shall be taxable as "Income from Business".
SPECULATION BUSINESS [19]
Where a taxpayer carries on "speculation business", it shall be treated as distinct and separate from any
other business carried on by the taxpayer. Incomes, gains or losses from such business shall be kept
separate from other business incomes. Incomes from business are dealt with separately under the
following sub-heads:
1. Income from non-speculation business; and
2. Income from speculation business.
Speculation business
Speculation business is defined in section 19(2) of the Ordinance in the following manner:
 Speculation business” means any business in which a contract for the purchase and sale of any
commodity (including stocks and shares) is periodically or ultimately settled otherwise than by
the actual delivery or transfer of the commodity, but does not include a business in which:
o a contract in respect of raw materials or merchandise is entered into by a person in the
course of a manufacturing or mercantile business to guard against loss through future
price fluctuations for the purpose of fulfilling the person’s other contracts for the actual
delivery of the goods to be manufactured or merchandise to be sold;
o a contract in respect of stocks and shares is entered into by a dealer or investor therein
to guard against loss in the person’s holding of stocks and shares through price
fluctuations; or
o a contract is entered into by a member of a forward market or stock exchange in the
course of any transaction in the nature of jobbing (arbitrage) to guard against any loss
which may arise in the ordinary course of the person’s business as such member.
Tax implications for speculation business
Where a person carries on a speculation business:
 that business shall be treated as distinct and separate from any other business carried on by the
person;
 this part shall apply separately to the speculation business and the other business of the person;
 section 67- Apportionment of deductions shall apply as if the profits and gains arising from a
speculation business were a separate head of income;
 any profits and gains arising from the speculation business for a tax year computed in
accordance with this part shall be included in the person`s income chargeable to tax under the
heading “Income from Business”
 any loss of the person arising from the speculation business sustained for a tax year shall be set
off only against the income of the person from any other speculation business of the person
chargeable to tax for that year;
 if a speculation loss sustained by a person for a tax year is not wholly set off, then the amount of
the loss not set off shall be carried forward to the following tax year and applied against the
income of any speculation business of the person in that year and so on, but no speculation loss
shall be carried forward to more than six tax years immediately succeeding the tax year for
which the loss was first computed.

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Exercise: Speculation Business

M/s XYZ Enterprises deals in cloth trading. Total revenue from cloth trading was Rs. 10,000,000 during
the year 20YY. The gross profit from the trading business was amounting to Rs. 2,000,000. During the
year, the price fluctuations were very high in cloth market. Considering this trend, M/s XYZ Enterprises
also made forward purchasing of cloth to reap the benefit of price fluctuations. In April 20YY, The
enterprises agreed to purchase Bengali cloth of 20,000 bundles at the rate of 100 per bundle, the
delivery of which was expected in June 20YY. The seller agreed to purchase the same goods at the rate
ruling at the date of sale. In June the price of Bengali cloth has been increased to Rs. 120 per bundle.
M/s XYZ Enterprises disposed of that cloth of 20,000 bundles to the seller at the market prevailing rate
without taking any delivery of stocks, Total revenue from sale of cloth aggregates to Rs. 2,400,000,
Therefore, the Enterprise earned income of Rs. 400,000. Total administrative and general expenses of
Rs. 1,000,000 were incurred during the year 20YY. Compute the taxable income and tax liability. It is
worth mentioning that carry forward loss of the Enterprise was Rs. 1,000,000 in respect of business.
Whereas speculation loss was Rs. 250,000.

Answer
Particulars Speculation Trading Total
Business Business
Gross Revenue 2,400,000 10,000,000 12,400,000
Gross Profit 400,000 2,000,000 2,400,000
Expenditure 193,548 806,452 1,000,000
(1,000,000 x 2,400,000/12,400,000)
Net income 206,452 1,193,548 1,400,000
Carry forward loss 250,000 1,000,000 1,250,000
Taxable Income/ (loss) for the year *(43,548) 193,548

*Speculation loss carried forward

** Loss of speculation business cannot be set off with trading business.
ADMISSIBLE DEDUCTIONS l20]
While computing the income under the head "Income from Business" certain expenses and allowances
are allowed as deduction. These deductions may broadly be categorized into the following four groups:
A) Expenses incurred for the purposes of business;
B) Animals used for business;
C) Depreciation and amortization on assets, intangibles, etc.; and
D) Amalgamation expenses incurred by an amalgamated company.
A) Expenses Incurred for the Purposes of Business [20(1)]
Any expenditure incurred by a person during the tax year ' wholly and exclusively' for the purpose of
business generating taxable income is allowed as deduction while computing such income. Where an
expenditure is not incurred wholly for the business". then only such proportion of it shall be allowed as
deduction, which fairly relates to the business.
Some of the examples of expenditures that may be allowed as deduction are given below:
1. Cost of the goods purchased and utilized for the business.
2. Cost of goods manufactured and sold.
3. Rent for premises used for the business.

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4. Any tax, cess, charge or rate (other than the income tax) paid in connection with the business or
any of its assets.
5. Repair charges of any asset used for the business.
6. Insurance premium paid for insuring the assets.
7. Any sum paid to an employee as bonus or commission for services rendered. The amount should
be reasonable by considering:
i) The pay of the employee;
ii) The conditions of the employee's service;
iii) The profits of the business during the year; and
iv) The general practice in similar business.
The above payments should be allowed as deduction only if these are not payable to the employees as
profit or dividend. If these are payable as distribution of profits then it should not be allowed as
deduction.
8. Actual amount of bad debts.
9. Any expenditure incurred by an employer on any educational institution or hospital for the
benefits of the employees or their dependents.
10. Any expenditure incurred on a recognized institute meant for training of industrial workers.
11. Expenditures incurred on a Pakistani for his training under an approved scheme.
12. Annual subscription paid to a registered trade organization (such as, LCCI, APTMA, PSMA, etc.).
13. Expenditure on a foreign visit undertaken with a trade delegation sponsored by Federal
Government.
14. Any expenditure incurred wholly and exclusively for the business.
Note: While computing income, the deductions and allowances shall be allowed according to the
method of accounting regularly used by the taxpayer. Where incomes are recognized on accrual basis,
the expenses shall also be allowed accordingly.
B) Animals Used for Business [20(1A)]
Where a person is using animals for the purposes of business (otherwise than as stock-in-trade) and the
animals have died or become permanently useless for business then the person shall be allowed a
deduction against business income for an amount calculated as below:
Actual cost of the animal XXX
Less: Amount realized in respect of carcass or animal (XXX)
Amount to be allowed as deduction XXX

C) Depreciation and Amortization on Assets [20(2)]

A person is allowed a deduction on account of depreciation or amortization in respect of the following
assets used for the business:
1. Depreciable assets;
2. Intangibles with useful life of more than one year; and
3. Pre-commencement expenditures.
The depreciation and amortization is allowed according to the provisions laid down in sections 22
through 25 and the Third Schedule to the Income Tax Ordinance, which is sufficiently discussed in the
chapter "Assets & Depreciation".

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Amalgamation Expenses [20(3)]

An amalgamated company is allowed a deduction in respect of any expenditure connected with the
amalgamation. These expenses may be:
1. Legal expenses;
2. Financial advisory services; and
3. Other administrative costs relating to planning and implementation of amalgamation.
DEDUCTION ON ACCOUNT OF FINANCIAL COSTS [28(1)]
While determining 'Income from Business" of a person, the following deductions shall be allowed on
account of 'financial costs':
1. Any expenditure in the nature of profit on debt, if the debt has been utilized for the purposes of
business.
2. Lease rentals for a business asset acquired on lease. The lease amount should have been paid
to:
i) A scheduled bank;
ii) A financial institution;
iii) A modaraba;
iv) A leasing company; or
3. Profit on debt incurred on capital borrowed for business.
4. Any payment made by a Scheduled bank on a profit and loss sharing account or a deposit with
such bank. (This payment should have been made by way of distribution of profits in respect of
such deposits).
DEDUCTIONS NOT ADMISSIBLE [21]
The following expenses / payments are not allowed as deduction while calculating the income under the
head 'Income from Business':
1. Any tax, cess or rate (including income tax) levied on the profits or gains of the business.
2. Any amount of tax deducted at source from an amount received by the person. Amount of tax
paid, deducted or / and collected is not an expense; hence, cannot be claimed and allowed as
Note: In case where sales tax/federal excise duty paid by a taxpayer is not charged by him
to his customer, such sales tax/federal excise duty paid shall be allowed as deduction while
computing income of a person under any head of income.
3. Any expenditure in respect of which a person is required to deduct or collect tax at source and
the person has either not deducted or has deducted but not paid such tax.
___ Maximum amount of expenditure to be disallowed in respect of purchases of raw
materials and finished goods shall be 20% of purchases.
4. In case of pharmaceutical manufacturers, any expenditure for sale promotion,
advertisement and publicity exceeding 10% of the turnover .
5. Any payment made by an association of persons to its partners or members on account of:
i) Profit on debt;
ii) Brokerage;
iii) Commission;
iv) Salary; or
v) Any other remuneration.

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6. Expenditure of a non-resident business on account of "Head Office Expenditure" which exceeds

the allowable limits. The allowable deduction shall be calculated as below.
Total Head Office Expenditure /Total World Turnover X Total Turnover in Pakistan
7. Any expenditure incurred on entertainment except those, which are incurred:
i) Abroad in connection with the business;
ii) In Pakistan on entertainment of foreign or local customers and suppliers;
iii) At the meetings of members, agents, directors and employees;
iv) On refreshment of employees;
v) At the opening of branches; and
vi) On entertainment of persons related directly to business. [Rule-1O]
Notes:
A) 'Entertainment ' means the provision of meals, refreshments and reasonable leisure
facilities in accordance with the tradition of business and subject to overall norms and
customs of business in Pakistan.
B) The Board may prescribe the conditions for allowing an entertainment expense. The
violation of such conditions shall also render the expense as inadmissible.
8. Any expenditure under a single account head exceeding Rs. 250,000 in aggregate shall be
inadmissible if the payment is not made through a crossed cheque or a bank draft.
This provision shall not be applicable to the following payments/expenditures:
i) Single transactions not exceeding Rs. 25,000;
ii) Utility bills;
iii) Freight charges;
iv) Travel fare;
v) Postage;
vi) Payments made to discharge any statutory obligation (such as duties, taxes, octroi,
export tax, fines, fee, cess, etc.); and
vii) Any amount credited by direct transfer to an employee's bank account for
reimbursement of expenses incurred on behalf of the taxpayer.
Note: Online transfer of payment from the business account of the payer to the business account of the
payee as well as payment through credit card shall be treated as transactions through the banking
channel, if such transactions are verifiable from the bank statements of the respective payer and the
payee.

Exercise:
Following payments of expenses are made otherwise than through crossed cheque.

Head Of Account Amount

Rent Paid To Mr. X for Lahore office rented premises 720,000
Air Tickets purchased 520,000
Payment of salary of Mr Ali one month only 125,000
Bill paid for repair of car 420,000
Electricity bill paid 950,000
Telephone bill paid 270,000
Paid professional tax 200,000

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Paid audit fee 350,000

Paid to tax consultant 550,000

Compute the addition under Section 21(l) of the Income Tax Ordinance, 2001
No addition is required on account of payments relating to Air Ticketing, Electricity, Telephone and
Professional Tax. The balance addition under section 21(l) is computed as under:

Nature of payment Amount

Rent paid to Mr. X for Lahore office rented premises 720,000
Payment of Salary to Mr. Ali 125,000
Bill paid for repair of car 420,000
Paid audit fee 350,000
Paid tax consultant 550,000
Addition under Section 21(l) 2,165,000

9. Any payment on account of salary exceeding Rs. 32,000 per month if not made through a
crossed cheque or transfer to the employee's bank account.
10. Any contribution to such provident fund, pension fund, gratuity fund, superannuation fund or
annuity fund which is not recognized or approved under the income tax law.
An amount in excess of fifty percent of total contribution made by a person (employer) to
approved gratuity fund, approved pension fund or an approved superannuation fund
11. Any contribution to any provident or other fund, if the person has not made effective
arrangements for deduction of tax at source at the time of payments out of such fund.
12. Any donation to an unapproved institution.
Note: Any donation to approved institutions (other than those specified in Clause (61) of Part-I
of Second Schedule) is also not allowed as a deduction while computing the taxable income of a
person; rather, a tax credit at the average rate of tax is allowed in respect of such donations.
(For further details readers may refer the Chapter "Tax Credits").
13. Any provision against the profits of the business, e:g., provision for bad debts.
14. Any appropriation of profit such as dividends, transfer to reserves or capitalization in any way
15. Any expenditure in the nature of fine or penalty for the violation of any law, rule or regulation.
16. Any expenditure of a capital nature (e.g., purchase of assets).
17. Any personal expenditure incurred by the person.
18. Any amount of commission paid or payable in respect of supply of products listed in the Third
Schedule of the Sales Tax Act, 1990, where the amount of commission paid exceeds 0.2% of
gross amount of supplies thereof unless the person to whom commission is paid or payable, as
the case may be, is appearing in the active taxpayer list under this Ordinance.
19. Any expenditure attributable to sales made to persons required to be registered but not
registered under the Sales Tax Act, 1990 by an industrial undertaking computed according to the
following formula, namely:—
(A/B) x C
where—
A is the total amount of deductions claimed under this Part;
B is the turnover for the tax year; and

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C is the total amount of sales exclusive of sales tax and federal excise duty to persons
required to be registered but not registered under the Sales Tax Act, 1990 where sales
equal or exceed Rs. 100 million per person:
Provided that disallowance of expenditure under this clause shall not exceed 10% of total
deductions claimed under this Part:
Provided further that the Board may, by notification in the official Gazette, exempt persons or
classes of persons from this clause on the basis of hardship.
20.Expenditure upto 8%, claimed by a person who, where required, fails to integrate his business with the
FBR through approved fiscal electronic device and software, will be disallowed.
Example:
ABC & Company is a partnership firm. For the tax year ended on 30 June 200A the firm declared a net
profit of Rs. 400 ,000. The scrutiny of the profit and loss account revealed that the following deductions
were also made while preparing the financial statements:
1. Income tax for previous year Rs. 30,000
2. Tax at source deducted by the customers 15,000
3. Salary paid to an employee without deduction of tax 200,000
4. Salary paid to partner A 60,000
5. Interest paid to partner B 5,000
6. Salary p.m. paid in cash to an employee - (Tax at source was deducted) 40,000
7. Contribution to unrecognized provident fund 30,000
8. Donations to unapproved institutions 10,000
9. Donations to approved institutions 20,000
10. Manager of the firm was paid the following amounts:
i) Salary 80,000
ii) Perquisites and allowances 50,000
11. Accounting depreciation 55,000
Required: Compute the taxable income of the firm considering that the depreciation under the Income
Tax Ordinance comes to Rs. 45, 000.
Answer:
Computation of Taxable Income Rs. Rs.
Net profit as per profit and loss account 400,000
Add: Deduction not Admissible [N-1]
Income tax [N-2] 30,000
Tax at source [N-3] 15,000
Salary [paid without deduction of tax [N-4] 200,000
Salary Paid to Mr. 'A’ [N-5] 60,000
Interest paid to Mr. ' B’ [N-5] 5,000
Salary paid in cash (40,000 x 12) [N-6] 480,000
Contribution to unrecognized Provident Fund 30,000
Donations to unapproved institutions 10,000
Donations to approved institutions [N-7] 20,000
Salary and allowances to Manager [N-8] Nil
Accounting depreciation [N-9] 55,000 905,000

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1,305,000
Less: Tax depreciation [N-9] 45,000
Total taxable income 1,260,000
Notes:
N-1 The expenses/payments which are not allowed as deduction under the Income Tax Ordinance
shall be added back to the profit or loss computed under the accounting principles.
N-2 Income tax paid is not an expense rather, it is an appropriation of profits, so should not be
allowed as deduction. Tax levied on profit are not allowed as expense.
N-3 Tax deducted at source by the customers is an advance payment of tax on behalf of the firm and
not an expense.
N-4 Any payment made without deduction of tax, if applicable, is inadmissible.
N-5 Any payment to a partner on account of salary, interest, etc., is not allowed as
deduction. It is immaterial that the tax at source has been deducted or not.
N-6 Salary exceeding Rs. 32,000 per month should be paid through cheque or direct transfer to
employee's bank account otherwise, it will be inadmissible.
N-7 Donation to approved institution is not allowed as direct deduction rather, a tax credit is
allowed at the average rate of tax.
N-8 Any payment made to employees on account of salary and allowances , etc., is allowed as
deduction against business income.
N-9 Accounting depreciation is not allowed as deduction. The depreciation computed as per Third
schedule (termed as Tax or Statutory Depreciation) is allowed as deduction.

AMOUNTS SUBSEQUENTLY RECOVERED (70]

Where in any subsequent year a taxpayer has received an amount of such expenditure or loss, which
was allowed as deduction against the income from business in any tax year, such amount shall be
deemed as income from business in the year of receipt.

ABNORMAL LOSSES (77(2)]

Where a business asset is destroyed, lost or stolen the amount representing the loss shall be charged to
the profit and loss account and shall be allowed as deduction while computing the "Income from
Business". The amount of loss is determined as below:
Value of the asset XXX
Less:
Any amount received as salvage value, etc., if any. XXX
Any compensation, indemnity or damages received under:
i) An insurance policy, indemnity or other agreement; XXX
ii) A settlement; or XXX
iii) A judicial decision. XXX XXX
XXX
EXPENSES ON SCIENTIFIC RESEARCH (26]
A person shall be allowed a deduction under the head "Income from Business" if the following
conditions are satisfied :

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1 It is a scientific research expenditure incurred in Pakistan.

2. The expenditure is wholly and exclusively incurred for the purpose of deriving income from a
business, which is chargeable to tax.

'Scientific research expenditure' means any expenditure on scientific research undertaken in Pakistan
for the purpose of developing the person's business. It also includes any contribution to 'scientific
research institute' to undertake research for the purposes of the person's business. However. it does
not include expenditure in respect of the:
i) Acquisition of a depreciable asset;
ii) Acquisition of an intangible;
iii) Acquisition of immovable property; or
iv) Ascertaining the existence, location, extent or quality of a natural deposit.

'Scientific research’ means any activity in the field of natural and applied science for the development of
human knowledge.

'Scientific research institute’ means any institution certified by Board as conducting scientific research
in Pakistan.

EXPENSES ON EMPLOYEES' WELFARE ANP TRAINING (27]

A person deriving income from business shall be allowed a deduction in respect of any
expenditure incurred by him during the tax year on:
1. Any educational institution in Pakistan established for the benefit of his employees and their
dependents;
2 Any hospital in Pakistan established for the benefit of the employees and their
dependents:
3. Any institution meant for the training of industrial workers. if it is recognized, aided or run by
the Government (Federal, Provincial or Local): and.
4. Training of any Pakistani in connection with a scheme specially approved by Board for this
purpose.

APPORTIONMENT OF COMMON EXPENDITURE, DEDUCTION AND ALLOWANCE [67)

It may happen that a common expenditure, deduction and allowance is incurred for different purposes.
Such expenditure, etc., shall be apportioned amongst all such activities to which it relates. The
apportionment shall be on some reasonable basis taking into account the nature and size of the
activities for which expenditure, etc., is incurred. Apportionment of expenditure is necessary if it is
incurred for:
1. More than one head of income;
2. Incomes taxable under normal tax regime (NTR) and income taxable as a separate block of
incomes (u/s 5, 6 & 7); or
3. Income, which is taxable under the Income Tax Ordinance and some other purpose (e.g.,
personal expenses).

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Rules for Apportionment of Common Expenditure, Deduction and Allowance [Rule-13)

The provision relating to the apportionment of expenditures, etc., are summarized below:
1. Any expenditure, etc., that is incurred for particular class of income shall be allocated to that
class only.
2. Any expenditure, etc., that is incurred for particular classes of income shall be apportioned to
those classes only.
3. Any common expenditure, etc., (including financial expenses) shall be apportioned amongst
each class of income according to the following formula:
Amount of Expenses, etc ., x Gross Receipts for the Class of Income
Gross Receipts for All Classes of Income
4. 'Gross receipt ' means net off receipts or turnover of sales tax and federal excise duty paid.
5. While allocating common expenditure, etc., (particularly the selling expenses) the nature and
source of each class of income must be taken into account.
6. The basis determined for allocation of expenditure, etc., should be certified by a Chartered
Accountant or a Cost and Management Accountant. This certificate would be accepted by CIR
unless there is a significant variation (i.e., 10% beyond the limits) from allocation under the
rules.
Notes:
1. In the formula "gross receipts" means all receipts without deduction of expenditures.
2. Where in case of certain transaction the net gain, brokerage, commission and other income is
taken as turnover. then the gross profit from business shall be taken as gross receipts (for the
purpose of apportionment of expenditure).
The term 'Gross Receipt' means net off receipts or turnover of Sales Tax or Federal Excise Duty paid.
i) Income fall under NTR
ii) Income exempt from Tax.
iii) Income chargeable to tax under separate tax regime - STR (u/s 5. 6 and 7).
iv) Income chargeable to tax under final tax regime - FTR (u/s 169).
3. "Common expenditure, deduction and allowance" means an expenditure. deduction and
allowance that are not clearly allocable to any particular class or classes of income (e.g., general
administrative expenses) .

NON-PAYMENT OF A LIABILITY [34(5) & (6))

Where a person has been allowed a deduction on account of an expenditure and liability in respect of
such expenditure is not paid within three (3) years of the end of the tax year in which it was allowed.
such a liability shall be treated as income from business after the expiry of above said three (3) years.
If the taxpayer pays the liability after the year in which it is treated as income, it will be allowed as
deduction against the income from business for the tax year in which payment is made.

BENEFIT FROM A TRADING LIABILITY [34(5A)]

Where a deduction has been allowed in respect of any trading liability and subsequently the taxpayer
has derived any benefit in respect of such trading liability, the value of such benefit shall be chargeable

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to tax, as "Income from Business" for the tax year in which benefit has been received. Cash discount (ie.
discount on earlier payment of a debt) is one of the examples of a benefit from a trading liability.

Exercise:
XYZ Limited engaged in the business of manufacturing and sale of chemicals has incurred the following
expenditures for tax year 2025:
(i) Rs. 150,000 given as a scholarship to Mr. Sameel, a citizen of Pakistan, for his technical
training in connection with a scheme approved by the Federal Board of Revenue under the
relevant provision of the law. Mr. Sameel is not an employee of XYZ Ltd
(ii) Maintenance of XYZ’s shares records has been outsourced. The total expenditure incurred
was Rs. 400,000, including the fee paid of Rs. 245,000 to increase the company’s authorized
capital.
(iii) Contribution of Rs. 200,000 to unrecognized provident fund. XYZ Ltd, in its accounting
system, has ensured that when any payment is made from the fund to an employee, tax
would be deducted at source from the amount of the payment, if the amount is chargeable
to tax as the salary income of the employee.
(iv) Rs. 50,000 paid as motor vehicle tax on the company’s vehicles.
(v) Rs. 500,000 paid for the valuation of the assets of another company which XYZ Ltd intended
to acquire.
(vi) Rs. 45,000 paid as a penalty imposed by the Commissioner for late filing of the annual return
of income for the tax year 2024.
(vii) New computer purchased for Rs. 300,000 on 20 June 2025 for which installation could not
be made until 15 July 2025.
(viii) Compulsory annual fee of Rs. 400,000 paid in cash, to the Engineering Development Board
established by the Federal Government.
(ix) Donation in kind to a relief fund runs by the Government of Sindh.
(x) Rs. 1,530,000 out of travelling expenses, being the travel and hotel expenses for XYZ’s
technical manager’s visit to Japan. The travel to Japan was entirely for business purposes. It
was necessary for the firm’s technical manager to travel to Japan for the purpose of
selecting a second-hand mixing machine, so as to ensure that the machine was compatible
with the company’s existing plant.
(xi) Cash flow statement shows that an amount of Rs. 2 million has been paid as legal and
professional charges to one of the company consultants. The said amount was overdue
since tax year 2017. XYZ Ltd has claimed this amount as an expense in tax year 2025 also.
(xii) XYZ Limited entered into a forward contract for the purchase of raw materials used in its
business of manufacturing edible oils to guard against loss through price fluctuations. On
the date of maturity of the forward contract, XYZ Ltd did not take delivery of the raw
materials but the contract was settled by a payment of Rs. 950,000.
Required
Being tax consultant of the company you are required to explain the admissibility/inadmissibility of the
above along with reason keeping in view the provisions of the Income Tax Ordinance, 2001

Answer
(i) Since the scholarship has been granted to a Pakistani citizen for his technical training
under a scheme approved by the Federal Board of Revenue, the expenditure is admissible.
The beneficiary of the scholarship does not need to be an employee of the taxpayer.
[S.27(c)]

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(ii) The total amount of expenditure being of revenue in nature is admissible.

(iii) A contribution to a recognized provident fund is an allowable deduction. A contribution
made to an unrecognized provident fund is not deductible: u/s 21(e) of the ITO, 2001
although admissible expenses u/s 21(f) as the employer has made effective arrangements
to ensure that tax would be deducted from any payments made by the fund in respect of
which the recipient is chargeable to tax under the head ‘Salary’
(iv) Motor vehicle tax is for the purposes of business and revenue in nature. Further, it does
not fall in the list of inadmissible deductions. [S.20(1) read with S.21(a)]
(v) Expenses incurred at Rs. 500,000 relate to the acquisition of another company. The
expense, therefore, being capital in nature, is disallowed. [S.21(n)]
(vi) A penalty of Rs. 45,000 paid for the late filing of a return of income is an inadmissible
expense on either of the following two grounds:
(a) A penalty for the late filing of a return of income is included in tax as defined in the
Income Tax Ordinance, 2001 (the ‘Ordinance’). Tax is an inadmissible deduction under the
law. [S.21(a)]
(b) It was imposed for violation of the provisions of the Ordinance, hence not admissible.
[S.21(g)]
(vii) A computer costing Rs. 300,000 was not put to use during the year ended 30 June 2025
hence is not entitled to any Depreciation / initial allowance.
(viii) Any expenditure, in aggregate, under a single accounting heading in excess of Rs. 250,000
other than by crossed bank cheque or crossed bank draft or any other banking instrument
is not deductible with certain exceptions. One of the exceptions is any fee expenditure.
Hence, the Rs. 400,000 paid, in cash, to the Engineering Development Board established
by the Federal Government is allowable and no adjustment is required. [2nd proviso to
S.21(l)]
(ix) A donation in kind to a relief fund run by the Government of Sindh is not for the purpose
of business, hence not allowable as expenditure. However, it is eligible for tax credit under
the law. [S.20(1)& 61]
(x) The expenditure of Rs. 1,530,000 incurred solely to secure the purchase of a mixing
machine, is capital expenditure and is not deductible. Rs. 1,530,000 should be added to
the cost of the mixing machine for tax purposes.
(xi) Where a person has been allowed a deduction for any expenditure incurred in deriving
income chargeable to tax under the head Income from Business and the person has not
paid the liability or a part of the liability to which the deduction relates within three years
from the end of the tax year in which the deduction was allowed, the unpaid amount of
the liability shall become chargeable to tax under the head Income from Business in the
first tax year following the end of those three years.
However, if the person subsequently pays the liability or a part of the liability, the person
shall be allowed a deduction for the amount paid in the tax year in which the payment is
made. [Ref: S 34(5) and 34(6)]
(a) Therefore, amount will be added back to the taxable income of the taxpayer in tax
year 2022, whereas it will be again allowed as an expense in tax year 2025.
(xii) The forward contract entered into by XYZ Ltd for the purchase of raw materials used in
its business of manufacturing edible oils is in the nature of a hedging contract which was
entered into to guard against loss from future price fluctuations. Such contracts have
specifically been excluded from the definition of speculative business [S.19 (2)]. Therefore,
the Rs. 950,000 paid to settle the forward contract is an expenditure incurred in the
normal course of business and is a deductible expenditure

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Debt [Section 2(15)]

Debt means any amount owing, including accounts payable and the amounts owing under promissory
notes, bills of exchange, debentures, securities, bonds or other financial instruments.
Bad debts (Sec 29)
 A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are
satisfied, namely:
o The amount of the debt was:
 previously included in the person’s income from business chargeable to tax; or
 in respect of money lent by a financial institution in deriving income from
business chargeable to tax;
o The debt or part of the debt is written off in the accounts of the person in the tax year;
and
o There are reasonable grounds for believing that the debt is irrecoverable.
 The amount of the deduction allowed to a person for a tax year shall not exceed the amount of
the debt written off in the accounts of the person in the tax year.
 Where a deduction is allowed in a tax year for a bad debt written off and in a subsequent tax
year the person receives in cash or kind any amount in respect of that debt, a computation shall
be made as under:
a- b
Here
(a) is amount received against the written off debt; and
(b) is the difference between whole amount of bad debt and bad debt allowed as a
deduction under Income Tax Ordinance, 2001.
If (a) is greater than (b), the difference shall be treated as income of the person. In other case, where (a)
is less than (b) the difference shall be treated as bad debts for the year in which the amount is received.

Exercise:
Ms. Shagufta is running a business in the name of Al Nafay Business Solutions. In the tax year 2024, she
claimed bad debts of Rs. 1,000,000 and Rs. 1,500,000 from its clients Mr. Junaid and Mr. Nawaz. She was
allowed deduction of bad debts of Rs. 750,000 and Rs. 800,000 with respect of receivable from Mr.
Junaid and Mr. Nawaz in Tax year 2024. During 2025, she received following sums from these two
debtors:
Mr. Junaid Rs. 900,000
Mr. Nawaz Rs. 500,000
Work out the amount to be added/allowed on account of bad debts in the tax year 2025.
Solution
Mr. Junaid
Amount Received Rs. 900,000
Less:
Difference between:
Actual Bad debts Rs. 1,000,000
Less: Bad Debts Actually allowed as
Deduction Rs. 750,000
Rs. 250,000

Excess income to be added in the income for the tax year 2024. Rs. 650,000
Mr. Nawaz
Mr. Junaid

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Amount Received Rs.500,000

Less:
Difference between:
Actual Bad debts Rs. 1,500,000
Less: Bad Debts previously allowed as
Deduction Rs.800,000
Rs. 700 000
Less: amount received will be allowed deduction
for the tax year 2025 (Rs. 200,000)

Example:
M/s. Lyallpur Cotton Mills Limited was allowed a deduction on account of bad debts amounting to Rs.
60,000 as against the actual bad debts of Rs. 100,000. After two years the company receives an amount
from the debtors rendered as bad. Determine the amount to be included in total income or allowed as
deduction if the amount so received is:
1. Rs. 100,000; or
2. Rs. 35,000
Answer:
Recovery of Rs. 100,000 Rs. Rs.
Amount recovered from bad debts 100,000
Less:
Total bad debts
Less: Amount allowed as deduction 100,000
Amount to be included in total income 60.000 (40,000)
60,000

2. Recovery of Rs. 35,000

Amount recovered from bad debts 35,000
Less: Total bad debts 100,000
Less: Amount allowed as deduction 60,000 (40,000)
Amount to be allowed as deduction (5000)

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ASSETS AND DEPRECIATION

ASSETS
The term 'asset' has been defined in different ways by accounting and legal experts. Some selected
Definitions are given below.
"Asset means any resource, tangible or intangible, from which future benefits are expected and the
rights to which have been acquired as a result of a past or present transaction." (Macmillan Dictionary of
Accounting).
The Income Tax Ordinance, 2001 recognizes the following types of assets
1. Capital asset; 2. Depreciable asset;
3. Eligible depreciable asset; 4. Intangible;
5. Pre-commencement expenditure; and 6. Stock-in-trade

DEPRECIABLE ASSET [2(17) & 22(15)]

Briefly any tangible moveable or immovable property having normal useful life more than one year and
is being used by the owner for his business purposes is a depreciable asset (For detailed definition, see
that part of this chapter which deals with the Depreciation).

ELIGIBLE DEPRECIABLE ASSET (23(5)]

"Eligible Depreciable Asset "means a depreciable asset other than the following assets:
1. Any road transport vehicle unless the vehicle is plying for hire. (A vehicle which is plying for hire
will be eligible depreciable asset);
2. Any furniture or fittings;
3. Any plant or machinery that has been used previously in Pakistan; and
4. Any asset whose total cost has already been allowed as deduction in the tax year in which it is
acquired.
5. Immoveable property or structural improvements to the immoveable property.
Note: Based on the definition, a large number of assets may be termed as 'Eligible
Depreciable Asset ' However, this classification of asset is meant only for the purpose of some special
depreciation allowance u/s 23, 23A or 23B of the Income Tax Ordinance.
According to the currently applicable provisions of the law (i.e., Part-II of the Third Schedule) only the
following assets may fall under this category of assets:
1. Plant and machinery;
2. Plant, machinery & equipment installed by an industrial undertaking set up in specified rural and
under-developed areas or engaged in manufacturing of cellular phones; and
3. Plant, machinery & equipment installed for generation of alternate energy by an industrial
undertaking.
INTANGIBLE:2(30) & 24(11)]
Intangible means asset or expenditure of following types if it provides an advantage or benefit for a
period of more than one year:
1. Patent; 2. Invention;
3. Design or model; 4. Secret formula or process;

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5 Copy right; 6. Trade mark;

7. Scientific or technical knowledge; 8. Computer software;
9. Motion picture film; 10. Export quotas;
11. Franchise; 12. License;
13. Intellectual property; 14. Other like property or right;
15. Contractual rights; or
16. Any other expenditure that provides benefit for a period of more than one year.
Note: Expenses relating to above items shall be amortized according to section 24 of Income Tax
Ordinance instead of allowing them as straight deduction. [FBR's Circular No. 7 of 2003, dated 11-07-
2003]

PRE-COMMENCEMENT EXPENDITURE (2(43) & 25(5)]

Broadly speaking ' Pre-Commencement Expenditure" is not an asset; rather, it is an expense. But as it
provides benefit for more than one year, it is amortized over a period of five (5) years. It is sometimes
termed as 'deferred revenue expenditure' or "fictitious asset".
Under the income Tax Ordinance, 2001 ' Pre-Commencement Expenditure' means any expenditure.
Incurred before the commencement of such business the income of which is chargeable to tax. It
includes:
1. Incorporation expenses; 2. Cost of feasibility studies;
3. Cost of construction of prototypes; and 4. Cost of trial production activities.
However, any expenditure, which is incurred for acquiring any land, depreciable asset or intangible, shall
not be included in 'pre-commencement expenditure'. The expenses shall form part of such asset for
which these were incurred.
STOCK-IN-TRADE [2(62) & 35(7)]
Stock-in-Trade means anything produced, manufactured, purchased or otherwise acquired for
manufacture, sale or exchange. It also includes any material or supplies that are to be consumed in the
production or manufacturing process.
However, stocks or shares do not form part of the 'stock-in-trade'. It means that shares, etc. will never
be treated as stock-in-trade even if these are held for business and sale purposes.
ACQUISITION OF AN ASSET [75(5) & (6)]
A person shall be treated as having acquired an asset at any of the following times:
1. When he begins to own an asset;
2. When he is granted any right to own an asset; or
3. When a personal asset is applied for business use.

DISPOSAL OF AN ASSET [2(18) & 75(1) to (4)]

Disposal of an asset means to pass over an asset to some other person. In its general meanings it
denotes the change in ownership of an asset Under the Income Tax Ordinance. 2001 a disposal may take
place when an asset is: [75(1)]

1. Sold; 2. Exchanged;
3. Transferred; 4. Distributed;

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5. Cancelled; 6. Redeemed;
7. Relinquished (to abandon, give up or renounce some right or thing);
8. Destroyed: 9. Lost;
10. Expired; 11. Surrendered;
12. Transmitted by succession or under a will;
13. In case of a business asset applied to personal use; or [75(3)]
14. In case of a business asset discarded or ceased to be used in business. [75(3A)]
Notes:
1. In case of transmission by succession or under a will, the time of disposal of an asset shall be the
time at which it is transmitted. [75(2)]
2. An asset may be disposed in full or in parts. [75(4)]
3. "Business asset' means an asset (including stock-in-trade and a depreciable asset), which is held
wholly or partly for use in a business. [75(7)]
4. "Personal asset' means an asset, which is held wholly for personal use. [75(7)]
COST OF AN ASSET [76]
The cost of an asset acquired by a person shall be determined in accordance with the following rules.
Purchase of an Asset [76(2)]
Where a person purchases an asset. Its cost of acquisition shall include the following amounts:
1. Consideration paid for the asset. The consideration may be in cash or in kind. Where the
consideration is in kind then the fair market value of an asset given as consideration (on the
date when new asset is acquired) shall be taken as consideration for new asset.
2. Expenses incurred on acquisition of an asset.
3. Expenses incurred for alteration or improvement of an asset.
4. Expenses incurred on disposal of an asset.
Note: Inclusion of 'disposal expenses ' in cost is against the basic definition of the term "cost" as these
expenses are incurred at the time of disposal of an asset and not at the time of acquisition. However, it
seems that in order to render the tax law compatible with International Accounting standards the law
makers have included disposal expenses in the definition of 'cost of acquisition'. In this way disposal
expenses are allowed as deduction while computing the gain or loss on disposal of an asset.
Example:
Usama Limited purchased a vehicle for Rs. 190,000 and incurred Rs. 10.000 on its registration. After
three (3) years the company sold out the vehicle for Rs. 160,000. The total accumulated depreciation till
the time of disposal (as per tax record) was Rs. 97,600. An amount of Rs. 5.000 was expended on the
disposal.
Required: Compute the gain I (loss) on disposal of the vehicle.
Answer:
Disposal Consideration Rs. 160,000
Less: Written down value at the time of disposal Cost:
Purchase Price Rs. 190,000
Expenses on Registration 10,000
Expenses on disposal 5,000
Total 205,000

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Less: Accumulated depreciation (97,600) (107,400)

Gain on disposal of vehicle 52 600
Personal Asset Treated as Business Asset [76(3)]
Where a personal asset is applied for business and treated as acquired by the business, then the fair
market value at the time the asset is applied for business shall be taken as cost of the asset to the
business.
Asset Produced or Constructed by a Person [76(4)]
Where a person has himself produced or constructed an asset. then the following amounts shall be
included in the cost of such asset:
1. Total costs incurred in producing or constructing the asset.
2. Expenses incurred on bringing the asset in useable condition.
3. Expenses incurred for alteration or improvement of an asset.
4. Expenses incurred on disposal of an asset.
Example:
Progressive Limited purchased a machine for Rs. 1,350,000. The company incurred the following
expenses in respect of the machine:
Freight, Octroi and other charges Rs. 15,000
Loading and unloading charges 2,000
Spares purchased for erection of the machine 3,000
Labour and other expenses connected with erection. 5,000
Wages paid to the worker during the month of erection of machine 5,000
Oil and lubricants during the month 500
Required: Compute the cost of the machine.
Answer:
Cost of the Machine Rs. Rs.
Purchase price 1,350,000
Add: Expenses on bringing the machine in useable condition:
Freight, etc. 15,000
Loading unloading 2,000
Spares 3,000
Labour charges 5,000 25,000
Total cost of the machine 1,375,000
Note: Expenses incurred after the erection of the machine, (e.g., wages to workers and oils
& lubricants) are ignored while computing the cost of an asset.

Asset Acquired with a Foreign Currency Loan (76(5) & (6)]

Where an asset is acquired with a loan in foreign currency and exchange rate fluctuation increases or
decreases the liability of the person in Pak rupees, then any increase or decrease in the liability, before
full and final repayment of the loan shall also be added to or deducted from the cost of the asset.
Notes:
1. For the purpose of depreciation, difference on account of foreign currency fluctuation, if any,
shall be taken into account in the year of occurrence.

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2. The terms and conditions of any hedging agreement shall be considered in determining whether
the exchange rate fluctuation has any effect on the increase or decrease in a person's liability.
[76(6)].
3. Where an asset is acquired against a foreign currency loan and, as a result of hedging
agreement, there is no change in the liability of the person in local currency then, there will be
no change in the cost of the asset.
Example:
Lalazar Limited acquired a foreign currency loan amounting to US$ 40 ,000 in the beginning of the year
200A The loan was repayable in eight (8) half-yearly installment of US $ 5,000. The loan was utilized for
import of a plant valuing equal to the amount of loan. At the time of obtaining the loan and importing
the plant one US Dollar was equal to Rs. 180 the Company incurred the following expenses in
connection with the plant:
Insurance and sea freight Rs. 20,000
Port expenses 5,000
Customs duty and excise duty on import 55,000
Inland freight and octroi charges 10,000
Expenses on installation of plant 10,000
After payment of four installments the exchange rate fluctuated and next two installments were paid
@ Rs. 185 and Rs. 190, respectively , per one US$.
Required: Compute the cost of the plant prior to and after the change in exchange rate (i.e .. in year
200A and 200C respectively). Also compute the depreciation for the years 200A, 200B and 200C
assuming that the depreciation is charged @ 15% on WDV.
Answer:
Cost of plant prior to change (i.e., in year 200A)
Purchase price (US $ 40,000 @ Rs. 180) Rs. 7,200,000
Add: Other Costs:
Insurance and sea freight 20,000
Port Expenses 5,000
Customs duty and excise duty 55,000
Inland freight and octroi 10,000
Installation expenses 10,000
Total Cost 7,300 000
Cost of Plant after Change (i.e., in year 200C)
Total cost prior to change (as above) Rs. 7,300,000
Add: Increase in liability due to the change in exchange rate [N-1) 175,000
Total cost after change 7,475 000
N-1 Increase in liability due to the change in exchange rate:
Increase in 5th installment $ 5,000 x Rs. 5 (i.e., Rs. 185 - Rs. 180) 25,000
Increase in 6th installment $ 5,000 x Rs. 10 (i.e., Rs. 190 - Rs. 180) 50,000
th th
To be increase in 7 and 8 installation (10,000 X (190-180)) 100,000
Total increase in liability 175,000

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Computation of Depreciation
Year 200A
Total cost of plant Rs. 7,300,000
Initial allowance (7,300,000 X 25%) 1,825,000
Depreciation (Rs. 7,300,000 x -1,825,000) X 15% 821,250
2,646,250
Year 200B
Total cost Rs. 7,300,000
Less Depreciation for year 200A and initial allowance 2,646,250
Written down value 4,653,750
Depreciation (Rs. 4,653,750 15%) 698,063
Year 200C
Total cost Rs. 7,475,000
Less Accumulated depreciation and initial allowance
(Rs. 2,646,250 + Rs. 698,063) 3,344,313
Written down value 4,130,687
Depreciation (Rs. 4,130,687 x 15%) 619,603

Example:
Using the data of Lalazar, compute the total cost and depreciation for the year 200D assuming that on
first day of the year 200D the exchange rate became Rs. 176 per US$. The remaining two installments
were paid on this rate.
Answer:
Total cost prior to change in year 200D Rs. 7,475,000
Less Decrease in liability due to change [N-1) (140,000)
Total cost after change 7,335,000

N-1 Decrease in Liability due to change in exchange Rate

Total loan repaid in 200D (5,000 x 2) US$ 10,000
Liability in Pak Rupees already booked (10,000 x 190) 1,900,000
Liability in Pak Rupees already paid (10,000 x 176) 1,760,000
Decrease in liability 140,000
Depreciation for year 200D
Total cost Rs. 7,335,000
Less Accumulated depreciation
Initial allowance Rs. 1,825,000
Year 200A 821,250
Year 200B 698,063
Year 200C 619,603 3,963,916
Written down value 3,371,084
Depreciation (Rs. 3,371,084 x 15%) 505,663

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Asset Acquired From Any Subsidy, Etc. [76(10))

The amount of any grant, subsidy, rebate, commission or any other assistance received or receivable in
respect of acquisition of an asset shall not be included in the cost of such asset. However, where the
amount of grant, etc. is chargeable to tax under the Income Tax Ordinance, 2001 then such amount shall
also be included in the cost of the asset.

Example:
A charitable institution received a grant of Rs. 150,000 for purchase of some equipment. The required
asset was purchased against Rs. 170,000. Compute the cost of the asset in each of the following
conditions:
1 The grant is not chargeable to tax; and
2. The grant is chargeable to tax.
Answer:

1. Grant not Chargeable to Tax Rs.

Purchase value of equipment 170,000
Less Grant received for the equipment 150,000
Cost of the asset 20,000
2. Grant Chargeable to Tax
Under this case Rs. 170,000 will be the cost of the equipment as the grant received is chargeable to tax.
The amount of grant shall be included in the income of the institution and the total amount paid for the
asset shall be the cost of the asset.
Where Acquisition of an Asset is Derivation of an Amount Chargeable to Tax [76(8)]
Where the acquisition of an asset by a person is the derivation of an amount chargeable to tax. the cost
of the asset shall be the amount so charged plus any amount paid by the person for the asset.
Where Acquisition of an Asset is Derivation of an Amount Exempt from Tax [76(9)]
Where the acquisition of an asset by a person is the derivation of an amount exempt from tax, the cost
of the asset shall be exempt amount plus any amount paid by the person for the asset.
Explanation
The immediately preceding two cases lay down the procedure for determining the cost of an asset
under two different situations, i.e. The asset is acquired out of an amount which is:
1. Chargeable to tax; or
2. Exempt from tax.
Under both the cases the amount to be taken as cost shall be the same. According to these provisions it
is not the source of income from which the asset is acquired rather the consideration which determines
the cost of an asset.
A taxpayer has two sources of income (i.e., an agricultural income which is exempt from tax and a
business income which is chargeable to tax). He wanted to acquire an asset. For this purpose, he may
utilize the exempt income or taxable income. Under both the cases the cost of the asset shall be the

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consideration for acquiring the asset and any other amount paid for bringing the asset in useable
condition.

Note: It is important to note that cost of an asset acquired from an exempted income and an asset
acquired from any grant. Subsidy, etc., shall be determined differently. Under the first case, total
amount expended in respect of the asset shall form part of the cost. However, under the second case,
the cost determined as above shall be reduced by the amount of grant. subsidy etc., received in this
connection if the grant, etc., is not chargeable to tax.

Disposal of an Asset in Parts [76(7)]

In a case where a part of an asset is disposed off, the cost of the asset shall be apportioned between the
part of the asset disposed off and the part that is retained in the business. The cost of the asset is
apportioned on the basis of the fair market value of both parts at the time of acquisition of the asset.

FBR's Power to Prescribe Rules [76(11)]

FBR is empowered to prescribe Rules for determination of cost of any asset. If so prescribed, the cost of
such assets shall be determined in the light of such rules. Asset Acquired on Disposal of an Asset under
Compulsory Acquisition [79 (4)] Where a person acquires an asset against the consideration of another
asset which was disposed of by reason of a compulsory acquisition under any law, then cost of such
asset shall be determined as below:
Cost of the asset disposed of XXX
Add: Consideration given for replacement asset XXX
Less: Consideration received for disposal of asset (XXX) XXX
Total cost of the replacement asset XXX

This method of cost determination shall be adopted only if the consideration received is reinvested in
acquisition of an asset of a like kind within a period of one year of the disposal.
Example:
An asset of a taxpayer (costing Rs. 450,000) was acquired by the Government against Rs. 600,000. The
taxpayer purchased another asset of the same nature for Rs. 650,000.
Determine the cost of the replacement asset purchased by the taxpayer.
Answer: Rs. Rs.
Cost of the asset disposed off 450,000
Add: Consideration for replacement asset 650,000
Less: Consideration received for disposal 600,000 50,000
Cost of the replacement asset 500,000
Note: Although the replacement asset is purchased for Rs. 650,000 but its cost for tax purposes shall be
taken as Rs. 500,000.
Example: 10.7
Considering the information contained in Example 10.6 compute the cost of the replacement
asset if the new asset is purchased for Rs. 550,000.

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Answer: Rs. Rs.

Cost of the asset disposed off 450,000
Add: Consideration for replacement asset 550,000
Less: Consideration received for disposal (600,000) (50,000)
Cost of the replacement asset 400,000

CONSIDERATION ON DISPOSAL OF AN ASSET [77)

At the time of disposal of an asset, the gain or loss on disposal is computed and charged to the profit &
loss account so as to arrive at the actual income of a person. An important element in this regard is the
value of the consideration received on disposal of an asset. Below is a summary of the provisions of the
Income Tax Ordinance, 2001 in this regard.
Disposal Consideration on Sale of an Asset [77(1))
Where an asset is sold out, the higher of the total amount received for the asset or its fair market value
shall be the consideration. Where the consideration is received in kind, then the fair market value of the
asset or thing received (at the time of disposal) shall be the consideration.
Disposal Consideration in Case of a Lost or Destroyed Asset [77(2))
Where an asset has been lost or destroyed, the disposal consideration for such asset shall consist upon
the following amounts:
1. Any amount received as salvage value, etc., if any.
2. Any compensation, indemnity or damages received under:
i) An insurance policy, indemnity or other agreement;
ii) A settlement; or
iii) A judicial decision.
Consideration of an Asset Applied for Personal Use [77(3))
Where a business asset is applied for personal use, then its fair market value at the time it is so applied
shall be taken as disposal consideration.
Consideration of a Discarded Asset [77(3))
Where a business asset is discarded or ceases to be used in business, then its fair market value at the
time it is discarded, etc., shall be taken as disposal consideration.

DEPRECIATION RULES
The Third Schedule to the Income Tax Ordinance, 2001 specifies rates at which the depreciation shall be
allowable under the law. These rules, etc., are briefed in the coming paragraphs.

ASSETS ON WHICH DEPREICATION IS ALLOWED [2(17) & 22 (1), (2) & (15)]
Depreciation under Income Tax is allowed on "depreciable asset", used by a person for his business.
Depreciation is computed by applying the depreciation rates specified in Third Schedule to the Income
Tax Ordinance. (22(1) & (2)]
"Depreciable asset" means a property which fulfills the following conditions:
1. It is owned by the person whose taxable income is being determined.
2. It should be any:

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i) Tangible moveable property;

ii) Immovable property (other than unimproved land); or
iii) 'Structural improvement' to immovable property.
'Structural Improvement' means any building, road, driveway , car park, railway line, pipe line, bridge,
tunnel, airport runway , canal, dock, wharf, retaining wall, fence, power lines, water and sewerage
pipes, drainage, landscaping or dam.
3. The property:
i) Has a normal useful life exceeding one year;
ii) Is likely to loose value as a result of normal wear and tear or obsolescence; and
iii) Is used wholly or partly by the owner in deriving income from business
chargeable to tax.
However, where the total cost of any asset has been allowed as a deduction in the year of its acquisition
then such asset shall not be included in "depreciable asset".
A depreciation allowance is admissible only if the assets are owned and used by a taxpayer for his
business. The depreciable assets may fall under any of the following categories:
1. Buildings; 2. Machinery;
3. Plant; 4. Furniture, fixture and fittings;
5. Ships;
6. Computer hardware, allied accessories and machinery and equipment used in manufacture of IT
products;
7. Technical or professional books; 8. Vehicles;
9. Aircraft, etc; 10. Below ground installations; and
11. Offshore platforms and production installation in mineral oil concerns.

ASSET USED PARTLY FOR BUSINESS [22(3))

Where an asset is used partly for business and partly for other purposes, then only that proportion of
the depreciation shall be allowed as deduction, which fairly relates to the business. It means that
depreciation allowed as well as disallowed shall be deducted from the cost of the asset in arriving at the
WDV. However, the WDV of the asset shall be increased by the amount of depreciation disallowed on
account of non-business use at the time of disposal.

Example:
Mr. Saif owns a building in which he carries on his business and also resides with his family. Only 1/4th
of the building is used for his business. Compute the depreciation allowance chargeable to business if
the cost of the building is Rs. 400 ,000/-. (Ignore the initial allowance). Assume that building is acquired
before 1 July 202A.
Answer: Rs.
Written down value (WDV) at the beginning (i.e., Cost) 400,000
Depreciation rate as per Third Schedule 10% of WDV
Depreciation for the building (400,000 x 10%) 40,000
Depreciation chargeable to business (40,000 X 1/4) 10,000
WDV of the asset carried Forward (For Depreciation) 360,000

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Note:
If Asset is sold in 202B than WDV of the asset will be (360,000+30,000) = 390,000
Initial Allowance is fully chargeable to business. No need to apportion initial allowance.

ASSET NOT USED FOR WHOLE YEAR

Where an asset is not used for the whole of the tax year, the depreciation in respect of such asset also
shall be charged for the whole year. In other words, full depreciation shall be charged for the year of
acquisition. But no depreciation shall be charged in the year when the asset is disposed.

TREATMENT OF DEPRECIATION WHERE BUSINESS IS EXEMPT [Proviso to 22(5)]

Business is Permanently Exempt:
Where income from a business is permanently exempt from tax, the person is not obliged to follow the
rules for depreciation allowance under the Income Tax Ordinance, 2001. The person may charge
depreciation as per accounting policies adopted for this purpose.

Business is Exempt for a Certain Period:

Where the income from business is subject to a 'tax holiday' (i.e., exempt from tax for a specific period)
the depreciation allowance (including initial allowance' u/s 23) shall be provided as per normal
procedure. The following procedure shall be adopted in this case:
1. The depreciation for the exempted period shall be deemed to have been allowed for the tax
years during which the income was exempt; and
2. After the exemption period, the depreciation shall be allowed on the WDV at the prescribed
rate. The WDV shall be calculated by deducting the depreciation deemed to have been allowed
from the actual cost of the asset.
Example:
A company was incorporated on 1st day of tax year 200A. It purchased plant and machinery immediate
after its incorporation at a price of Rs. 1,000,000. The company is exempt from tax for five years (i.e., up
to tax year 200E). (Ignore the 'initial allowance').
Required: Compute the amount of depreciation allowance allowable for the tax year 200F.
Answer:
WDV at the beginning of the tax year 200F [N-1) Rs. 443,705
Rate of depreciation 15%
Depreciation for tax year 200F 66,555
N-1 WDV for the tax year 200F:
Actual cost of the Plant and Machinery 1,000,000
Less: depreciation deem to have been allowed up to the tax year 200E (N-2) 556,295
WDV 443,705
Tax Year WDV at the Beginning of the Year Depreciation @15% WDV
200A 1,000,000 150,000 850,000
2008 850,000 127,500 722,500

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200C 722,500 108,375 614,125

2000 614, 125 92, 119 522,006
200E 522,006 78,301 443 ,705
Total 556,295

ASSET WITH USEFUL LIFE UPTO ONE YEAR (22(15)]

Where the useful life of an asset is one year, no depreciation allowance shall be allowed Rather, the
renewal or replacement cost shall be allowed as revenue expenditure.
RATES FOR DEPRECIATION ALLOWANCE [Part I of Third Schedule]
The depreciation allowance in respect of the assets used for the purposes of business shall be computed
at the rates specified in the table given below
S. No. Description Rate on WDV
1 Building (all types). 10%
2 Furniture (including fittings). 15%
3 Machinery and Plant (not otherwise specified). 15%
4 Technical or professional books. 15%
5 Motor vehicles (all types). 15%
6 Ships. 15%
7 Computer hardware, including printer, monitor, allied items
and machinery and equipment used in manufacture of l.T. products. 30%
8 Aircrafts, aero-engines and aerial photographic apparatus. 30%
9 Below ground installation in mineral oil concerns. 100%
10 Offshore platforms and production installations
in mineral oil concerns. 20%
11 A ramp built to provide access to persons with disabilities
not exceeding Rs. 250,000 each. 100%

INITIAL ALLOWANCE FOR DEPRECIATION [23 & Part II of Third Schedule]

In addition to a normal depreciation allowance, an additional depreciation allowance (termed as initial
allowance) shall be allowable deduction against the "Income from Business". The following conditions
apply to the initial allowance:
1. The initial allowance is allowable on "eligible depreciable assets” only.
2. The asset should be newly constructed, erected or installed (i.e., it is placed into service in
Pakistan for the first time in a tax year).
3. The initial allowance shall be admissible in respect of the later of the tax year in which the asset
is used first time in Pakistan or the tax year in which commercial production is commenced.
4. The allowance shall be allowed at 25% applied to the cost of the asset as determined under the
Income Tax Ordinance. 2001.
5. In case of a leasing company the deduction on account of initial allowance in respect of assets
leased by it shall be restricted upto lease rental income only. Any unabsorbed depreciation may
be carried forward for deduction in next years.

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Leasing Company" means any leasing company, investment bank, modaraba, scheduled bank or
development financial institution that has leased its assets to another person.
Note: Initial depreciation on building is not allowed from Tax year 2020.

CONDITIONS APPLICABLE TO DEPRECIATION ALLOWANCE [Rule-12]

An allowance for depreciation is conditional upon the following information:
1. The asset has been used during the tax year; and
2. The particulars prescribed in Rule-12 of the Income Tax Rules, 2002 and the information and
documents required by the Commissioner of Income Tax are duly furnished.

Particulars required to be Furnished [Rule-12]

The following particulars should be furnished to the tax authorities in respect of an asset:
1. Description of the asset (depreciable asset or intangible) in respect of which depreciation
is claimed.
2. The part allocable to business, if the asset has not been used wholly for the business.
3. Number of days for which the asset (i.e., intangible) is used for business.
4. The date of acquisition.
5. WDV of the asset at the beginning of the tax year.
6. Amount of the capital expenditure incurred on:
i) Addition; ii) Alteration;
iii) Improvements; and /or iv) Extensions
7. Sale proceeds of any asset which has been disposed off.
8. WDV of the asset disposed off during the tax year.
9. Total value of each asset on which depreciation is allowable. It will be computed as follows:
WDV at the beginning of tax year XXX
Add: Capital expenditure during the tax year XXX XXX
Less: Initial depreciation allowed. if any XXX XXX

Example:
A company purchased a machine for Rs. 400,000 on the first day of the tax year 2024. Compute the
amount to be allowed as depreciation on machine for the tax year 2024.
Answer:
Cost of the machine Rs.400,000
Initial depreciation as per Third Schedule (400,000 x 25%) (100,000)
WDV for normal depreciation 300 000
Normal depreciation (300,000 x 15%) X 45,000
Total depreciation for the year:
Initial depreciation 100,000
Normal depreciation 45,000
Total 145,000
10. Prescribed rate of depreciation stating separately the rate for:
i) Initial depreciation (also first year allowance & accelerated depreciation); and

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ii) Normal depreciation.

11. Normal useful life for each intangible.
12. Amount of depreciation allowable on account of:
i) Initial depreciation;
ii) Normal depreciation; and
iii) Amortization.
13. Total depreciation and amortization allowed for the tax year.
14. The WDV of each depreciable asset and the cost of intangible at the end of the tax year along
with its remaining normal useful life.
PARTICULARS FOR ASSETS DISPOSED DURING THE YEAR
1. Sale proceeds of the assets disposed off during the tax year,
2. WDV at the beginning of the tax year of such assets which were disposed off during the tax year,
and
3. The excess or deficit on the disposal of assets.

GENERAL PROVISIONS
1. The total amount of the depreciation allowance shall not exceed the original cost of the asset. In
other words, the maximum depreciation allowable under the Income Tax Ordinance is restricted
upto the cost of the asset. [22(7)]
2. Where taxpayer disposes off an asset at any time during the tax year , no depreciation
allowance shall be deductible for the year of disposal. [22(8)]
GAIN OR LOSS ON DISPOSAL OF ASSET [22(8)]
Any gain or deficit on the disposal of an asset shall respectively be taken as profit or loss from the
business and be charged to the profit and loss account.

Example:
Riaz Limited has the following assets at the start of the tax year 2025:
Class of Assets WDV as Per Tax Records
Land Rs. 8,000,000
Building 15,000,000
Plant & Machinery 20,000,000
Motor Vehicle 2,500,000
Computers 450,000
Furniture 100,000
During the tax year the company disposed of the following assets:
Assets WDV Sale Proceeds
Motor Vehicles Rs. 100,000 Rs. 120,000
Computers 75,000 66,000
Furniture 10,000 6,000
WDV was at the start of the tax year before tax depreciation for the year.
The company also purchased the following assets during the year:
Office Furniture Rs. 15,000

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Old Computer 62,500

Required: Compute the amount of depreciation allowance for the tax year and the amount of gain or
loss from the disposal of assets. Ignore initial depreciation

Answer:
Depreciation Allowance for the Year:
Assets WDV whole Year Depreciation
Beginning Addition Deletion asset Rate Allowance
Land 8,000,000 - - 8,000,000 - -
Buildings 15,000,000 - - 15,000,000 10% 1,500,000
Plant &
Machinery 20,000,000 - - 20,000,000 15% 3,000,000
Motor Vehicles 2,500,000 - 100,000 2,400,000 15% 360,000

Computers 450,000 62,500 75,000 375,000 30% 131,250 (w-1)

Furniture 100,000 15,000 10,000 90,000 15% 15,750 (W-2)

Total 46,050,000 77,500 185,000 45,865,000 5,007,000
W-1
(375,000 X 30%) +(62,500 X 30% ) = 131,250
W-2
(90,000 X 15%) + (15,000 X 15% ) = 15,750
W-3
Gain or Loss on Disposal of Assets:
Assets Sale Proceeds WDV Gain/(Loss)
(1) (2) (3) (2) - (3)
Motor Vehicle 120,000 100,000 20,000
Computers 66,000 75000 (9,000)
Furniture 6,000 10000 (4,000)
Total 192,000 185,000 7000

WRITTEN DOWN VALUE (WDV) [22(5)]

The WDV of the assets shall be determined in the light of the following principles: Asset Acquired During
the Tax Year
Where an asset is acquired during the tax year, its WDV shall be computed as below:
Total cost of the asset XXX
Less: Initial allowance, if any XXX
WDV at the beginning of the tax year XXX

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Example:
A company purchased a new machine on the first day of its tax year 2025 for Rs. 100,000. Compute
WDV of the asset at the beginning of the tax year and the total amount to be allowed as depreciation.

Cost of the machine Rs. 100,000

Less: Initial allowance (@25% of cost) 25,000
WDV at the beginning of tax year 75,000
Less: Depreciation allowance {@ 15% of WDV) 11,250
WDV at the end of the tax year 63,750
Depreciation allowed for the year:
Initial allowance 25,000
Normal depreciation 11,250
Total 36,250
WDV of any Asset which is Partly Used for Business [22(6)]
Where an asset is partly used for business and partly for another use, the WDV for depreciation
purposes shall be computed on the basis that the asset has been solely used for business.
Example:
Considering the already discussed example under the title "Asset Partly Used for Business" the WDV for
second tax year shall be computed as below:
Cost of the building (1/4 the being used for Business) Rs. 400,000
Total depreciation (@ 10% of WDV) for first year 40,000
WDV at the end of first year (and at the beginning of the second year) 360,000
Total depreciation (@ 10% of WDV) for second year 36,000
WDV at the end of second year 324,000
Total depreciation allowed as deduction
i) For first tax year (1/4th of Rs. 40,000) Rs. 10,000
th
ii) For second tax year (1/4 of Rs. 36,000) 9,000 19,000
Depreciation not allowed as deduction
i) For first tax year (Rs. 40,000 - Rs. 10,000) Rs. 30,000
ii) For second tax year (Rs. 36,000 - Rs. 9,000) 27,000 57,000

Gain or Loss on Disposal of an Asset which is Partly Used for Business [22(9)]
The gain or loss on disposal of an asset is computed by deducting the WDV out of the consideration
received against the asset. In case of an asset which is partly used for business, the WDV may be
computed in any of the following ways:
1. Cost of the asset XXX
Less: Total depreciation allowed on asset till its disposal XXX XXX
OR
2. WDV computed for depreciation purpose XXX
Add: Total depreciation not allowed XXX XXX

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Example:
Assume that the building discussed in earlier Example is disposed off during the third year for Rs.
390,000. The gain or loss on its disposal shall be computed as below:
Disposal consideration 390,000
Less: WDV at the time of disposal (400,000 - 19,000) OR (324,000 + 57,000) 381,000
Gain on disposal 9,000
Asset Acquired Prior to the Tax Year
Where an asset was acquired at any time before the tax year, the WDV shall be determined as per the
following:
Actual cost of the asset at the time of acquisition. XXX
Less: Total depreciation (normal and special) allowed before the tax year. (XXX)
WDV at the beginning of the tax year. XXX

EXCEPTIONS REGARDING COST INCURRED AND CONSIDERATION RECEIVED [22(11) & (13)]
While determining the cost of acquisition of an asset, amount of depreciation, disposal consideration
and gain or loss on disposal of an asset, the rules discussed in earlier paragraphs are generally
applicable. These rules are contained in Part-Ill of Chapter-IV (ie., sections 75 to 79) of the Income Tax
Ordinance. However, under certain cases these general principles are not applicable, which are:
1. Passenger transport vehicle not plying for hire.
2. Assets given on lease by leasing company, etc.
3. Disposal of immovable property. 4. Export of depreciable asset.
Provisions regarding all above cases are separately discussed in this chapter at their appropriate places.
Passenger Transport Vehicle Not Plying for Hire [22(13)(a)]

Cost of the Vehicle [22(13)(a)]

The cost of such vehicle shall be lesser of the actual cost of the vehicle or Rs. 7,500,000. In other words
the maximum cost for depreciation purpose shall be Rs. 7,500,000 if the vehicle is purchased at a price
higher than this amount.
If vehicle is acquired on lease than any lease rental is allowed as expense.
Provided that for the purpose of determining the deduction on account of lease rentals the cost of a
passenger transport vehicle not paying for hire to the extent of principal amount shall not exceed two
and a half million rupees.
Example:
M/s. Sarfraz Limited is a manufacturing company. It purchased a bus worth Rs. 7,750,000 at the start of
the tax year and expended Rs. 50,000 on its registration, etc. The bus is used for transportation of the
employees of the company. Compute the depreciation to be allowed as deduction while computing the
income of the company.
Answer:

Total Actual cost [Rs. 7,750,000 + Rs. 50,000] Rs. 7,800, 000
Cost of the bus for depreciation purposes 7,500,000
Depreciation [Rs. 7,500,000 @ 15%] 1,125,000

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Note: Initial allowance for depreciation is not allowed on vehicles not plying for hire.
For gain or loss on disposal of a passenger transport vehicle not plying for hire the 'Consideration
Received on Disposal' shall be computed according to the following formula
Ax B
C
A = Amount received on disposal of vehicle
B = Cost determined for depreciation purpose (i.e., lesser of actual cost of the vehicle or Rs.
7,500,000)
C = Actual cost of acquiring the vehicle.
Example:
M/s. Sarfraz Limited disposes of the bus in the next tax year against Rs. 8,000,000. The bus was
purchased at the beginning of the previous tax year (as in Example ) for Rs. 7,800,000. Compute the
gain or loss on disposal of the bus under the Income Tax Ordinance.
Answer:
Amount of disposal consideration:
(Rs. 8,000,000 x Rs. 7,500,000) / Rs. 7,800,000 7,692,308
Less: Written down value at the time of disposal

Purchase price of the Vehicle for tax purpose 7,500,000

Less: Depreciation 1,125,000 6,375,000
Gain on disposal of the vehicle 1,317,308

COST AND DISPOSAL CONSIDERATION OF IMMOVABLE PROPERTY

Rules regarding cost and disposal consideration of immovable property differ from other assets.
Legal provisions are discussed below
Cost of Immovable Property, etc. [22(13)(b)]
The cost of land shall not be included in the cost of an immovable property or structural improvement to
immovable property. Thus the cost of the land and cost of immovable property on such land shall be
shown separately.
Disposal of Immovable Property [22(13)(d)]
Tax treatment of an immovable property differs in each of the following situations:
A) Where consideration is more than the original cost of the asset; and
B) Where the consideration received is less than the original cost of the asset.
Provisions of the Income Tax Ordinance dealing with the tax treatment under both cases are discussed
below.
(A) Consideration more than the Original Cost
Any consideration received on disposal of an immovable property shall be treated as cost of the
property if the consideration exceeds the original cost of the asset Under such a case the total amount
allowed as deduction on account of depreciation allowance (accumulated depreciation) on such asset
shall become the gain on disposal of the asset

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Example:
An office building costing Rs. 1,000,000 has been disposed off by a company. The written down value at
the time of disposal is Rs. 750.000. Compute the gain or loss on disposal if the property is disposed for
Rs. 1,200,000.

Answer:
Gain on Disposal of Building
Consideration received on disposal 1,200,000
Less: Written down value: Cost of the asset [N-1] 1,200,000
Less: Accumulated depreciation [N-2] (250,000) (950,000)
Gain on disposal of asset 250,000
N-1: The disposal consideration is treated as cost of the immovable property if the consideration
received is more than the original cost of the asset
N-2 Accumulated depreciation charged to the business till disposal is as below:
Original cost of the building 1,000,000
Less: Written Down Value (750,000)
Accumulated depreciation 250,000
(B) Consideration less than the Original Cost
Section 22(13)(d) lays down the provisions regarding such an immovable property which is disposed off
at a consideration which is more than the original cost of the asset The law does not provide any special
treatment for an immovable asset whose disposal consideration is less than the original cost Under such
a case the general provisions of the law shall be applied. Thus where an immovable property is disposed
off at a consideration, which is less than the cost of the asset, then the gain or loss on its disposal shall
be accounted for as per normal procedure.

Example:
A building with a written down value of Rs. 1,000,000 has been disposed of during the tax year. The
building cost was Rs. 1,500,000. Compute the gain or loss on its disposal if the sale consideration is:
1. Rs. 1,250,000; or
2. Rs 900,000

Answer:
Gain or loss on disposal
Disposal Consideration
Rs. 1,250,000 Rs. 900,000
Disposal Consideration 1,250,000 900,000
Less: W. DV (1,000,000) (1,000,000)
Gain/(loss) on disposal 250,000 (100,000)

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EXPORT OF A DEPRECIABLE ASSET [22(14)]

Cost of the asset shall be treated as the consideration received on disposal of an asset if:
1. It is a depreciable asset:
2. It has been used in Pakistan by the person: and
3 It is exported or transferred by the person out of Pakistan
Note: Under this case. There will always be a gain on the disposal of asset The gain will be equal to the
accumulated depreciation charged to the accounts.

AMORTIZATION OF INTANGIBLES [24]

Intangible is an asset, which has no physical form. Examples of such assets are patent, copyright,
Goodwill design, Model, Secret formula or process, etc . The law allows a deduction on account of
amortization of such assets. The legal provisions in this regards are summarized below
1. A deduction on account of amortization shall be allowed if the following conditions are satisfied
i) The asset is wholly or partly used for the purpose of business. The income of which 1s
chargeable to tax: and
ii) The intangible has a normal useful life of more than one year.
2. The amortization shall be allowed only if, at the time of computing the income of the person.
The total cost of the intangible has not been claimed and allowed as deduction under any other
provision of the Income Tax Ordinance.
3. The amortization deduction shall be allowed for each tax year. The amount is computed as
below
Total cost of the asset /Normal useful life of asset
In other words, the deduction shall be allowed during the normal useful life of the asset on straight-line
method. [24(3)]
4. Where an intangible has useful life that is not ascertainable, then its life shall be treated as (25)
years It will enable the person to amortize the total cost of such asset during (25) years.
5. A fair proportional part of the amortized amount shall be allowed as deduction if during the tax
year; the intangible is partly used for business chargeable to tax.
6 Where such asset is not used for the whole of the tax year. Then the amount of deduction shall
be computed as below [24(6)]
Total Amortization Amount x No . of days the intangible is used for business
No. of days in tax year
Note: It shall be treated that an intangible has been used on the day (Including a non-working day) on
which it is available for use. [24(1O)]
7. Amortization amount in any case, cannot exceed the total cost of the intangible. [24(1)]
8. In the year of disposal no amortization deduction shall be allowed. [24(8)]
9. Any gain or loss on disposal of an intangible shall be treated as income or deduction under the
head "Income from Business". [24(8)]
10. In order to calculate the gain or loss on disposal of an intangible, the WDV shall be computed as
below: [24(9)]
i) Where Intangible is wholly used for Business
Cost XXX

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Less: Total amortization allowed till disposal XXX

WDV XXX
ii) Where Intangible is Partly Used for Business
Cost XXX
Less: Total amortization that would have been allowed,
if the intangible were wholly used for business XXX
WDV XXX
Note: From above calculations it is clear that the WDV under both cases (i.e., wholly used for
business or partly used for business) will not change.
11. Cost of an intangible means any expenditure incurred by a person for:
i) Acquiring or creating the intangible;
ii) Improving the intangible; or
iii) Renewing the intangible.
Exercise
Briefly explain the tax treatment in respect of each of the following independent situations for the Tax
year 2025:
(i) Aiza (Pvt.) Ltd has revalued its Building in accordance with International Accounting Standards and
consequently charged depreciation on the revalued amount.
(ii) Aiza (Pvt.) Ltd during the year has opened an overseas office in France and has claimed initial
allowance and depreciation on eligible depreciable assets purchased by the office.
(iii) Uzair Limited has charged impairment in respect of one of its depreciable assets. The Commissioner
is of the view that impairment expense will not be allowed as an expense.
(iv) Uzair Limited has discontinued a major product line of its business and envisages selling off the
machinery related to this product line over a period of one to two years to get the right price. Uzair Ltd
wants to claim depreciation on the idle machinery until disposed off.
(v) Ms. Sana sells a number of personal vehicles in a tax year and makes a significant amount of profit in
the process. She is of the view that the said income is exempt from tax.
(vi) XYZ Ltd has recorded a gain on revaluation of its foreign currency balances at the year end. The gain
comprises of both realized and unrealized amount.
(vii) On May 2025, Ms. Sana purchased a vehicle not plying for hire amounting to Rs. 8,210,000 to be
used solely for the purpose of her business. While preparing the tax return she has claimed initial
allowance and depreciation as per the prescribed rates given in the Income Tax Ordinance, 2001 for the
full year on Rs. 8,210,000.
(viii) In April 01, 2025 Mr. Azhar purchased accounting software amounting to Rs. 5 million for his
business. The software has a useful life of 28 years. Mr. Azhar has charged full year amortization on
straight line basis over the useful life of the software.
(ix) Entertainment expense payable amounting to Rs. 210,000 has been debited to profit & loss account
of ABC Ltd. The company has not deducted any tax on the said expense.
(x) ABC (Pvt.) Ltd has charged depreciation according to the rates admissible under the tax law
amounting to Rs. 125,000 on machinery taken on a lease from a scheduled bank in August 2019. Lease
rentals paid during the tax year 2024 amounted to Rs. 220,000. The leased machinery was transferred to
owned assets on maturity on 30 April 2025. On maturity the accounting WDV of the assets was Rs.

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500,000, market value was Rs. 800,000 whereas residual value of the asset was Rs. 50,000.
Answer:
(i) Deduction for depreciation is associated with tax written down values of assets calculated with
reference to specific provisions. Accounting revaluation of assets has no bearing on tax written down
value of assets. Consequently, depreciation will be allowed on tax written down values of building
without taking into account the effect of revaluation. [Ref: S 22(5)]
(ii) Initial allowance is only available on assets used in Pakistan. Accordingly, the company will not be
entitled for deduction on account of initial allowance on assets purchased by the branch for use in
business outside Pakistan. The company will however be allowed to claim normal depreciation on all
depreciable assets. [Ref: S 23 (1) and S 22]
(iii) The contention of the Commissioner is correct. Charge for impairment of fixed assets is not a tax-
deductible expense. As the impairment charge will be ignored for tax purpose, the written down value
of assets will not be reduced by the charge and depreciation will be calculated as if no impairment has
taken place.
(iv) One of the criteria for an asset to qualify as depreciable asset is that it should be used partly or
wholly for deriving business income. As the product line has been discontinued and the machinery is no
more in use, therefore, it ceases to qualify as a depreciable asset‘. Accordingly, no deduction will be
allowed for depreciation. [Ref: S 22 and S75(3A)]
(v) Income from sale of personal motor vehicles is not taxable under the head Capital Gains. If the
vehicles are bought and sold with the motive of trade, the resultant gain will constitute business
income. However, vehicle intended for personal use are excluded from the definition of capital assets.
[Ref: S 37(5) (d)]
(vi) Unrealized gain on revaluation of foreign currency balances is notional income in nature and is not
liable to tax. Foreign exchange gains will be included in the taxable income for the tax year in which
realized.
(vii) Full year depreciation should be charged on restricted value of Rs. 7,500,000. As vehicle is not an
eligible depreciable asset, therefore, initial allowance cannot be claimed.
(viii) Amortization should be allowed for 91 days over the useful life of 28 years. (Sec 24(4),24(6))
(ix) Tax is required to be deducted only at the time of payment. Since the expense is still payable,
therefore, company has rightly claimed the said expense.
(x) In case of assets taken on finance lease, lease rentals are an admissible deduction instead of
depreciation. Further, as the asset was transferred during the tax year 2025, therefore, full year
depreciation will be allowed on the residual value of the asset if the residual value has not been claimed
as lease rentals. No initial allowance will be allowed as the asset was already in use. (S. 22, S.28 (1) (B) S
23)
AMORTIZATION OF PRE-COMMENCEMENT EXPENDITURES [25]
A person shall be allowed a deduction on account of amortization of pre-commencement expenditure
@ 20% of the total expenditure. In this regard the following points should be kept in mind:
1. Pre-commencement expenditures are amortized on straight-line method.
2. Total amortization shall be restricted upto the actual expenditure.
3. Where the entire amount of pre-commencement expenditure has been allowed as deduction
under any other provision of the law then the amortization shall not be allowed.

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Practice Question 1

Anwar in doing his business as sole trader Organisation under the name Anwar Chemicals (AC). The
goods manufactured by AC are exempt from sales tax. The company prepares its financial statements at
30 June each year.
The following are the audited financial results of AC for the year ended 30 June 2025:

Note Rs.
Sales 1 150,000,000
Cost of sales 2 (90,000,000)
––––––––––––
Gross profit 60,000,000
––––––––––––
Administrative expenses 3 (16,000,000)
Distribution and selling costs 4 (13,000,000)
Other operating expenses 5 (11,000,000)
Other income 6 1,000,000
––––––––––––
(39,000,000)
––––––––––––
Profit/(loss) from operations 21,000,000
Finance costs 7 (2,000,000)
––––––––––––
Net profit 19,000,000
––––––––––––
Unless stated otherwise, AC paid for all the expenditure through crossed cheques and tax was deducted
and deposited by AC as required under the law.

Notes:
Note 1
Sales include an advance amount of Rs. 500,000 received for sales to be made in July 2025. The
directors decided to treat this amount as revenue in the year ended 30 June 2025 on the basis that the
goods will definitely be manufactured in July 2025 and supplied to the customer.
Note 2
Cost of sales includes:
–Purchase of a trademark costing Rs. 3,285,000 and used from 2 January 2025 onwards. The useful life
of this trademark is ten years.
–Cost of a new laptop of Rs. 200,000 purchased for and used in the production department. The
company has a policy to charge capital expenditure up to Rs. 200,000 to the profit or loss account in full
during the year in which it is purchased.
–Penalty imposed under the Sales Tax Act, 1990 of Rs. 55,000 paid for the late deposit of sales tax.
Note 3
Administrative expenses include:

Rs.
(i) Software installed which has a useful life of one year 200,000
(ii) Donation paid to the central mosque of the city 50,000

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(iii) Expenditure incurred on entertainment at the meeting of

Employees get together 500,000
(iv) Depreciation on fixed assets 4,500,000
(v) Provision for gratuity (AC does not maintain any approved gratuity fund) 1,400,000

Note 4
Distribution and selling costs include:
–A best performance reward of Rs. 400,000 paid in cash to an employee who surpassed the ambitious
sales target fixed for the year. This amount was treated as a part of his salary and tax was duly deducted.
–Trade fair expenses of Rs. 400,000, 5% of which are not supported by documentary evidence.
Note 5
Other operating expenses include:
(i)A bad debt charge consisting of:

Rs.
Increase in general provision for bad debts 300,000
Loan to an ex-employee – written off as being irrecoverable 119,000
Trade debts written off as irrecoverable after exhausting all recovery measures 700,000
(ii) Repair for the of laboratory paid in cash 26,000
Note 6
Other income of Rs. 1,000,000 consists of:
Rs.
Profit received from a fixed deposit maintained with a bank 850,000
Tax deducted by the bank 150,000
––––––––––
1,000,000
––––––––––
Note 7
The finance costs of Rs. 2,000,000 consists of:

Rs.
–Profit paid on funds borrowed by AC from a bank for the personal needs of a

director of the company. 900,000

–Lease rentals paid during the year to an approved leasing company for a car

taken on a finance lease. [see note 8] 280,000

–Profit paid to a bank on a loan taken for advancing concessional loans to AC’s

staff as per the terms of their contracts of employment 820,000

––––––––––
2,000,000
––––––––––

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Note 8

Other information
(i) Schedule of own fixed assets as per tax record:
Asset Tax written down
value (TWDV)
as on 1 July 2024
Rs.
Freehold land 9,000,000
Building on freehold land 7,000,000
Plant, machinery and equipment 9,550,000
Computers and other IT related equipment 2,000,000
Furniture and fittings 3,150,000
Motor vehicles 3,500,000

(ii) During the year ended 30 June 2025, AC had the following movements in fixed assets:

Date Description
Acquired a new car having a fair market value of Rs. 3,000,000 under a
finance lease from an approved leasing company (plying for hire) [as in note
15 August 2024 7]

1 September 2024 Sold a machine for a total consideration of Rs. 1,000,000. The machine had
been purchased for Rs. 1,500,000 on 1 July 2023. The tax written down
value
of the machinery on 1 July 2024 was Rs. 900,000. No gain or loss has been
recognised in the accounts as the sale proceeds were still receivable by the
company on 30 June 2025.

(iii)AC has a brought forward business loss of Rs. 1,500,000 from the tax year 2021.
(iv)Tax paid by or collected from AC during the year ended 30 June 2025 was:

Rs.
Advance tax paid in cash in four equal installments on the due dates 3,000,000

Required:
Compute the taxable income of Anwar Chemicals (AC) and tax payable thereon for the tax year 2025,
giving clear explanations for the inclusion in or exclusion of each of the items listed in the notes.

Note: The reasons/explanations for the items not listed in the computation of taxable income
should be shown separately, as specific marks are allocated for these explanations.

Note: Ignore workers’ welfare fund and minimum tax provisions.

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Ans.1
Anwar Chemicals
Computation of Taxable income and tax liability
For the tax year 2025
Particulars Notes Rs. Rs.
Profit as per income statement 19,000,000
Less: Income not accrued during the year 500,000
Profit on fixed deposit with bank 14 1,000,000 (1,500,000)
17,500,000
Add: Deductions not Allowed
Purchase of trademark 1 3,285,000
Purchase of new laptop 2 200,000
Penalty for late payment of sales tax 3 55,000
Donation to a mosque 4 50,000
Accounting depreciation on fixed assets 5 4,500,000
Provision for gratuity 6 1,400,000
Performance reward paid in cash 7 400,000
Trade fair expenses (400,000 X 5%) 8 20,000
Provision for bad debts 9 300,000
Loan to an ex-employee – written off 10 119,000
Repair Charges for laboratory equipment 11 26,000
Profit on funds obtained for non-business use 12 900,000
Tax gain on disposal of machine 13 100,000
11,355,000
Less: Deductions allowed
Amortization of intangible 1 162,000
Initial allowance 13 50,000
Tax depreciation 13 3,640,000
(3,852,000)
Income from Business 25,003,000
Less: Brought forward loss from tax year 2021 (1,500,000)
Taxable income 23,503,000
Tax liability on taxable income 6,666,350
Add; Tax on profit on debt (Other source income) @ 15 % 14 150,000
6,816,350
(W-1)
Calculation of tax liability
Tax up to Rs. 5,600,000 1,610,000
Tax on exceeding amount
(23,503,000-5,600,000) X 45% 8,056,350
9,666,350
Surcharge @ 10% 966,635
Tax deducted at source (3,000,000)
7,632,985

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Items not included in the computation of taxable income

1. Software – Rs. 200,000
Software is an intangible. Since the useful life of the software acquired during the year was
estimated to be one year only, it is admissible as revenue expenditure.
2. Expenditure incurred on entertainment for Employees of organisation – Rs. 500,000
Entertainment expenditure incurred during the meeting of employees is admissible expenditure
and not prohibited under the law.
3. Car given to a dealer under a sales promotion scheme – Rs. 1,500,000
AC was required to collect tax on the fair market value of the car. Non-withholding of tax on this
account will attract certain adverse consequences under the law. However, the expenditure
incurred on a prize for sales promotion does not become inadmissible for default of non-
deduction of tax.
4. Irrecoverable trade debts written off – Rs. 700,000
Since the trade debts were written off after taking all recovery measures, there are reasonable
grounds to believe that the amount has become irrecoverable. The deduction being in
accordance with law is admissible
5. Lease rentals – Rs. 280,000
A lease rental comprises the principal amount and finance charges. Since the plant and
machinery were taken on a finance lease from an approved leasing company, the lease rentals
paid are fully admissible.
6. Profit paid for funds taken to advance loans – Rs. 820,000
Profit paid to a bank on a loan taken for advancing concessional loans to staff as per the terms
of their contracts of employment is an admissible expenditure being for the purposes of
business.

Notes
Note-1
A trade mark is included in the definition of an intangible asset in the Income Tax Ordinance, 2001. The
full cost of an intangible is not allowed as a deduction in any single tax year. It is to be amortized over
the useful life of the intangible. An intangible asset had a useful life of ten years. Further, since the trade
mark was used for 180 days during the tax year 2025, amortization should be worked out as below:

Cost of the intangible Rs. 3,285,000

useful life in years 10 years
Amortized cost chargeable for the tax year 2025 3,285,000/ (10*365) X 180 = 162,000

Note-2
The expenditure incurred on the purchase of a new laptop is of capital nature and not allowable as a
deduction. However, it is eligible for initial allowance and depreciation as computed in note 13.
Note-3
Since the penalty of Rs. 100,000 was paid for violation of the provisions of the Sales Tax Act, 1990, it is
not admissible.
Note-4
A donation paid to a mosque is not an admissible expenditure as it was not wholly and exclusively for
the purposes of business. Further, it is not eligible for tax credit as it is not an approved institution.

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Note-5
Accounting depreciation is not a deductible charge. Tax depreciation and initial allowance are deductible
at the rates prescribed in the Third Schedule and subject to the conditions mentioned in the relevant
provisions of the Ordinance.
Note-6
Since AC does not have an approved gratuity fund, any amount accrued on the basis of a provision for
gratuity is not admissible due to the specific disqualification clause under the Ordinance to this effect.
Note-7
A performance reward given to an employee is included in the definition of salary and any salary paid
exceeding Rs.32,000 per month other than by a crossed cheque or direct transfer of funds to the
employee’s bank account becomes an inadmissible expense.
Note-8
Any expenditure which is undocumented or unverifiable is not allowable to that extent under the
Ordinance. Hence, 5% of total trade fair expenses of Rs. 400,000 are to be added back at Rs. 20,000.
Note-9
Provision for bad debts at Rs. 300,000 has been made on a general basis which does not satisfy the
essential conditions of:
– written off in the accounts; and
– existence of reasonable grounds for believing that the debt is irrecoverable.
The provision is, therefore, added back to the total income of the taxpayer being inadmissible
Note-10
Since the amount of the loan was not included earlier in the income from business of AC chargeable to
tax, it is not allowable as a deduction under the law
Note-11
Charges incurred for the installation of the laboratory equipment are capital in nature and are to be
treated as part of the cost of the assets and not allowable as revenue expenditure. However, they will
be eligible for tax depreciation and initial allowance.

Note-12
AC obtained funds borrowed from the bank which were not utilized for the purpose of deriving ‘Income
from business’ by the AC, hence the profit paid on them was not admissible under the law
Note-13
Asset TWDV on Addition/ Initial TWDV for Rate of Depreciation
01-07-24 (Deletion) Allowance Depreciation Depreciation
Freehold 9,000,000 - - - - -
land
Building 7,000,000 - - 7,000,000 10% 700,000
on
freehold
land
Plant and 9,550,000 (900,000) 8,650,000 15% 1,297,500
machinery
Computers 2,000,000 200,000 (50,000) 2,150,000 30% 645,000
and other
IT related

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equipment
Furniture 3,150,000 3,150,000 15% 472,500
and
fittings
Motor 3,500,000 3,500,000 15% 525,000
vehicles
Total 50,000 3,640,000

Sub-notes to note 13
a) The rate of initial allowance on computers used for business during the tax year is 25%.
b) Any gain or loss on the sale of assets eligible for depreciation is assessable under the head
‘Income from business’, therefore, any gain or loss is to be recognized in the year in which it is
accrued and not in the year of receipt of sale proceeds. Hence, Rs. 100,000 being the excess of
sale proceeds of Rs. 1,000,000 over the tax written down value of Rs. 900,000 will be treated as
income from business. Further, no depreciation is allowable for the tax year in which an asset is
disposed of.
c) New laptop as per note 2.
d) The car taken on a finance lease is not owned by AC, hence no initial allowance or tax
depreciation is allowable. Lease rentals have already been claimed.
Note-14
Since AC is not a financial institution, its profit received from a fixed deposit maintained with a bank is
taxable under the head ‘Income from other sources’ and not under the head ‘Income from businesses.

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Practice Question 2

Mr. Table is a manufacturer of electronic goods. The summarised income statement for the year ended
30 June 2025 is as follows:

Note Rs. Rs.

Turnover 25,000,000
Cost of sales (10,000,000)
–––––––––––
Gross profit 15,000,000
Operating expenses
Depreciation 5,000,000
Loss on the disposal of a car used fully for business purposes 1 170,000
Salary to owner’s brother 2 160,000
Irrecoverable bad debts 3 700,000
Professional fees 4 600,000
Salaries 5 2,310,000
Repairs and maintenance 6 1,400,000
Employee training and facilities 7 200,000
Other expenses 8 215,000
––––––––––
(10,755,000)
–––––––––––
Profit before tax 4,245,000
–––––––––––
All the payments were made through the admissible modes of payment and tax was duly deducted unless
mentioned otherwise in the notes.

Notes:
Note 1
Particulars relating to the car sold are:
Rs.
Original cost of the car 8,000,000
Original cost restricted for the purpose of computing tax depreciation 7,500,000
Tax written down value at the time of disposal 6,423,542
Book value at the time of disposal 7,100,000
Sale proceeds 6,930,000
Note 2
Salary paid to owner’s brother in cash for whole year.
Note 3
Soft loans given to two employees of Business were written off as irrecoverable bad debts in the books of
account with the approval of the Owner of the business.
Note 4
The professional fees were legal fees paid in connection with the acquisition of land (as mentioned in
note 9(ii)).

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Note 5
Salaries claimed include a Rs. 650,000 contributions to an unapproved superannuation fund. Mr. Table
has made satisfactory arrangements for the deduction of tax from the payments made from the
superannuation fund as per the law.
Note 6
Repairs and maintenance consist of:
–Rs. 550,000 spent on the repair of plant and machinery. The amount of each invoice was less than Rs.
10,000 and was paid in cash; and
–Rs. 850,000 spent on the replacement of old furniture.
Note 7
The employee training and facilities amount was given to an institute established by an associated
Business of Mr. Table for the training of general industrial workers. The institute has already applied for
recognition by the local government for this purpose and is likely to be approved soon.
Note 8
Other expenses were on account of a fine paid for violation of a provincial law dealing with the building
codes.
Note 9
Fixed asset details are as follows:
(i)The tax written down values of the assets held on 1 July 2024 (excluding the car sold mentioned in note
1) were:

Rs.
Land 10,000,000
Factory buildings 40,000,000
Plant and machinery 7,000,000
Computer hardware 450,000
Motor cars 4,000,000
(ii) Additions to fixed assets during the year were:
Rs.
1 January 2025: Computer software having an estimated useful life of four years 400,000
15 March 2025: Land 5,000,000
Note 10
Mr. Table paid Rs. 500,000 as advance tax in cash in four equal quarterly instalments and in addition, the
following taxes were withheld at source by different withholding agents of Mr. Table under the Ordinance.

Rs.
Along with electricity bills 100,000
On the supply of goods 50,000

Required:
Compute the taxable income and tax payable of Mr. Table for the tax year 2025 giving clear
reasons/explanations for the inclusion in to the computation of each of the items listed in the
question.

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Ans.2

Mr. Table
Resident Individual
Taxable income and tax liability for the tax year 2025
Note Rs. Rs.

Profit before tax 4,245,000

Add: deductions not admissible

Accounting depreciation (1) 5,000,000

Accounting loss on the disposal of the car (2) 170,000

Irrecoverable bad debts (3) 700,000

Professional fees in connection with the acquisition of land (4) 600,000

Contribution to an unapproved superannuation fund (5) 650,000

Repairs and maintenance – furniture (capital expenditure) (6) 850,000

Employee training and facilities – expenditure for training

of general industrial workers (7) 200,000

Other expenses – fine for the violation of a provincial law (8) 215,000

Taxable profit on sale of car (2) 73,333

––––––––––

8,458,333

Less: Deductions Admissible

Tax depreciation (10) 5,912,500

Amortization of software (9) 49,863

––––––––––
(5,962,363)

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––––––––––

Income from business/Taxable income 6,740,970

––––––––––

Calculation to tax liability

Tax up to Rs. 5,600,000 1,610,000
Tax on exceeding amount (6,740,970-5,600,000) X 45% 513,437
2,123,437
Less: Tax already paid
Advanced tax paid 500,000
Electricity bills 100,000
On Supplies 50,000 (650,000)
Tax payable with tax return 1,473,437

Notes
Note 1
Accounting depreciation is not a deductible charge. Tax depreciation and initial allowance are deductible at the rates
prescribed in the Third Schedule and subject to the conditions mentioned in the relevant provisions of the Ordinance.
Note 2
An accounting loss on the disposal of an asset is not allowable. Any gain or loss is computed with reference to the tax
written down value of an asset at the time of its disposal and the consideration received as follows:

Rs.
Consideration received for the sale of the car [A] 6,930,000
Actual cost of the car [B] 8,000,000
Value restricted for tax depreciation [C] 7,500,000
Sale proceeds for computing the gain or loss [A/B x C]
[(6,930,000/8,000,000) x 7,500,000] [D] 6,496,875
Less: Tax WDV of the car [E] (6,423,542)
––––––––––
Taxable gain on the sale of the car [D – E] 73,333
––––––––––
Note 3
Since the taxpayer is not a financial institution involved in the business of lending, it is not entitled to claim a deduction for
the bad debts even though they were written off as irrecoverable in the books of account and there were reasons to believe
that the sum was not recoverable.
Note 4
Any expenditure incurred to acquire a capital asset is capital expenditure and not allowable in computing taxable
income.
Note 5
A contribution to an unapproved superannuation fund is not an admissible expenditure. An eligible contribution to a
superannuation fund has to meet two conditions, i.e. the fund should be approved and the taxpayer must have made
satisfactory arrangements for the deduction of tax from the payments under the head ‘salary’. Non-fulfilment of either
of the two conditions renders the deduction inadmissible.

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Note 6
Furniture is a capital asset having a useful life of many years. Mere replacement of the existing asset does not make
the cost of replacing the asset an admissible expenditure. However, tax depreciation is admissible as computed in
the relevant note.
Note 7
Since the institute has not yet been approved by the local government and the payment was not made for the training
of own employees, it is neither admissible as expense of the business nor as under the specific provision for
employee training and facilities.
Note 8
Any fine or penalty paid or payable by the person for the violation of any law, rule or regulation is not an admissible
deduction
Note 9
Computer software is an intangible. Its given useful life is four years, hence, the cost is to be amortised over
four years. Further, since in the tax year 2025, it was used for only 182 days, the amortisation is to be
restricted proportionately as under:
Rs.
Cost to be amortised each year (Rs. 400,000/4) 100,000
Amount to be amortised in the tax year 2023 (Rs. 100,000 x 182/365) 49,863

Note 10

Tax depreciation and initial allowance

Asset Tax written Addition/ Initial TWDV Rate of Depreciation

down value (deletion) allowance for depreciation

(TWDV) on during the 25% depreciation

1 July 2024 year

Rs. Rs. Rs. Rs.

Land 10,000,000 5,000,000 – – –

Factory building 40,000,000 40,000,000 10% 4,000,000

Plant and machinery 7,000,000 7,000,000 15% 1,050,000

Computer hardware 450,000 450,000 30% 135,000

Motor cars 4,000,000 4,000,000 15% 600,000

Furniture – 850,000 850,000 15% 127,500

––––––––––

Total 5,912,500

––––––––––

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Practice Question 3

Ambreen runs a beauty parlour in Lahore. She is also a part-time employee at APWA giving lectures to its
members on body care. The following information relates to Ambreen’s income and expenditure for the
accounting year ended 30 June 2025:

Note Rs.
Income
Sale of products to ordinary individual consumers 3,050,000
Tax refund received from the Income Tax Department for the tax
year 2023 575,000
Additional payment received on delayed tax refund (as above) 75,000
Salary (net of tax of Rs. 44,500) received from APWA 1,005,500
––––––––––
4,705,500
––––––––––
Expenditure
Materials consumed in the beauty parlour (1) 977,000
Rent of the beauty parlour premises (2) 800,000
Purchase of equipment 90,000
Wages paid to beauty parlour staff (3) 1,000,000
Telephone bills (including sales tax of Rs. 40,000 and income tax of Rs. 25,000) 200,000
––––––––––
3,067,000
––––––––––
Net income 1,638,500
––––––––––
Notes:

(1) This amount includes chemicals costing Rs. 45,000 which expired and had to be destroyed.
(2) Ambreen did not deduct any tax from the rental payments and payment was made in cash.
(3) The wages paid to the beauty parlour employees are based on the number of hours worked.
All the wages were paid in cash and the amounts paid per employee ranged from Rs. 32,500 per
month to Rs. 35,000 per month.

Additional information:

(i) Ambreen has a speculation business loss brought forward from the tax year 2024 amounting to Rs.
190,000.
(ii) Ambreen’s business assets are all classed as equipment and had a total cost of Rs. 2,860,003
on 1 July 2024, against which capital allowances of Rs. 1,360,000 had been claimed till 30 June
2024.

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(iii) Ambreen obtained a car on a finance lease from a scheduled bank on 1 January 2025. The total
value of the car is Rs. 3,500,000, and its proportionate use has been:
– 50% for the beauty parlour business; and

– 50% for her employment with APWA.

No depreciation has been claimed on this car. During the year Ambreen made payments of Rs.
250,000 towards the principal amount and Rs. 70,000 towards finance charges on the car.

(iv) Ambreen has two children, who are both currently students at a medical college.

Required:

Compute Ambreen’s taxable income for the tax year 2025 and tax payable on the filing of
her return of income for that year. Give reasons for the treatment of any items excluded from
taxable income or for which no expense/deduction is allowed.

Ans.3
Ambreen

Taxable income and tax payable for the tax year 2024 (accounting year ended 30 June 2025)

Income from business

Rs. Rs.
Net income declared 1,638,500
Less:
Salary receipts from APWA 1,005,500
Tax refund [s.2(29)] 575,000
Additional payment on delayed refund 75,000
––––––––––
(1,655,500)
Add:
Rent of beauty parlour (inadmissible) 800,000
Purchase of equipment 90,000
Wages paid to employees in cash 1,000,000
Income tax paid with telephone bills
(inadmissible as expense) 25,000
––––––––––
1,915,000
Less admissible deductions:
Initial allowance on new equipment ( Rs.90,000 x 25%) [s.23] 22,500
Tax depreciation on new equipment (Rs. 90,000 – 22,500) x 15%
X 50% 10,125
Tax depreciation on brought forward equipment
Rs.(2,860,003 – 1,360,000) x 15% 225,000
Lease rentals (320,000 (250,000 + 70,000) x 50%) [s.28] 160,000
–––––––––– (417,625)
––––––––––
Income from business 1,480,375

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Income from salary

Amount received from APWA inclusive of amount of tax
Rs. (1,005,500 + 44,500) 1,050,000
Income from other sources
Additional payment on delayed refund 75,000
––––––––––
Total income/Taxable income 2,605,375
––––––––––
Tax on taxable income
Rs. 170,000 + (2,605,375 – 1,600,000) x 30%
471,613
Less tax already paid:
Tax on salary 44,500
Tax with telephone bills 25,000
–––––––––– (69,500)
––––––––––
Tax payable with return of income 402,113
––––––––––
Explanation of items not included in the computation of taxable income

Destruction of expired chemicals

The Rs. 45,000 costs of the chemicals destroyed after their expiry date is a normal business expense and
allowable. No adjustment is required.

A loss from speculation business can only be set off against income from speculation business. As there
is no such income in the tax year 2025, the loss cannot be set off.

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Question Bank
Q.1
Sun & Moon have recently registered as partners. They have incurred the following
expenditures during the tax year 2025.
Rupees
Fees paid to consultants for preparation of registration deed 50,000
Preparation of feasibility report 100,000
Purchase of office equipment 150,000
Purchase of machinery 1,000,000
Machinery freight 200,000
Installation cost 50,000
Required:
You are required to explain the tax treatment by computing the amount allowable as deduction
for the tax year 2025 in accordance with the provisions of Income Tax Ordinance, 2001.

Ans.1

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Q.2
You are the tax consultant of Ideal Associates who are engaged in the business of manufacture
and sale of electronic goods for the last twenty years. The firm has requested for your opinion in
respect of the following expenditures incurred for tax year 2025:
i. Provision for bad debts.
ii. Payment against a liability which was outstanding since 2020 and had been added back
into the taxable income of the firm in 2024.
iii. Initial allowance on a three-year old plant, which has been imported from China. The
remaining useful life of the plant is 7 years.
Required:
Advise the management on the treatment of the above transactions, under the Income Tax
Ordinance, 2001.

Ans.2
(i) Expense on account of mere provision for bad debts cannot be allowed due to following two
conditions:
 All the events, that determine liability, have not occurred and
 The amount of the liability cannot be determined with reasonable accuracy.
However actual bad debts (not provision) shall be allowed as deductions if the following
conditions are satisfied:
 The amount of debt was previously included in the person ‘s income from business
chargeable to tax; or
 In respect of money lent by a financial institution in deriving income from business
chargeable to tax;
 The debt or part of the debt is written off in the accounts of the person in the tax year;
and
 There are reasonable grounds for believing that the debt is irrecoverable.
(ii) Since the liability pertaining to the year 2020 has been outstanding since last three years,
therefore, it shall be added back to the income for the tax year 2024 under section 34(5).
However, as the payment has been made in the tax year 2025 the same shall be allowed as
admissible deduction under section 34(6)

(iii) The firm can claim the initial allowance against the imported used plant as:
 It is used in Pakistan for the first time in a tax year.
 It is used by the firm for the purposes of its business
 It falls in the definition of eligible depreciable asset;

Q.3
Carrot Ltd (CL) is engaged in the manufacture, import and sale of electronic appliances for the
past twenty years. While reviewing the company’s tax provisions, you noticed the following
amounts appearing in the tax calculation for the year ended June 30, 2025.
i. Expenditure of Rs. 450,000 on promotion of a product which is expected to generate
revenue for twelve years.
ii. Bad debt in respect of a staff loan, Rs. 25,000.
iii. Reimbursement of expenses of Rs. 300,000 to CL by the parent company. This amount
was incurred by CL in 2019 on marketing a new product imported from Dubai.
iv. Initial allowance of Rs. 4,000,000 on a used equipment acquired locally from MSD
Limited.

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v. Financial charges amounting to Rs. 100,000 and depreciation amounting to Rs. 200,000
on a vehicle acquired on finance lease from Radish Leasing. Lease rentals paid during
the year amounted to Rs. 400,000.

Required:
Under the provisions of Income Tax Ordinance, 2001 discuss the admissibility of each of the
above amounts for tax purposes.

Ans.3
Comments on the deductibility of expenditures charged by CL:
(i) Any expenditure that provides an advantage or benefit for a period of more than one year is
included in the definition of intangibles and is required to be amortized over the period of 12
year. As such CL would be allowed to charge only 1/12th of the expense i.e. Rs. 37,500 in tax
year 2025.
(ii) Bad debts
Only those bad debts are allowed as admissible deductions which have previously been
included in the taxpayer ‘s business income chargeable to tax and on fulfillment of some more
conditions. Since the staff loan was not previously offered to tax as business income, it would
not be admissible.
(iii) Recouped Expenditure:
Recoupment of an expenditure, in cash or in kind, can only be included in the income
chargeable to tax, in the tax year in which it is received, if previously, the same has been
allowed as a deduction in computing the taxable income.
Since the expenditure incurred by CL on marketing of a commercially imported product was
never allowed as an admissible expense as it related to an income which was taxable under
Final Tax Regime, it cannot be added to the taxable income of the company at the time of its
recoupment.
(iv) Initial allowance:
Initial allowance is only admissible on such plant and machinery which was not previously used
in Pakistan. Since in this case, the equipment was previously used in Pakistan, the initial
allowance is not admissible.
(v) Vehicle on finance lease:
Entire lease rentals paid during the year, on leased assets, i.e. Rs. 400,000 shall be allowed as
admissible deduction.
Following expenditures however, would not be admissible:
Finance charges Rs. 100,000
Depreciation Rs. 200,000

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Q.4
Mr. Qateel, a resident individual, is engaged in the manufacture of various consumer goods
under the name and style „Qateel Enterprises (QE)‟ . The following information has been
extracted from the records of QE for the financial year ended 30 June 2025.

"Additional information:
(i) Cost of sales includes:
 Rs. 45,000 paid as fine for violation of contract with a customer for delay in supply of
goods.
 accounting depreciation of Rs. 1,900,000 (including depreciation on leased assets).
(ii) Operating expenses include:
 Rs.450,000 paid for renewal of a manufacturing licence for fifteen years.
 vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars.
 Rs. 200,000 paid as security deposit to K-Electric (KE) for replacement of transformer at
the factory
 Rs. 300,000 collected by KE as advance tax through monthly electricity bills.
 cash donation to poor families amounting to Rs. 64,600 and donation of Rs. 2,000,000
paid through cheque to Edhi Foundation, which is listed in Part 1 of the Second
Schedule of the Income Tax Ordinance, 2001.
 penalty of Rs. 25,000 imposed by the Commissioner Inland Revenue for late filing of
annual return of income for the tax year 2021.
 entertainment expenditure of Rs. 128,000 incurred on arrival of foreign customers for
business purposes.
(iii) Other income includes:
 dividend of Rs. 580,000 received from listed companies. The amount is net of income
tax at the rate of 15% and Zakat of Rs. 100,000 deducted under the Zakat and Usher
Ordinance, 1980.
 Capital gain of Rs. 1,200,000 from sale of shares of a private limited company. Shares
were acquired on 1 August 2019.
(iv) On 30 June 2025, leased machinery was transferred to Qateel on maturity of lease. The
leasing company was asked to adjust the amount of security deposit against the residual value
of Rs. 100,000. The date of commencement of lease was 1 July 2020.
Lease rentals paid during the year amounted to Rs. 270,000. On the date of maturity, the
accounting written down value and market value of the machinery was Rs. 590,490 and Rs.
800,000 respectively.

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(v) During the year, a warehouse was constructed for storage of goods at a cost of Rs.
1,040,000. No accounting depreciation has been recorded on it.
(vi) Tax depreciation for the tax year 2025 without considering the effect of para (iv) and (v)
above, amounted to Rs. 1,560,000.
(vii) Advance income tax paid during the year amounted to Rs. 480,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder computer
the total income, taxable income and net tax payable by or refundable to QE for the year ended
30 June 2025.

Ans.4
MR. QATEEL
Computation of income tax liability
For the tax year 2025
Computation of income tax liability

For the tax year 2025 Rupees

Income from business

Accounting profit before taxation 2,809,297
Add: Inadmissible expenses/admissible income
Fine paid – violation of the contract with customer for delay in supplies
(inadmissible where violating a law/ rule/ regulation) -
Vehicle tax (inadmissible where violating a law/ rule/ regulation) -
Accounting depreciation 1,900,000
Renewal of license fee 450,000
Replacement of transformer (KESC) – security deposit 200,000
Advance tax collected (KESC) 300,000
Donation paid in cash to poor families 64,600
Donation paid to Edhi Foundation in cash 2,000,000
Penalty paid to CIR for late filing of return 25,000
Entertainment expenditures – foreign customer -
Finance charges on lease machinery 35,703
4,975,303

Rupees
Less: Admissible expenses & inadmissible/FTR income
Renewal of license fee [450,000/15] 30,000
Gain on sale of a private limited company shares 1,200,000
Tax depreciation as given 1,560,000
Tax depreciation on warehouse constructed W-1 104,000
Lease rental paid 270,000

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Dividend income 580,000

Tax depreciation on leased machinery acquired by
paying residual value (100,000 x 15%) 15,000
3,759,000
4,025,600
Capital gain
Sale of shares 1,200,000
Total income for the year 5,225,600
Zakat deducted on dividend (100,000)
Taxable income under NTR 5,125,600
Computation of tax liability (Non-Salaried Case)
Tax on Rs. 5,125,600 [Rs.650,000+ (5,125,600-
3,200,000)x 40%] 1,420,240
Gross Tax under NTR 1,420,240
th
Less: tax credit on donation to institutions mentioned in 13
schedule
Rs. 1,420,240 /5,125,600 x Rs.1,537,680 [i.e.lower of
Rs.2m or 30% (Rs.1,537,680) of taxable income] (426,072 )

Tax liability under NTR 994,168

Add: Tax on dividend – FTR (15%) 120,000
Total tax liability 1,114,168
Less: Advance tax (WHT)
Advance tax collected on electricity bill (300,000)
Advance tax paid (480,000)
Advance tax on dividend (120,000)
(900,000)
Tax payable (with tax return) 214,168
W-1: Warehouse constructed 1,040,000
Tax depreciation @ 10% x Rs. 1,040,000 (104,000)
WDV 936,000

Q.5
During the tax year 2025, Salman Shahid sold the following assets:
(i) A vehicle used by manager-in-charge of his garment factory for Rs. 7.8 million. The vehicle was
purchased for Rs. 8.1 million in tax year 2022.

Required:
Under the provisions of the Income Tax Ordinance, 2001 compute under the appropriate head of
income, the amount to be included in the taxable income of Salman Shahid for the tax year 2025.

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Ans.5

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Past Papers
Q.1 [Autumn 2018 Q.3 (b)]
The accounting profit before tax of Bashir Associates (BA) for the year ended 30 June 2025 is Rs.
1,200,000.
Last year, BA had written off balances outstanding from two of its debtors namely Pulse
International (PI) and Hussain Global (HG) which were partly allowed by the tax authorities.
Details are as follows:

During the current tax year, BA received Rs. 652,000 from PI and Rs. 346,000 from HG, in full settlement
of their debts.
In the light of the Income Tax Ordinance, 2001 compute BA’s taxable income for the tax year 2025.

Ans.1

Excess income to be added in the income for the tax year 2025 327,000

Amount short received to be allowed as deduction for the TY 2025 (339,000)

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Q.2 [Autumn 2018 Q.5]

Saleem is a resident taxpayer and runs a fitness centre in DHA Karachi. He files his return of income
regularly. Following information pertains to his business for the tax year 2025:

(i) Accounting profit before tax amounted to Rs. 2,350,000.

(ii) Administrative expenses include annual rent of the premises used for fitness centre amounting to Rs.
1,560,000. Withholding tax of Rs. 144,000 was deducted from the rent payment but was not deposited
in the government treasury.

(iii) A passenger transport vehicle used for pick and drop of employees of fitness centre was disposed of
for Rs. 8,500,000. The vehicle was purchased for Rs. 9,500,000 in tax year 2024. Accounting gain of Rs.
200,000 has been recorded in the profit or loss account.

(iv) On 1 July 2024, a car was acquired on finance lease for Rs. 3,000,000. Advance tax paid at the time
of acquisition and registration of vehicle aggregated Rs. 85,000. The vehicle has been used 70% for
business purposes and 30% for Saleem’s personal use. Accounting depreciation of Rs. 600,000 and
financial charges of Rs. 462,000 were recorded in the profit or loss account. Lease rentals paid during
the year amounted to Rs. 857,000.

(v) During the year, Saleem recorded gain of Rs. 50,000 on disposal of shares. Details are as under:

Name of investee company Sold on Purchase on Gain/(loss) on

disposal (Rs.)
Sun (Private) Limited 1 Aug 2024 1 Sep 2020 500,000
Moon Limited - a listed company 15 Sep 2024 1 Jan 2022 (700,000)
Planet Limited - a listed company 1 Feb 2025 1 Jan 2023 250,000
50,000

Required:
Compute Saleem’s taxable income under appropriate head of income and tax liability for the tax year
2025.

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Ans.2
Saleem

Computation of taxable income for the year 2025

Rupees
Income from business
Accounting profit before adjustment 2,350,000

Add: Inadmissible expenses/admissible income

Rental charges - withholding tax deducted but not deposited 1,560,000
Depreciation on leased assets 600,000
Financial charges on leased assets 462,000
Tax Gain on Disposal 335,526
2,957,526
5,307,526
Less: Admissible expenses/inadmissible income
Accounting profit on sale of vehicle 200,000
Lease rental (857,000×70%) 599,900
Accounting gain on the sale of shares 50,000

(849,900)
4,457,626
Income from capital gain
Gain on the sale of share of Sun (Private) Limited
500,000

Gain on the sale of securities

Moon Limited (700,000)
Planet Limited 250,000
(450,000)
Total income 4,507,626
Add: Loss on sale of shares of listed companies - Separate block of income 450,000
Taxable income under NTR 4,957,626

Computation of tax liability

Tax on 3,200,000 650,000
Tax on income exceeding 3,200,000 @ 40% (1,757,626×40%) 703,050
Tax payable under NTR 1,353,050
Advance tax collected at the time of vehicle purchased (85,000)
Income tax payable 1,268,050

Note 1: Loss on disposal of a passenger transport vehicle

Consideration received on disposal of passenger transport vehicle not

plying for hire A×B/C Where (8.5×7.5/9.5) 6,710,526

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(A is the amount received on disposal of the vehicle Rs. 8.50 million; B is the amount referred to in
clause
(a) of sub-section (13) Rs. 7.5 million; and C is the actual cost of acquiring the vehicle Rs. 8.5 million.)
Written down value of vehicle (7.5×85%) (6,375,000)
Gain on disposal 335,526

Q.3 [Spring 2018 Q.4(a)]

Nadeem has agricultural land in Thatta which is being used for the cultivation of sugarcane. During the
year, he cultivated 200,000 tonnes of sugarcane. Out of total cultivation, 140,000 tonnes of sugar cane
was sold to a sugar mill at a price of Rs. 4,550 per ton whereas the remaining quantity was utilized in his
own sugar mill.
During the year, there were no other purchases of sugar cane by his sugar mill. The sale of his sugar mill
stood at Rs. 310 million whereas total expenses other than the raw material amounted to Rs. 19 million.

There was no opening and closing stock of sugarcane.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income of Nadeem for the tax year 2025.

Ans.3

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Q.4 [Spring 2017 Q.1]

Mushtaq is a sole proprietor of Mushtaq Enterprises (ME) engaged in the business of manufacturing of
different products. ME’s profit and loss account shows profit before taxation of Rs. 2,898,000 for the
year ended 30 June 2025. A review of ME’s records has revealed the following information.

(i) ME employs two salesmen. Rs. 46,000 per month were paid to each salesman in cash which
includes reimbursement of Rs. 6,000 per month incurred on entertainment of customers at
the business premises.
(ii) Administrative expenses include Rs. 150,000 which were paid to a research institute in China
for the purpose of developing a new product.
(iii) Accounting loss on the sale of patents was Rs. 65,000. The tax written down value of these
patents at the beginning of the year was Rs. 430,000 and these were sold for Rs. 524,000.
Amortization charged to the profit and loss account on these patents for the current year
was Rs. 25,000.
(iv) Receivables from Atif and Aslam which had been written off in the previous year were
recovered. Details are as follows:

(v) ME has opened a sales office in Dubai. In this respect, furniture costing Rs. 850,000 with
written down value (WDV) of Rs. 650,000 was shifted to Dubai office. The tax WDV of the
furniture at the beginning of the year was Rs. 610,000.
(vi) Accounting depreciation for the year is Rs. 582,450. However, no depreciation has been
provided on the following fixed assets purchased on 1 March 2025:

(vii) Tax depreciation for the year, prior to the adjustments mentioned in (vi) above, amounted
to Rs. 456,400.
(viii) Advance tax paid u/s 147 was Rs. 200,000.
(ix) The assessed business losses of tax year 2019 brought forward in year 2025 are Rs. 830,000.
These include unabsorbed tax depreciation amounting to Rs. 705,000.

Other transaction of Mushtaq On 1 June 2025,

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he sold 6,000 shares of listed company for Rs. 432,000 out of 15,000 shares which he received on 1
May 2018, on the death of his father. The fair market value of shares on the date of transfer to
Mushtaq was Rs. 30 per share and his father purchased these share at rate of 25 per share.

Required:

Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder, compute taxable
income and net tax payable by or refundable to Mushtaq for the year ended 30 June 2025.

Ans.4
Mushtaq Enterprises
Computation of total income, taxable income and net tax payable/refundable
For tax year 2025
Income from Business: Rupees
Profit before tax 2,898,000
Add: Inadmissible expenses/ admissible income
Salary to salesman [2 X (46000-6000) x 12] 960,000
Entertainment expenses -
Research expenditure incurred outside Pakistan 150,000
Accounting loss on sale of patent 65,000
Amortization charged on patent 25,000
Tax Gain on sale of patent [524,000- 430,000] 94,000
Bad debts Recovered Atif: [700,000-(800,000-550,000)] 450,000
Accounting Depreciation 582,450
Transfer of furniture to Dubai (850,000-610,000) 240,000

Less:: Admissible expenses/ Inadmissible income

Accounting Bad Debt recovered (700,000+400,000) (1,100,000)
Bad debts Recovered Aslam [1200,000 – 600,000 - 400,000] (200,000)
Tax Depreciation (w-1) (667,650)
3496,800

Computation of tax liability

Tax on 1,600,000 170,000
Tax on income exceeding 1,600,000 @ 30% (1,066,800×30%) 320,040
Tax payable under NTR 490,040
Add: Tax @ 12.5% on securities (282,000 X 12.5%) 35,250
Less: Advance tax u/s 147 (200,000)
Income tax payable 325,290

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W-1 Depreciation
Furniture (200,000 x 15%) 30,000
Used imported machine
Initial Depreciation (500,000 x 25%) 125,000
Depreciation (500,000-125,000) X 15% 56,250
Depreciation given 456,400
Total Depreciation expense 667,650

Q.5[Spring 2016 Q.8]

Baqir, Asad and Rahi are members of an association of persons (BAR) and share profits and losses in the
ratio of 5:3:2 respectively. BAR is engaged in the business of trading consumer electronics and has two
independent branches one each in Tehran and Dubai. Following information has been extracted from
BAR’s profit and loss account for the year ended 31 December 2024:

Additional information:
Cost of sales includes:
(i) Closing stock which has been valued at net realizable value of Rs. 1,820,000. The cost of
closing stock under absorption costing was Rs. 1,950,000.
(ii) Provision of Rs. 75,000 against slow moving stores and spares.
(iii) Freight charges of Rs. 160,000. These were paid in cash to Momin Goods Transport for
transporting goods to customers in Multan.

Administrative and selling expenses include:

(i) Commission of Rs. 290,000 paid to Baqir, annual performance award of Rs. 310,000 paid to Rahi
and Rs. 455,000 paid to AB Bank Limited in final settlement of a loan obtained by Asad for the
construction of his house in Muree.
(ii) Total bad debts expense charged to P&L amounting to Rs. 735,000. The opening and closing
balances of provision for bad debts amounted to Rs. 1,100,000 and Rs. 1,435,000 respectively.
Bad debts written off include a loan of Rs. 280,000 provided to a supplier.
(iii) Sales promotion expenses of Rs. 275,000. These expenses were paid by Rahi through his
personal credit card.

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(iv) Rs. 86,000 paid to an institution operated by Federal Government for the training of industrial
workers in Punjab.

Further information:
For the year ended 31 December 2024 Dubai branch made a profit of Rs. 1,500,000 and Tehran branch
made a loss of Rs. 1,800,000. These figures are not included in the above profit and loss account.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income, net tax payable by BAR and the amount to be carried forward, if any, for tax year 2025.
Assume tax and accounting depreciation is same.

Note:

 Your computation should commence with the profit before tax figure of Rs. 5,488,000.
 Show all relevant exemptions, exclusions and disallowances.

Ans.5
BAR (AOP)
Computation of income tax liability
For the tax year 2025

Computation of tax liability

Tax on 5,600,000 1,610,000
Tax on income exceeding 5,00,000 @ 45% (1,908,000×45%) 858,600
Tax payable under NTR 2,468,600

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Q.6[Spring 2016 Q.2]

Akram has recently established an advertising agency in the name and style of Azad
Advertising. For introducing his business to both international and local clients, he has allocated
considerable chunk of his marketing budget to entertainment expenditures. Under the Income
Tax Ordinance, 2001 and Rules made thereunder, advise Akram about the prescribed
limits/conditions for the deduction of entertainment expenditure.

Ans.6

Entertainment expenditure:
Akram would be allowed a deduction for entertainment expenditure if the following conditions
are satisfied:
The expenditure should be incurred in deriving income from business chargeable to tax and
should be limited to expenditure incurred which satisfies the following conditions:
 expenditure incurred outside Pakistan on entertainment in connection with business
transactions or is allocated as head office expenditure;
 expenditure incurred in Pakistan on entertainment of foreign customers and suppliers;
 expenditure incurred on entertainment of customers and clients at the person’s business
premises;
 expenditure incurred on entertainment at a meeting of shareholders, agents, directors or
employees; or
 expenditure incurred on entertainment at the opening of branches.
A deduction shall only be allowed for expenditure incurred on the entertainment of persons
related directly to Akram’s business.

Q.7 [Autumn 2015 Q.2]

Under the provisions of the Income Tax Ordinance, 2001 what would be the cost of an asset for the
purpose of depreciation deduction in each of the following circumstances?
a) Mr. Aamir acquired a new machine partly in exchange for an old machine. He paid freight to
bring the old machine to the seller’s location and also purchased cooling equipment which was
attached to the new machine for its smooth functioning.
b) Mr. Saulat acquired production machinery by utilizing a loan repayable in euro. The loan is
expressed in rupees and is repayable in two years’ time. Mr. Saulat also received 20% subsidy on
such machinery from the Provincial Government.

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c) On 1 July 2024 Mr. Talha started using his personal computer for business purposes. He also had
to upgrade the operating system to comply with his business needs.
d) Mr. Rahi constructed a furnace for his factory in Korangi Industrial Area.

Ans.7

(a) Cost of an asset:

The cost of new machine purchased by Mr. Aamir in exchange for an old machine shall be
the sum of the following amounts:
i. the total cash given for the new machine;
ii. the fair market value of the old machine as determined at the time the asset is acquired;
iii. any incidental expenditure incurred in acquiring new machine and disposing of the old
exchanged machine. Such as freight given in this case; and
iv. any expenditure incurred to alter or improve the new machine. For instance purchase of
cooling equipment given in this case.

(b) Cost of an asset:

In determining the cost of production machinery, the actual amount spent by Mr. Saulat shall be
reduced by the amount of subsidy received by him on acquisition of such machinery, unless
such amount of subsidy is chargeable to tax.
Since Mr. Saulat has purchased the machinery with a loan repayable in euro and before full and
final repayment of the loan, if there is an increase or decrease in the loan liability, in terms of
rupee, due to exchange rate fluctuation, the amount by which the liability is increased or
reduced shall be added to or reduced from the cost of the asset, as the case may be.
However, difference if any, on account of foreign currency fluctuation, shall be taken into
account in the year of occurrence for the purposes of depreciation.

(c) Cost of an asset:

 The cost of personal computer shall be its fair market value on 1 July 2024, the date on
which Mr. Talha started using it for business purposes plus
 cost incurred by him on its up-gradation.

(d) Cost of an asset:

The cost of the furnace shall be the sum of the following:
(i) the total cost incurred by Mr. Rahi for the construction of the furnace; and
(ii) any incidental expenditure incurred by Mr. Rahi for acquiring of the asset;
(iii) any expenditure incurred to alter or improve the asset.

(iv) Disposal of the asset.

Q.8
Mustafa, Ali and Zain are partners of a resident firm in Pakistan, under the name and style MAZ
Enterprises (MAZE) which is engaged in manufacturing and local supply of auto spare parts. All partners
have equal share of profits and losses in the firm.
Following information has been extracted from accounting records of MAZE for the tax year 2025:

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Additional information:
(i) The above accounts have been prepared on cash basis and stock-in-trade has been valued
on the prime-cost method. However, the partners want to change the method of accounting
from cash basis to accrual basis. In this respect, following information has been gathered:

(ii) Cost of goods sold includes cost of used machinery imported from China on 31 July 2024 amounting
to Rs. 2,110,000. The cost includes payment of custom duty of Rs. 90,000 and income tax of Rs. 110,000
to the Collector of Customs.
(iii) Administrative and selling expenses include:
 payment of Rs. 380,000 to a local hotel for holding annual eid-milan party for the employees,
key customers and their families.
 payment of a fixed monthly remuneration of Rs. 150,000 to each partner.
 payment of Rs. 180,000 for purchase of accounting software on 31 December 2024. The
software is expected to be used for ten years.
(iv) Financial charges are net of interest income of Rs. 360,000 (net of tax @ 10% deducted by the bank),
earned by the firm on its savings accounts.

Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income, taxable income and tax payable by MAZE using accrual basis of accounting for tax year 2025.
 Note: Show all the relevant exemptions, exclusions and disallowances.

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Ans.8
MAZ Enterprises
Computation of total income, taxable income and net tax payable/refundable
For tax year 2025

Computation of tax liability

Tax on 5,600,000 1,610,000
Tax on income exceeding 5,600,000 @ 45% (16,166,025×45%) 7,274,711
Tax payable under NTR 8,884,711
As Taxable income is above Rs. 10 million so surcharge @ 10% of the 888,471
taxable income is applicable
Add; Tax @ 15 % on profit on debt 60,000
9,833,182
Less: Tax deducted by the bank (40,000)
Less: Tax withheld on import of machinery (110,000)
Tax P/A 9,683,182

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Q.9
For the purpose of this question, assume that the date today is 31 August 2025.
Shahid is engaged in the business of manufacturing and supplying of auto parts. Following is
the extract of his profit or loss statement for the tax year 2025:

(v) Other income includes:

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 capital gain of Rs. 45,000 received, net of withholding tax of Rs. 6,750, on sale of 20,000 shares
in Metal Limited (ML) in November 2024. ML is listed on PSX. On 1 January 2023, Shahid
purchased these shares for Rs. 200,000 at initial public offering.
 rent of Rs. 980,000 received from an agriculture land in Badin. No withholding tax was deducted
at the time of receipt.
(vi) Tax depreciation for the year amounts to Rs. 680,000.
(vii) Tax deducted at source by customers amounts to Rs. 875,000.
(viii) The unabsorbed tax depreciation brought forward from tax year 2024 amounts to Rs. 568,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income, taxable income and net tax payable by or refundable to Shahid for the tax year 2025. (Use
accrual basis of accounting)
Note:
 Your computation should commence with profit before tax figure.
 Ignore minimum tax under section 113.

Ans.9
Shahid
Computation of total income, taxable income and net tax payable/refundable
For tax year 2025

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Computation of tax liability

Tax on 3,200,000 650,000
Tax on income exceeding 3,200,000 @ 40% (1,673,250×40%) 669,300
Tax payable under NTR 1,319,300
Add; Tax @ 15 % on fixed deposit (450,000 X 15%) 67,500
Add; Tax Capital gain @ 12.5% (51,750 X 12.5%) 6,469
1,393,269
Less: Tax deducted by customer (875,000)
Less: Tax deducted on capital gain (6,750)
Less: Tax deducted on fixed deposit (45,000)
466,519

Q.10
Farhan, Kamran and Rehan are members of an association of persons (AOP) and share its profit and loss
in the ratio of 2:2:1 respectively.
Following information is available with regard to AOP and its members for the tax year 2025:
(i) During the year, AOP earned a profit before tax of Rs. 2,000,000 after making following
payment to its members:

(ii) Kamran is running a business as a sole proprietor from which he earned Rs. 800,000. Kamran is also a
member of another AOP where his share of profit or loss is 60%. During the year, the other AOP
incurred a loss after tax of Rs. 350,000 and paid Rs. 150,000 on account of income tax.
(iii) Rehan received net dividend of Rs. 102,000 from a listed company after deduction of withholding tax
@ 15%.

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(iv) Farhan has no other source of income.

Required:
Under the provisions of the Income Tax Ordinance, 2001 compute taxable income and tax liability of
AOP and each of its members for the tax year 2025.

Ans.10
M/S Farhan , Kamran and Rehan
Computation of Taxable Income and Tax Liability of AOP
For the tax year 2025

Computation of tax liability

Tax on 5,600,000 1,610,000

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Tax liability of Kamran on income from other business

Tax on Rs. 1,600,000 - 170,000 -
@ 30% on amount exceeding Rs. 1,600,000 - 360,000 -
Total tax payable - 530,000 -
Less: tax credit for AOP
(530,000/2,800,000 x 2,000,000) - (378,571) -
Tax liability of Kamran - 151,429 -

Income under FTR

Dividend income (Rs.102,000 /0.85) 120,000

Tax on dividend income (Rs. 120,000×15%) 18,000

Tax deducted at source (18,000)
Tax liability of Rehan -

Q.11

Libas & Co. is an association of persons (AOP) with three members, Saba, Junaid and Akram,
sharing profit and loss in the ratio of 1:1:2 respectively.
During the year, AOP earned profit before tax of Rs. 8,500,000 from its principal businessi.e.
trading of garments. In addition, AOP is also involved in purchase and sale of following securities
listed on the Pakistan Stock Exchange:
Details of purchase Details of sale
Name of investee
No. of Price per No. of Price per
company Date Date
shares share (Rs.) shares share (Rs.)
XOK Limited 1 Oct 2021 200,000 200 29 June 2025 [Note A] 200,000 225
18 Aug 2021 55,000 145
PBB Limited 20 Dec 2024 100,000 180
10 Jan 2023 100,000 150
OOI Limited 15 Feb 2025 [Note B] 150,000 86 15 March 2025 150,000 78

Note A: Sale proceeds from disposal of these shares was credited to the AOP’s bank
account on 2 July 2025.
Note B: Due to shortage of funds for making this purchase, AOP borrowed Rs.
5,000,000 incash from Imran, who is in the business of lending money at
15% per annum.
Other information related to Saba:
(i) During the year, she earned Rs. 1,500,000 by working as a freelance photographer.
(ii) On 1 April 2025, Saba received Rs. 1,100,000 from Zafar in full settlement of a
loan. The loan was provided on 1 April 2024 at 10% per annum interest through
proper banking channel.

Required:
Under the provisions of the Income Tax Ordinance, 2001, compute taxable income and tax liability of
AOP and Saba for the tax year 2025.

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Ans.11
Libas & Co.
Computation of taxable income and tax liability of AOP
For the tax year 2025

Computation of tax liability

Tax on 5,600,000 1,610,000
Tax on income exceeding 5,600,000 @ 45% (7,900,000×45%) 3,555,000
Tax payable under NTR 5,165,000
As Taxable income is above Rs. 10 million so surcharge @ 10% of the taxable income 516,500
is applicable
Tax on capital Gain (7,075,000 X 12.5%) 884,375
Tax Payable 6,565,875

Saba
Computation of taxable income and tax liability of Saba
For the tax year 2025

Computation of tax liability

Tax on 3,200,000 650,000
Tax on income exceeding 3,200,000 @ 40% (1,775,000×40%) 710,000
Tax liability 1,360,000
Less: Tax credit for AOP (1,360,000/4,975,000 x 3,375,000) (922,613)

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Tax Payable 437,387

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CHAPTER
Method of Accounting

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TAX ACCOUNTING

General accounting
Method of accounting (Sec 32)
Cash Basis Accounting (Sec 33)
Accrual Basis Accounting (Sec 34)
Valuation of stock in trade (Sec 35)

1 General accounting
The question arises how to compute the income under this head of income. Therefore, it is
essential to know the method of accounting required by the law in order to ascertain the actual
income of a taxpayer:

2 Method of accounting (Sec 32)

 A person’s income chargeable to tax shall be computed in accordance with the method of
accounting regularly employed by such person.
 A company shall account for income chargeable to tax under the head “Income from
Business” on an accrual basis, while other persons may account for such income on cash
or accrual basis.
 The Board may prescribe that any class of persons shall account for income chargeable to
tax under the head “Income from Business” on a cash or accrual basis.
 An application may be made by a person, in writing, for a change in the person’s method of
accounting to the Commissioner. The Commissioner may by an order, in writing approve
such an application but only if he is satisfied that the change is necessary to clearly reflect
the person’s income chargeable under the head “Income from Business”.
 If a person’s method of accounting has changed, the person shall make adjustments to items
of income, deduction, or credit or to any other items affected by the change so that no item
is omitted and no item is taken into account more than once.

3 Cash Basis Accounting (Sec 33)

A person accounting for income chargeable to tax under the head “Income from Business” on a
cash basis shall derive income when it is received and shall incur expenditure when it is paid.

4 Accrual Basis Accounting (Sec 34)

 A person accounting for income chargeable to tax under the head “Income from Business”
on an accrual basis shall derive income when it is due to the person and shall incur
expenditure when it is payable by the person.
 An amount shall become due to the person when the person becomes entitled to receive it
or is liable to pay it even if the time for receipt / payment is postponed or the amount is
payable by instalments.
 An amount shall become payable by a person when all the events, that determine liability,
have occurred and the amount of the liability can be determined with reasonable accuracy.
 If the liability or a part of the liability for which the deduction claimed is not paid within three
years from the end of the tax year in which the deduction was allowed, the unpaid amount
of the liability shall be chargeable to tax under the head “Income from Business” in the first
tax year following the end of the three years.
 If an unpaid liability which is charged to tax as above is subsequently paid in full or in part,
the person shall be allowed a deduction for the amount paid in the tax year in which the
payment is made.

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 Where a person has been allowed a deduction in respect of a trading liability and such
person has derived any benefit in respect of such trading liability, the value of such benefit
shall be chargeable to tax under head “Income from Business” for the tax year in which such
benefit is received.

5 Valuation of stock in trade (Sec 35)

 The cost of stock-in-trade disposed of by the person in the year shall be computed in
accordance with the following formula, namely:
(A + B) – C
Where:
A is the opening value of the person’s stock-in-trade for the year;
B is cost of stock-in-trade acquired by the person in the year; and
C is the closing value of stock-in-trade for the year.
 The opening value of stock-in-trade of a person for a tax year shall be:
(i) the closing value of the person’s stock-in-trade at the end of the previous year; or
(ii) where the person commenced to carry on business in the year, the fair market value of
any stock-in-trade acquired by the person prior to the commencement of the business.
This fair market value shall be determined at the time the stock is ventured in the
business.
 The closing value of a person’s stock-in-trade for a tax year shall be the lower of cost or net
realisable value of the person’s stock-in-trade on hand at the end of the year.
 A person accounting for income chargeable to tax under the head “Income from Business”
on a cash basis may compute the person’s cost of stock-in-trade on the prime-cost method
or absorption-cost method, and a person accounting for such income on an accrual basis
shall compute the person’s cost of stock-in-trade on the absorption-cost method.
 Where particular items of stock-in-trade are not readily identifiable, a person may account
for that stock on the first-in-first-out method or the average-cost method but, once chosen,
a stock valuation method may be changed only with the written permission of the
Commissioner and in accordance with any conditions that the Commissioner may impose.
In this section:

Definitions

 “Absorption-cost method” means the generally accepted accounting principle under

which the cost of an item of stock-in-trade is the sum of direct material costs, direct labour
costs, and factory overhead costs;
 Prime-cost method” means the generally accepted accounting principle under which the
cost of stock-in-trade is the sum of direct material costs, direct labour costs, and variable
factory overhead costs;
 “Direct labour costs” means labour costs directly related to the manufacture or production
of stock-in-trade;
 “Direct material costs” means the cost of materials that become an integral part of the
stock-in-trade manufactured or produced, or which are consumed in the manufacturing or
production process;

 “Factory overhead costs” means the total costs of manufacturing or producing stock-in-
trade, other than direct labour and direct material costs;
 “First-in-first-out method” means the generally accepted accounting principle under
which the valuation of stock-in-trade is based on the assumption that stock is sold in the
order of its acquisition;

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 “Average-cost method” means the generally accepted accounting principle under which
the valuation of stock-in-trade is based on a weighted average cost of units on hand;
 “Stock-in-trade” means anything produced, manufactured, purchased, or otherwise
acquired for manufacture, sale or exchange, and any materials or supplies to be consumed
in the production or manufacturing process, but does not include stocks or shares; and

 “Variable factory overhead costs” means those factory overhead costs which vary
directly with changes in volume of stock-in-trade manufactured or produced.

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CHAPTER
Set off and Carry forward of losses

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Rules for set-off and carry forward of losses

Head of income Rules for set-off & carry forward
Salary 1. Section 12(4) specifies that no deduction shall be
allowed while computing income under the head
salary hence there cannot be loss under this head.
2. Salary income cannot be used to set off the loss
under any other head of the income.
Income from property 1. Loss under this head may be set off against income
under any other head of income other than salary
income and FTR
2. Loss under this head can’t be carry forward.

Business-non speculation 1. Business loss may be set off against any other
income of person for the year under NTR however
it can’t be set off against salary and FTR.
2. Unadjusted business losses can be carried forward
up to the six tax year and adjusted against income
under the same head only and Depreciation loss
can be carry forward for unlimited period.
Income from other sources 1. Loss under this head may be set off against any
other income of person for the year under
consideration however it can’t be set off against
salary or FTR.
2. Unadjusted losses can’t be carry forward to
succeeding tax year for adjustment.

Business speculation 1. Speculation business loss can be set off only against
speculation gains during the tax year.
2. Speculation business loss can be carried forward up
to six tax years and shall be adjusted against
income under the same head only.
Capital gain(other than securities and 1. Capital loss can be set-off only against capital gains
immovable property) during the tax year.
2. Capital loss can be carried forward up to six tax
years and shall be adjusted against income under
same head only.
3. However, Capital loss can be adjusted against
capital gain under section 37A and not vice versa.
Capital gains-securities 1. Loss under this head may be set off against any gain
on the disposal of some other securities.
2. Losses under this head can be carry forward to 3
subsequent tax years only against gain under
security
Capital gains-immovable property 1. Loss on disposal of immovable property Cannot be
set-off or carried forward.

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Capital gains-(loss on disposal of painting 1. Loss is not recognized under the income tax
sculptures, drawings, work of art, Ordinance,2001. It means there will be no set-off or
jewelry, rare manuscript, folio or carry forward of loss on disposal of such capital
books, postage stamp, first day assets.
cover, coins, medallion, antique)
Foreign losses ( of all types ) 1. All foreign losses can be set-off and carried forward.
2. Foreign-source loss can be set-off against income
under the same head of income only.
3. Foreign-source loss can be carried forward up to six
tax year for adjustment against same head of
income.
Notes:
1. Above discussed rule regarding set-off and carry forward of losses applied only to such income
which is taxable under NTR. Any income which falls under FTR or STR can’t be used to adjust
losses under NTR.

2. The law does not permit any deduction while computing income under FTR or STR; Hence there
can’t be loss under this mode of taxation.

3. Loss can be set-off only as provided above any loss that can’t be set-off under the rules. (e.g.
Loss on disposal of personal asset) can’t be carried forward. [56(2)]

4. Where a person sustains losses under different heads of income, including “income from
business” the business loss shall be set-off after setting of all other losses. [56(3)]

5. The depreciation allowance admissible under the third schedule shall be charged up to that
portion only which can be absorbed by the income. The general rule relating to set-off and carry
forward of losses shall not applied to unabsorbed depreciation. Amount of such depreciation
shall no be taken as normal business loss rather, shall be treated separately.

6. If the income from a source is exempt from tax the loss of such income can’t be set-off and
carried forward.

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Exapmle.1
Mr. A has declared his income/ Loss for the current tax year as under;
Business loss 900,000
Income from property 1,200,000
Taxable other source 800,000

Answer.1
Income from property 1,200,000
Taxable other source 800,000
Business loss (900,000)

Taxable Income 1,100,000

Example 2
For tax year 2025, taxable income/(loss) of Mr. Bilal under various heads of income is as follows:

Required:
Calculate the total income of Mr. Bilal after making adjustment of losses and income under keeping in
view the provisions of Income Tax Ordinance, 2001.

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Past Papers
Q.1 [Autumn 2018 Q.3 (c)]
Jamil and Company (JC) is the sole trader of a branded tea in Pakistan. In addition to the trading
business, JC is also engaged in forward purchasing and selling of tea to reap the benefits of price
fluctuation in local and international markets. Following information has been extracted from the
records of JC for the year ended 30 June 2025:

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Capital Loss for tax year 2019 2

Under the Income Tax Ordinance, 2001 and Rules made thereunder, compute JC’s taxable income /
(loss) and the amount of loss to be carried forward, if any, for the tax year 2025.
Ans.1

Capital loss of Rs. 2 million cannot be carried forward to next year as the period of six years lapsed in tax year
2025.

Q.2 [Spring 2018 Q.4(c)]

Discuss the provisions of the Income Tax Ordinance, 2001 regarding set off and carry forward of losses
under the following heads:
(i) Income from business
(ii) Income from speculation business

Ans.2
Business Loss
i. Where a person sustains a loss for a tax year under the head “income from business”, the
said loss can be fully offset against the person’s income, if any, chargeable to tax under any
other head of income except income from salary and FTR.

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ii. Where such loss cannot be fully offset against the income of any other head for that year, so
much of the loss that has not been offset fully, may be carried forward to the following tax
year and set off against the person’s chargeable income under the head “income from
business” for that year.
iii. No loss can be carried forward for more than six tax years immediately succeeding the tax
year for which the loss was first computed.
iv. Where the business loss includes deductions allowed under depreciation and amortization
that have not been set off against income, the amount not set off, may be added to the
deductions allowed under these heads in the subsequent years and so on until completely set
off.
Speculation Losses
i. If a person sustains a loss in a tax year from any speculation business, he can set off such loss
only against profits of any other speculation business carried on by him during the same tax
year.
ii. In the subsequent years too, the speculation loss can be set-off against income of any
speculation business only. It means that loss from speculation business cannot be adjusted
against income under any other head.
iii. If a person has a speculation loss carried forward for more than one tax years, the loss of
earliest tax year shall be set-off first.
Q.3 [Spring 2016 Q.4]

Lone Traders (LT), a sole proprietorship, is engaged in the business of buying and selling of Maize and
Wheat in bulk quantities. Following information has been extracted from LT’s records for the year ended
31 December 2024:
i. Wheat sold to food companies in Punjab amounted to Rs. 13,000,000. The sale was made after
allowing discount of Rs. 680,000 to some of the new customers. The gross profit margin was
25% on gross sales.
ii. LT paid Rs. 600,000 to a research institute for the development of a formula which is likely to
improve the quality of wheat it purchases from the growers.
iii. In August 2024, LT signed a future contract with Mubarak Enterprises (ME) for the purchase of
500 metric tons of maize at Rs. 15,800 per metric ton. The delivery was expected to be made in
October 2024. ME also agreed to repurchase the entire lot at the price prevailing on the date of
sale.
iv. In October 2024 price of maize increased to Rs. 18,240 per metric ton and LT sold the entire lot
to ME without taking delivery.
v. LT incurred expenditure of Rs. 25,000 in respect of above future contract.
vi. Administrative, selling and distribution expenses amounted to Rs. 2,500,000. These included a
penalty of Rs. 45,000 which was imposed due to late payment of sales tax on wheat.
vii. Assessed losses brought forward from previous year were as follows:

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute LT’s
taxable income/(loss) and the amount of loss to be carried forward, if any, for tax year 2025.

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Ans.3

Lone Traders (LT)

Computation of Taxable income / (loss)
For the tax year 2025

Q.4 [Spring 2015 Q.6]

Aslam is a resident taxpayer who operates his business from Lahore (LHR) and Paris (PAR). In August
2023, he established a new branch in Berlin (BER).
Following information is available in respect of his business operations for tax year 2025:

The following amounts paid by Aslam in respect of BER have been charged to LHR:
(i) salaries for the first three months amounting to Rs. 5 million.
(ii) rent expense for the year amounting to Rs. 7 million.
Required:

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Under the provisions of the Income Tax Ordinance, 2001 calculate the tax payable by Aslam in the tax
year 2025 and foreign tax losses to be carried forward to next year, if any.

Ans.4

Calculation of Tax liability and tax Payable

Particulars Rs.
On 5,600,000 1,610,000
Exceeding 4,000,000 (65,000,000-5,600,000) x 45% 26,730,000
28,340,000
Less: Foreign tax credit (3,000,000)
Lower of
(i) Foreign tax paid = 3,000,000
(ii) At average rate = 10,464,000
(2,834,000/65,000,000 x 24,000,000)
Less: Tax deducted at source (10,000,000)
As Taxable income is above Rs. 10 million so surcharge @ 10% of the taxable income is 28,340,000
applicable (28,340,000 x 10%)
Tax Payable 15,340,000

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Q.5
Following information pertain to Ms. Ayesha for the tax year 2025.

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Ans.5

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 10

CHAPTER
Returns Assessment and Appeals

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Returns

Tax Returns
1. Introduction to tax return
A tax return is the prescribed document made for a tax year which is prepared by the taxpayer in order
to declare his taxable income and tax liability thereon to the FBR. Income tax rules, 2002 prescribe the
forms to be used for returns of income.
Tax return allows a taxpayer to calculate his tax liability, schedule tax payments or request refund for
the overpayment of taxes. In Pakistan, tax returns must be filed annually with reportable income,
including salary, income from property, business income, dividends, capital gains and income from other
sources.
Tax returns are submitted on “IRIS” in Pakistan. IRIS is a web-based computer program for operation
and management of Inland Revenue taxes and laws administered by the board.

2. Persons liable to file a tax return

The following persons are required to furnish a return of income for a tax year:
(i) Every company;
(ii) Every person (other than a company) whose taxable income for the year exceeds the
maximum amount that is not chargeable to tax; or
(iii) Any non-profit organization
(iv) Every person whose income for the year is subject to final taxation under any provision of the
Ordinance;
(v) persons or classes of persons notified by the Board with the approval of the Minister in-
charge
In addition to the above, return is also required to be filed by the person who:
(i) has been charged to tax in respect of any of the two preceding tax years;
(ii) claims a loss carried forward for a tax year;
(iii) owns immovable property with a land area of 500 square yards or more or owns any flat
located in areas falling within the municipal limits existing immediately before the
commencement of local government laws in the provinces; or areas in a cantonment; or the
Islamabad capital territory.
(iv) owns immoveable property with a land area of five hundred square yards or more located in a
rating area;
(v) owns a flat having covered area of two thousand square feet or more located in a rating area;
(vi) owns a motor vehicle having engine capacity above 1000 CC;
(vii) has obtained National Tax Number or
(viii) is the holder of commercial or industrial connection of electricity where the amount of annual bill
exceeds Rs.500,000.
(ix) Is a resident person registered with any chamber of commerce and industry or any trade or
business association or any market committee or any professional body including Pakistan
Engineering Council, Pakistan Medical and Dental Council, Pakistan Bar Council or any
Provincial Bar Council, Institute of Chartered Accountants of Pakistan or Institute of Cost and
Management Accountants of Pakistan.
(x) is a resident person being an individual required to file foreign income and assets statement
under section 116A; or
(xi) every individual whose income under the heading ‘Income from business’ exceeds Rs.300,000
but does not exceed Rs. 400,000 is also required to file tax return.

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3. Persons not liable to file tax return

Under section 115, the following persons are granted immunity from the aforesaid provision of filing of
tax return:
Following persons:
 a widow;
 an orphan below the age of twenty-five years;
 a disabled person; or
 a non-resident person.

Shall not be required to furnish a return of income for a tax year solely because of:
1) owning immovable property with a land area of 500 square yards or more or any flat
located in areas falling within the municipal limits, existing immediately before the
commencement of local government laws in the provinces; or areas in a cantonment; or
the Islamabad capital territory.
2) owns immoveable property with a land area of five hundred square yards or more
located in a rating area;
3) owns a flat having covered area of two thousand square feet or more located in a rating area;
4) owns a motor vehicle having engine capacity above 1000 CC.

4. Powers to call returns and statements

Section 114 empowers the Commissioner of income tax to call for return, the Commissioner may, by
notice in writing, require a person, or a person’s representative, as the case may be, to furnish a return
of income by the date specified in the notice for a period of less than twelve months, where:
 the person has died;
 the person has become bankrupt or gone into liquidation;
 the person is about to leave Pakistan permanently;
 the Commissioner otherwise considers it appropriate to require such a return to be furnished.

The Commissioner may, by notice in writing, require any person who, in the Commissioner’s
opinion, is required to file a return of income for a tax year or assessment year but who has
failed to do so to furnish a return of income for that year within thirty days from the date of
service of such notice or such longer or shorter period as may be specified in such notice or as
the Commissioner may allow. Any such notice may be issued in respect of one or more of the
last five completed tax years or assessment years.
Provided that in case of a person who has not filed return for any of the last five completed
tax years, notice may be issued in respect of one or more of the last ten completed tax years.
Provided further that the above time-limitation shall not apply if the Commissioner is satisfied
on the basis of reasons to be recorded in writing that a person who failed to furnish his return
has foreign income or owns foreign assets.

5. Powers to enforce filing of returns

a. The Board shall have the powers to issue income tax general order in respect of
persons who are not appearing on ATL but are liable to file return.
b. The income tax general order issued may entail any or all of the following
consequences for the persons mentioned therein, namely:
 disabling of mobile phones or mobile phone Sims
 discontinuance of electricity and gas connection

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 restriction on foreign travel from the country for a citizen of Pakistan, excluding persons
holding National Identity Card for Overseas Pakistanis (NICOP), minors, students,
persons proceeding abroad for Hajj or Umrah and such other classes of persons as
notified by the Board.
c. The Board or the Commissioner having jurisdiction over the person mentioned in the income
tax general order may order restoration of mobile phones, mobile phone sims and
connections of electricity and gas, in cases where he is satisfied that the return has been filed
or person was not liable to file return.
d. No person shall be included in the general order unless following conditions have been met
with, namely:
 notice under section 114(4) has been issued by Commissioner demanding return of
income
 date of compliance of the notice under sub-section (4) of section 114 has elapsed and
 the person has not filed the return.

6. Method of filing of Tax Return

A return of income shall be in the prescribed form and shall be accompanied by such
annexure, statements or documents as may be prescribed;
a. shall fully state all the relevant particulars or information as specified in the form of
return, including a declaration of the records kept by the taxpayer; and
b. shall be signed by the person, being an individual, or the person’s
representative where section 172 applies.
c. shall be accompanied with due payment of tax as per return of income;
d. shall be accompanied with a wealth statement as required under section 116 and
e. shall be accompanied with a foreign income and assets statement as required under
section 116A.
A return of income filed electronically on the web or any magnetic media or any other
computer readable media as may be specified by the Board shall also be deemed to be a
return and the Board may, by notification in the official Gazette, make rules for determining
eligibility of the data of such returns and e-intermediaries who will digitize the data of such
returns and transmit the same electronically to the Income Tax Department under their
digital signatures and other matters relating to electronic filing of returns, statements or
documents etc..
Every return purporting to be made or signed by, or on behalf of a person shall be treated as
having been duly made by the person or with the person’s authority until the person proves
the contrary.

7. REVISION OF TAX RETURN

7.1 Filing of revised return or statement

Any person who, having furnished a return, discovers any omission or wrong statement therein,
may file revised return subject to the following conditions, namely:
a. It is accompanied by the revised accounts or revised audited accounts, as the case may
be;
Provided that Commissioner may waive this condition if Commissioner is satisfied that
filing of revised accounts or audited accounts is not necessary.
b. The reasons for revision of return, in writing, duly signed, by the taxpayers are filed
with the return;
c. It is accompanied by approval of the Commissioner in writing for revision of return.

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However, this condition shall not apply if revised return is filed within sixty (60) days of
filing of return. Further, where the Commissioner has not made an order or approval in
writing, for revision of return, before the expiration of sixty days from the date when the
revision of return of sought, the approval so required shall be deemed to have been
granted by the Commissioner, and the specified condition shall not apply. The mode
and manner for seeking the permission for revision shall be prescribed by the Board;
and
d. Taxable income declared is not less than and loss declared is not more than income or
loss, as the case may be, determined by an order issued under Best Judgement
assessment, Amendment of assessment, Revision by the Commissioner, Decision in
appeal, Disposal of appeals by the Appellate Tribunal, Reference to High Court or
Rectification of mistakes under sections 121, 122, 122A, 129, 132, 133 or 221. (These
sections are discussed in detail in the next chapter)

If any of the above conditions is not fulfilled, the return furnished shall be treated as an invalid
return as if it had not been furnished.
Provided also that condition specified in clause (c) shall not apply and the approval required
thereunder shall be deemed to have been granted by the Commissioner, if-
a. the Commissioner has not made an order of approval in writing, for revision of return, before
the expiration of sixty days from the date when the revision of return was sought; or
b. taxable income declared is more than or the loss declared is less than the income or loss,
as the case may be, determined under Assessments (section 120).

7.2 Procedure for filing of revised return and statement

If a taxpayer files a revised return voluntarily along with deposit of the amount of tax short paid or
amount of tax sought to be evaded along with the default surcharge, whenever it comes to his
notice, before receipt of notice under sections 177 (Audit) or section 122(9) (Amendment of
Assessments, no penalty shall be recovered from him
In case the taxpayer deposits the amount of tax as pointed out by the Commissioner during the
audit or before the issuance of notice under the provisions of Amendment of Assessments (sub-
section (9) of section 122), he shall deposit the amount of tax sought to be evaded, the default
surcharge and twenty-five per cent of the penalties leviable under the ordinance along with the
revised return:
In case the taxpayer revises the return after the issuance of a show cause notice under sub-section
(9) of section 122, he shall deposit the amount of tax sought to be evaded, default surcharge and
fifty per cent of the leviable penalties under the ordinance along with the revised return and
thereafter, the show cause notice shall stand abated.

8. Due dates for filing tax returns

Following are the different dates for tax reporting purposes

Section Tax Return Filer Return Period Due Date

118(1) A return of income of a Tax year ending between 1st On or before 31 December next
company January to 30 June following the end of tax year
118(1) & (3) All other cases of person All year ends. On or before 30 September next
filing returns. following the end of tax year.
118(5) Return in response to notice Year end as specified in Due date fixed for submission of
under section 117 notice tax return.
(discontinuance of business)
114(4) Return in response to notice Year end as specified in Due date specified in the notice for
under section114(5) (return notice submission of tax return or thirty
liable to be filed but not filed) days from the date of issuance of
notice.

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According to section 118(2A), where salary income for the tax year is Rs.500,000 or more, the
taxpayer is required to file return of income electronically in the prescribed form and it shall be
accompanied by the proof of deduction or payment of tax and wealth statement as required under
section 116. However, according to SRO 791(I)/2015 dated 10 August 2015 it has been directed
that all individuals earning taxable salary shall be liable to file their returns electronically from tax
year 2015 onwards. Consequently, the threshold of Rs.500,000 or more, as stated above, shall no
more be applicable.

9. Filing of Tax Return on Discontinuance of Business

Any person discontinuing a business shall give the Commissioner a notice in writing to that
effect within fifteen days of the discontinuance.
The person discontinuing a business shall, under the provisions of the Ordinance or on being
required by the Commissioner by notice, in writing, 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 for the
purposes of this Ordinance.
Where no notice has been given by taxpayer 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 who has discontinued the business or is likely to discontinue the
business to furnish to the Commissioner within the time specified in the notice a return of
income for the period specified in the notice.
A return furnished under this case shall be treated for all purposes of the Ordinance as a
return of income, including the application of Section 120.
In case of non-compliance to file return in response to notice by CIR, the CIR may proceed
with best judgment assessment u/s 121. To determine taxable income for best judgment
assessments, CIR may use sectoral benchmark ratios (GP ratio, wastage ratio, NP ratio etc.)
as notified by the Board.

10. Extension of Time for Furnishing Returns and Other Documents

A person required to furnish return or wealth statement may apply, in writing, to the Commissioner
for an extension of time to furnish the return or wealth statement, as the case may be.
The application for extension must be made by the due date of filing of the return or wealth
statement, as the case may be.
Extension in due date may be granted if the Commissioner is satisfied that the taxpayer was unable
to furnish return, or statement due to
(a) absence from Pakistan;
(b) sickness or other misadventure; or
(c) any other reasonable cause
An extension of time as discussed above should not exceed fifteen days from the due date for
furnishing the return of income or statement, as the case may be, unless there are exceptional
circumstances justifying a longer extension of time.
Provided that where the Commissioner has not granted extension for furnishing return under sub-
section (3) or sub-section (4), the Chief Commissioner may on an application made by the taxpayer for
extension or further extension, as the case may be, grant extension or further extension for a period
not exceeding fifteen days unless there are exceptional circumstances justifying a longer extension of
time.”;
An extension of time granted as discussed above shall not change the due date for payment of
income tax payable on the basis of return and default surcharge shall be chargeable for delayed
payment of tax due.

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11. WEALTH STATEMENT

Wealth statement is a statement of assets and liabilities, for any year, which a person is required to file,
in the prescribed form and verified in prescribed manner giving particulars of:
 the person’s total assets including foreign assets and liabilities including foreign liabilities as on
the date or dates specified in such notice;
 the total assets including foreign assets and liabilities including foreign liabilities of the person’s
spouse, minor children, and other dependents as on the date or dates specified in such notice;
Explanation: For removal of doubt, it is clarified that assets of spouse shall only be included
in the wealth statement of the person if the spouse is dependent.
 any assets including foreign assets transferred by the person to any other person during the
period or periods specified in such notice and the consideration for the transfer; and
 the total expenditures incurred by the person, and the person’s spouse, minor children, and
other dependents during the period or periods specified in the notice and the details of such
expenditures; and
 the reconciliation statement of wealth.
Every resident taxpayer being an individual, filing a return of income for any tax year shall furnish a
wealth statement and wealth reconciliation statement for that year along with such return.
Further, every member of an association of persons shall also furnish wealth statement and wealth
reconciliation statement for the year along with return of income of the association.
Where a person, who has furnished a wealth statement, discovers any omission or wrong statement
therein, he may, without prejudice to any liability incurred by him under any provision of this ordinance,
furnish a revised wealth statement along with the revised wealth reconciliation and the reasons for
filing revised wealth statement, under intimation to the commissioner in the prescribed form and
manner, at any time before the receipt of notice for amendment in assessment, for the tax year to which
it relates, is made;
Provided that where the Commissioner is of the opinion that the revision under this sub section is not
for the purpose of correcting a bona fide omission or wrong statement, he may declare such revision
as void through an order in writing after providing opportunity of being heard.
Explanation: For the removal of doubt, it is clarified that wealth statement cannot be revised after the
expiry of five years from the due date of filing of return of income for that tax year.

11.1 Foreign Income and Assets Statement

 Every resident taxpayer being an individual having foreign income of not less than ten
thousand United States dollars or having foreign assets with a value of not less than one
hundred thousand United States dollars shall furnish a statement, hereinafter referred to as
the foreign income and assets statement, in the prescribed form and verified in the
prescribed manner giving particulars of:
a) the person’s total foreign assets and liabilities as on the last day of the tax year;
b) any foreign assets transferred by the person to any other person during the tax year
and the consideration for the said transfer; and
c) Complete particulars of foreign income, the expenditure derived during the tax year
and the expenditure wholly and necessarily for the purposes of deriving the said
income.
 The Commissioner may by a notice in writing require any person being an individual who, in
the opinion of the Commissioner on the basis of reasons to be recorded in writing, was
required to furnish a foreign income and assets statement but who has failed to do so to
furnish the foreign income and assets statement on the date specified in the notice.

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11.2 How to prepare a wealth statement
Preparation of wealth statement is a technical task but familiarity with the method of preparation
of financial statements helps a lot in solving such problems. The manner of preparation of
wealth statements is given hereunder:
Wealth statement is primarily a balance sheet of an individual taxpayer where personal assets
and liabilities of a person are reflected on any given date i.e. the date on which the taxpayer
closes his accounts or the date as demanded through a notice in writing. It is worthwhile to
mention here that wealth statement only gives details of personal assets and liabilities held by a
person but does not reflect the status of business assets and liabilities. However, it does show
net equity or shareholding of that person in any business. A wealth statement is incomplete
without reconciliation statement showing accretion, no change or decrease in wealth.
Cash and bank reconciliation statement is derived from the cash and bank account. It starts
from taking opening balance of cash and bank balances and after adding cash inflows and
subtracting cash outflows, the remaining amount portrays closing balances of cash and bank
account(s). This closing balance is included in the assets of the wealth statement. It is important
to bear in mind that where expenditure side is not explained through the cash receipt side, then
the difference could be un-explained investment as income for the year. To avoid this treatment,
figures need to be tallied with investments worked out through wealth reconciliation statement.
Now after taking the figure of the cash and bank reconciliation, wealth statement for the current
year is complete and a person can easily calculate the figure of increase/decrease in the net
wealth by subtracting the last year’s net wealth figure from the current year’s net wealth figure
shown in the current year wealth statement.
While preparing wealth statement assets and liabilities are recorded at historical cost
irrespective of their present market value.

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Example:
Mr. Nadeem has filled following wealth statement as on 30.06.2025
Particulars Amount (Rs.)
Plot at DHA, Lahore 3,500,000
Capital in ABC & Co 2,500,000
Jewelry 500,000
Shares in XYZ (Pvt.) Ltd 1,000,000
Bank 3,500,000
Total Assets 11,000,000
Personal Loan 1,000,000
Total Net Assets 10,000,000

During the year following information is provided:

 He earned salary income of Rs. 1,300,000 and paid tax Rs.100,000.
 He sold share of Rs. 200,000 for a consideration of Rs. 350,000.
 He settled his personal loan of Rs. 500,000.
 His household expenses aggregate to Rs. 850,000.
 He has given gift of Rs. 400,000 to his brother Kamran through crossed cheque.
 He has earned profit on ABC & Co of Rs.450,000. His drawings from the firm during the
year was Rs. 275,000. He paid tax of Rs. 40,000on firm income.

 He purchased a new plot at EME society for total consideration Rs. 2,000,000
payables in 20 installments. During the year he paid Rs. 700,000 in installments.
 On 30 June 2025, his bank balance was Rs. 2,835,000.
Required:
Prepare the wealth statement and wealth reconciliation as on 30.06.2025
Answer:
Particulars Amount (Rs.)
Opening Wealth 10,000,000
Add: Sources
Salary Income 1,300,000
Gain on Sale of Shares 150,000
Profit on ABC & Co. 450,000
Total Wealth 11,900,000
Less: Deductions
Gift to Brother 400,000
Tax Deducted from Salary 100,000
Tax on Profit of ABC & Co. 40,000
Household Expenses 850,000
Total Deductions 1,390,000
Net Wealth (Rs. 11,900,000 - Rs. 1,390,000) 10,510,000

Cash and Bank Reconciliation Amount (Rs.)

Opening Bank Balance 3,500,000
Add: Inflows

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Salary 1,300,000
Drawings 275,000
Sale of Shares 350,000
Total Inflows 1,925,000
Less: Outflows
Household Expenses 850,000
Taxes 140,000
Gift 400,000
Plot Instalments 700,000
Loan Instalment 500,000
Total Outflows 2,590,000
Closing Bank Balance 2,835,000

Wealth Statement (2025) Amount (Rs.)

Plot at DHA 3,500,000
Capital in ABC (Note 1) 2,675,000
Advance for Plot at EME 700,000
Jewelry 500,000
Shares in XYZ 800,000
Bank 2,835,000
Total Assets 11,010,000
Less: Loan (500,000)
Closing Wealth 10,510,000

Note 1: Capital in ABC Amount (Rs.)

Opening Capital 2,500,000
Profit 450,000
Total Capital 2,950,000
Drawings (275,000)
Closing Capital 2,675,000

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Assessments

ASSESSMENT
1. Definitions
Assessment under the Income Tax Ordinance, 2001 is generally made on the basis of returns
filed for a tax year. This is termed as Universal Self-Assessment Scheme (USAS) by the FBR,
though no such words are used in the Ordinance. Assessment includes provisional
assessment, re-assessment and amended assessment and the cognate expressions shall be
construed accordingly.
Assessment year means assessment year as defined in the repealed Ordinance.

2. Ways of Framing the Assessment

Various ways of framing the assessment under the Income Tax Ordinance, 2001 are as under:
i. Normal assessment, usually referred to as ‘assessment’
ii. Best judgment assessment
iii. Provisional assessment in certain cases
Now we will discuss them one by one in the ensuing paragraphs.

a) Normal Assessment
Section 120 of the Ordinance states that: If a taxpayer has furnished a complete return of income
other than a revised return, the Commissioner shall be treated to have assessed the income and tax
due thereon.
Return shall be taken to be complete if it is in the prescribed form accompanied by such annexures,
statements or documents, fully state all the relevant particulars or information, duly signed with
evidence of payment due and accompanied with a wealth statement in accordance with section
114(2).

Adjustments to be made in declared amounts of the return [Section 120(2A)]

A return of income furnished under sub-section (2) of section 114 shall be processed
through automated system to arrive at correct amounts of total income, taxable income
and tax payable by making adjustments for—
1. Any arithmetical error in the return;
2. Any incorrect claim, if such incorrect claim is apparent from any information in the
return;
3. Disallowance of any loss, deductible allowance or tax credit as specified; and
4. Disallowance of carry forward of any loss under clause (b) of sub-section (1) of
section 182A.
Provided that no such adjustments shall be made unless a system generated notice is
given to the taxpayer specifying the adjustments intended to be made:
Provided further that the response received from the taxpayer, if any, shall be considered
before making any adjustment, and in a case where no response is received within 30 days
of the issue of such notice, adjustments shall be made.
Provided also that where no such adjustments have been made within 6 months of filing of
return, the amounts specified in the return as declared by the taxpayer shall be deemed to
have been taken as adjusted amounts on the day the return was filed and the taxpayer
shall be intimated automatically through IRIS.
Provided also that the provisions of this sub-section shall apply from the date notified by the
Federal Board of Revenue in the official Gazette.

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Note: FBR has thus far not notified any date. Resultantly, the concept of self- assessment
is still applicable.

Note:
For the purposes of this section, —
“Arithmetical error” includes any wrong or incorrect calculation of tax payable including any
minimum or final tax payable.
"An incorrect claim apparent from any information in the return" shall mean a claim, on
the basis of an entry, in the return, —
1. of an item, which is inconsistent with another entry of the same or some other item in
such return;
2. regarding any tax payment which is not verified from the collection system; or
3. in respect of a deduction, where such deduction exceeds specified statutory limit which
may have been expressed as monetary amount or percentage or ratio or fraction.

However, in addition to above deemed assessment, the Commissioner has powers to conduct
audit of income tax affairs of any person under section 177 and all the provisions of that section
shall apply accordingly.
Assessment in Case of Incomplete Return
If the return of income furnished is not complete, the Commissioner shall issue a notice to the
taxpayer informing him of the deficiencies (other than incorrect amount of tax payable on taxable
income, as specified in the return, or short payment of tax payable) and directing him to provide
certain information, particulars, statement or documents by the date specified in the notice in order
to make the return a ‘complete return’.
If a taxpayer fails to fully comply, by the due date, with the requirements of the notice the return
furnished shall be treated as an invalid return as if it had not been furnished. However, if the
taxpayer fully complies with the requirements of the notice, by the due date, the return furnished
shall be treated to be complete on the day it was furnished.
Such notice shall not be issued after expiry of 180 days from the end of the financial year is which
return was furnished.
b) Best Judgment Assessment
This type of judgment is made where a person fails to:
 furnish return of income in response to notice of a Commissioner under sub section (3) or sub
section (4) of section 114; or
 furnish return of income in response to notice under sub-section (3) of section 117; or
 furnish a return as required under section 143 or section 144 (return to be filed by air
carrier or shipping companies); or
 furnish the wealth statement as required under section 116; or
 furnish return of income in response to notice under sec 117(3) notice of business
discontinuance. Produce before the commissioner, or a special audit panel appointed
under sub- section (11) of section 177 or any person employed by a firm of chartered
accountants or a firm of cost and management accountants under section 177, accounts,
documents and records required to be maintained under section 174, or any other relevant
document or evidence that may be required by him for the purpose of making assessment of
income and determination of tax due thereon.
Under any of the above cases, the Commissioner may, based on any available information or
material and to the best of his judgment, make an assessment of the taxable income of the
person and the tax due thereon. Under such a case, the assessment, if any, treated to have been
made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.

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For the purposes of making a best judgment assessment under subsection (1), the
Commissioner may determine taxable income on the basis of sectoral benchmark ratios
prescribed by the Board.
As soon as possible after making a best judgment assessment, the Commissioner shall
issue the assessment order to the taxpayer stating:
 the taxable income;
 the amount of tax due;
 the amount of tax paid, if any; and
 the time, place and manner of appealing against the assessment order.
An assessment order under section 121 shall only be issued within six years from the end
of the tax year to which it relates.
Provided that where notice for furnishing a return of income to any person under sub-section
(4) of section 114 is issued by a Commissioner in respect of one or more of the last ten
completed tax years in pursuance of proviso to sub-section (5) of section 114, an
assessment order under this section shall only be issued within two years from the end of
tax year in which such notice is issued.

c) Provisional assessment in certain cases

This type of assessment is applicable in case:
 Where any concealed asset of a person is impounded by any agency of Federal or Provincial
Government. In such a case, the Commissioner is empowered to make provisional
assessment before making a best judgment assessment or amended assessment.
 Where an offshore asset of any person, not declared earlier, is discovered by the
Commissioner or any department or agency of the Federal Government or a Provincial
Government, the Commissioner may at any time before issuing any assessment order under
section 121 or amended assessment order under section 122, issue to the person a
provisional assessment order or provisional amended assessment order, as the case may
be, for the last completed tax year of the person taking into account the offshore asset
discovered.
 Where any concealed asset is impounded, it shall be taken into account in the computation of
taxable income and tax payable for the last completed tax year of the person during which the
concealed asset was accounted for.
 The Commissioner shall finalize the provisional order or provisional amended assessment
order as soon as possible.

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Note:
Concealment of income includes:
a) The suppression of any item of receipt liable to tax in whole or in part, or failure to
disclose income chargeable to tax;
b) Claiming any deduction or any expenditure not actually incurred;
c) Any act referred to in sub-section (1) of section 111; and
d) Claiming of any income or receipt as exempt which is otherwise taxable.
Explanation - For removal of doubt it is clarified that none of the aforementioned acts would
constitute concealment of income unless it is proved that taxpayer has knowingly and willfully
committed these acts;
Concealed asset means: Any property or asset which, in the opinion of Commissioner, is
acquired from any income chargeable to tax but could not be charged to tax.

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3. Special Provisions with Respect to Assessment

a) Assessment in relation to disputed property

Where the ownership of any property the income from which is chargeable to tax is in
dispute in any civil court in Pakistan, an assessment order or amended assessment
order in respect of such income may be issued at any time within one year after the end
of the financial year in which the decision of the court is made.

b) Evidence of Assessment
I. The production of an assessment order or its certified copy shall be conclusive
evidence of due making of assessment. The assessment order or its certified copy
shall also be conclusive evidence that the amounts and all other particulars are
correct except in cases where the proceedings relating to assessment are under
appeal.
II. Any order of assessment or other document required to be made under
Income Tax Ordinance, 2001, may not be:
1. Quashed or void or voidable for want of form; or
2. Affected due to any mistake, defect or omission therein
III. However, an order shall be quashed or void:
1. If it is in substance and effect, not in conformity with Income Tax Ordinance,
2001; or
2. The person assessed or intended to be assessed or effected by the
document is not designated in it according to common understanding.

4. AMENDMENT OF ASSESSMENT
a) Amendment of assessment
Method of amendment of assessment is elaborated in section 122 of the Ordinance.
i. Commissioner is empowered to amend an assessment order treated as issued on
self- assessment basis u/s 120 or an assessment order made to the best of
Commissioner’s judgment u/s 121. The Commissioner may make such alteration or
additions as he considers necessary.
ii. Amendment of assessment shall not be made after the expiry of 5 years, from the end
of the financial year in which the order is issued or treated as issued.
iii. If a taxpayer furnishes a revised return of income
1. the Commissioner shall treat the revised return as amended assessment
of the taxable income and tax payable thereon as set out in the revised
return; and
2. the taxpayer’s revised return shall be taken to be an amended assessment
order issued to the taxpayer by the Commissioner on the day the revised
return was furnished.
iv. Commissioner is also empowered to amend further as many times as may be
necessary, the original assessment order as amended previously within the later of:
1. five years from the end of the financial year in which the original assessment
order is issued or treated as issued by the Commissioner; or
2. one year from the end of the financial year in which the amended
assessment order is issued or is treated as issued.
v. An assessment order shall only be amended, or an amended assessment shall only
be further amended as above, where the Commissioner has definite information,

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acquired from an audit or on the basis of definite information the Commissioner is

satisfied, that:
1. any taxable income has escaped assessment;
2. total income has been under assessed or assessed at too low tax rate or has
been the subject of excessive relief or refund; or
3. any amount under a head of income has been misclassified.
vi. Definite information includes information relating to sales or purchases of any goods
made by the taxpayer, receipts of the taxpayer from services rendered or other
receipts relating to the acquisition / possession / disposal of any money / asset /
valuable article, or investment made or expenditure incurred by the taxpayer.
vii. The Commissioner may amend, or further amend, an assessment order, if he
considers that it is erroneous in so far it is prejudicial to the interest of revenue.
viii. Once the order of assessment is amended, the Commissioner shall issue an
amended assessment order as soon as possible stating:
1. the amended taxable income of taxpayer;
2. the amended amount of tax due;
3. the amount of tax paid, if any, and
4. the time, place and manner of appealing the amended assessment
ix. No assessment shall be amended or further amended without giving the taxpayer an
opportunity of being heard.
x. Order under this section shall be made within one hundred and eighty days of issuance of
show cause notice or within such extended period as the Commissioner may, for reasons to
be recorded in writing, so however, such extended period shall in no case exceed ninety
days. This proviso shall be applicable to a show cause notice issued on or after the first day of
July, 2021.
xi. Any period during which the proceedings are adjourned on account of a stay order or
Alternative Dispute Resolution proceedings or agreed assessment proceedings under
section 122D or the time taken through adjournment by the taxpayer not exceeding sixty
days shall be excluded from the computation of the period specified above.

b) Detailed explanation
The above provisions relating to amendment of assessment carry much significance. Following
points should be kept in mind:
I. An assessment can only be amended in two situations i.e. on the basis of audit or on the
basis any definite information or where the assessment is erroneous and prejudicial to the
interest of revenue.
II. An assessment can be erroneous however, in case the same is not prejudicial to the interest of
revenue then tax authorities cannot initiate the proceedings of amendment of assessment
under section 122(5A) of the Ordinance. Thus, co-existence of both situations i.e. first error in
the assessment secondly tax loss suffered by the tax authorities, is very necessary to invoke
provisions of section 122(5A) [amendment of assessment].
III. Any change of opinion does not constitute any definite information or makes the assessment
as erroneous and prejudicial to the interest of revenue.
IV. No amendment is allowed unless the taxpayer has been given proper opportunity of being
heard.

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5. Action against Assessment/Amended Assessment Order

Action against an assessment order or an amended assessment order can be take by both FBR and
the taxpayer. Such actions are listed as follows:

From FBR From Taxpayer

Revision by the Commissioner Rectification of mistake
Revision by the Chief Commissioner Appeal
Modification of orders Alternated Dispute Resolution Committee

5.1 Revision of assessment by the Commissioner

Process of revision of assessment is defined in section 122A of the Ordinance in the following
manner:
i. The Commissioner may, suo-moto call for the record of any proceeding in which an order has been
passed by any Officer of Inland Revenue other than the Commissioner (Appeals).
ii. Where, after making such inquiry as is necessary, Commissioner considers that the
order requires revision, the he may make such revision to the order as he deems fit.
iii. Any such order shall not be prejudicial to the person to whom the order relates.
iv. The Commissioner shall not revise any order if:
(a) an appeal against the order lies to the Commissioner (Appeals) or to the
Appellate Tribunal and the time within which such appeal may be made has
not expired; or
(b) The order is pending in appeal before the Commissioner (Appeals) or has
been made the subject of an appeal to the Appellate Tribunal.
v. If any order is remanded back to any lower authority by the Commissioner for
modification, alteration, implementation of directions or de novo proceedings, the
order giving effect to the directions of the Commissioner shall be issued within one
hundred and twenty days.

5.2 Revision by Chief Commissioner

The Chief Commissioner may, either of his own motion or on an application made by the taxpayer
for revision, call for the record of any proceedings relating to issuance of an exemption or lower rate
certificate with regard to collection or deduction of tax at source under Income Tax Ordinance, 2001.
Record of such proceedings shall be called in which an order has been passed by any authority
subordinate to him.
If, after making such inquiry as is necessary, The Chief Commissioner considers that the order
requires, revision, he may make such order as he may deem fit in the circumstances of the
case. However, he shall provide a reasonable opportunity of being heard to the taxpayer.

5.3 Powers of tax authorities to modify orders

I. The modification of orders is elaborated in section 124A of the Ordinance in the following
way: This applies where a question of law is decided either by a High Court or the
Appellate Tribunal in case of a taxpayer.
II. In such a case the Commissioner may proceed to amend the assessment, to the extent it
needs revision due to the decision of High Court or Appellate Tribunal on the question of law.
In this regards the Commissioner shall ignore the fact that either an appeal is preferred or an
application for reference is made against the order of High Court or Appellate Tribunal.
III. Where decision of High Court or Appellate Tribunal is reversed or modified, the
Commissioner may modify assessment in which the said decision was followed within one
year of the date of receipt of decision. In making such modification, the provisions of Income
Tax Ordinance, 2001 relating to time limit for making an assessment or amended
assessment shall be ignored.

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5.4 Agreed assessment in certain cases

I. Where a taxpayer, in response to a notice under sub-section (9) of section 122-Amendment of
assessment, intends to settle his case, he may file offer of settlement in the prescribed form
before the assessment oversight committee, hereinafter referred to as the Committee, in addition
to filing reply to the Commissioner.
II. The Committee after examining the aforesaid offer may call for the record of the case and after
affording opportunity of being heard to the taxpayer, may decide to accept or modify the offer of
the taxpayer through consensus and communicate its decision to the taxpayer.
III. Where the taxpayer is satisfied with the decision of the Committee:
(a) the taxpayer shall deposit the amount of tax payable including any amount of penalty
and default surcharge as per decision of the Committee;
(b) the Commissioner shall amend assessment in accordance with the decision of the
Committee after tax payable including any amount f penalty and default surcharge as
per decision of the Committee has been paid;
(c) the taxpayer shall waive the right to prefer appeal against such amended assessment;
and
(d) no further proceedings shall be undertaken under this Ordinance in respect of issues
decided by the Committee unless the tax as per clause (c) has not been deposited by
the taxpayer.
IV.Where the Committee has not been able to arrive at a consensus or where the taxpayer is not
satisfied with the decision of the Committee, the case shall be referred back to the
Commissioner for decision on the basis of reply of the taxpayer in response to notice under
sub-section (9) of section 122 notwithstanding proceedings or decision, if any, of the
Committee.
V. The Committee shall comprise the following income tax authorities having jurisdiction over the
taxpayer, namely:-
(a) the Chief Commissioner Inland Revenue;
(b) the Commissioner Inland Revenue; and
(c) the Additional Commissioner Inland Revenue.
VI.This section shall not apply in cases involving concealment of income or where interpretation of
question of law is involved having effect on other cases.

6. RECORDS AND AUDIT

6.1 Records
i. Every taxpayer shall maintain in Pakistan such accounts, documents and records as
may be prescribed.
ii. The Commissioner may disallow or reduce a taxpayer‘s claim for a deduction if the
taxpayer is unable, without reasonable cause to provide a receipt, or other record or
evidence of the transaction or circumstances giving rise to the claim for the deduction.
iii. The accounts and documents required to be maintained shall be maintained for six
years after the end of the tax year to which they relate;
However, where any proceeding is pending before any authority or court the
taxpayer shall maintain the record till final decision of the proceedings.
Moreover, time limit of 6 years will not be applicable in case of foreign source
income, assets, expenses etc. and taxpayer is required to maintain record for
indefinite period of time.
iv. Pending proceedings include proceedings for assessment or amendment of

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assessment, appeal, revision, reference, petition or prosecution and any proceedings

before an Alternative Dispute Resolution Committee.
v. Deduction means any amount debited to trading account, manufacturing account,
receipts and expenses account or profit and loss account.
vi. The Commissioner may require any person to install and use an Electronic Tax
Register of such type and description as may be prescribed for the purpose of storing
and accessing information regarding any transaction that has a bearing on the tax
liability of such person.

Note:
Electronic record includes the contents of communications, transactions and procedures
under this Ordinance, including attachments, annexes, enclosures, accounts, returns,
statements, certificates, applications, forms, receipts, acknowledgements, notices, orders,
judgments, approvals, notifications, circulars, rulings, documents and any other information
associated with such communications, transactions and procedures, created, sent,
forwarded, replied to, transmitted, distributed, broadcast, stored, held, copied, downloaded,
displayed, viewed, read, or printed, by one or several electronic resources and any other
information in electronic form

6.1.1 Prescribed books of accounts (Rule 28-33)

Rule Type of Taxpayer Records to be kept

28 Every taxpayer  all sums of money received and expended by the

deriving income from taxpayer and the matters in respect of which the
business receipt and expenditure takes place.
29 Every taxpayer other  all sales and purchases of goods and all services
than companies, provided and obtained by the taxpayer.
deriving income  all assets of the taxpayer
chargeable under the  all liabilities of the taxpayer; and
head Income from
 in case of a taxpayer engaged in assembly,
business
production, processing, manufacturing, mining or like
activities, all items of cost relating to the utilization of
materials, labour and other inputs.
 the books of account, documents and records to be
maintained under this chapter shall be maintained for
six years after the end of the tax year to which they
relate.
 the provision of maintaining the books shall not apply
where any proceeding under the Ordinance is
pending before any authority or court the taxpayer
shall maintain the record till final decision of the
proceedings.
30(1) Taxpayers with  Serially numbered and dated cash-memo / invoice
business income up to / Receipt for each transaction of sale or receipt
Rs.500,000 and new containing the following
taxpayers deriving (a) taxpayer’s name or the name of his business,
income from business address, national tax number or CNIC and sales
tax registration number, if any
(b) the description, quantity and value of goods sold

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or services rendered;
 Where each transaction does not exceed
Rs. 100, one or more cash-memos per day for all
such transactions may be maintained
 Daily record of receipts, sales, payments, purchases
and expenses a single entry in respect of daily
receipts, sales, purchases and different heads of
expenses will suffice; and
 Vouchers of purchases and expenses.
30(2) Taxpayers with  Serially numbered and dated cash-memo / invoice /
business income receipt for each transaction of sale or receipt
exceeding Rs. containing the following
500,000 and (a) taxpayer’s name or the name of his business,
wholesalers, address, national tax number or CNIC and sales
distributors, dealers tax registration number, if any
and commission (b) the description, quantity and value of goods sold
agents or services rendered; and
(c) in case of a wholesaler, distributor, dealer and
commission agent, where a single transaction
exceeds Rs. 10,000, the name and address of
the customer
Provided that where each transaction does not
exceed Rs.100, one or more cash-memos per
day for all such transactions may be maintained
 Cash book and/or bank book or daily record of
receipts, sales, payments, purchases and expenses;
a single entry in respect of daily receipts, sales,
purchases and different heads of expenses will
suffice.
 General ledger or annual summary of receipts, sales,
payments, purchases and expenses under distinctive
heads.
 Vouchers of purchases and expenses and where a
single transaction exceeds Rs. 10,000 with the name
and address of the payee; and
 Where the taxpayer deals in purchase and sale of
goods, quarterly inventory of stock-in-trade showing
description, quantity and value.
30(3). Professionals like  Serially numbered and dated patient-slip / invoice
medical practitioners, / Receipt for each transaction of sale or receipt
legal practitioners, containing the following
accountants, auditors, (a) taxpayer’s name or the name of his business or
architects, engineers profession, address, national tax number or
etc. CNIC and sales tax registration number, if any
(b) the description, quantity and value of medicines
supplied or details of treatment/ case/ services
rendered (confidential details are not required)

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and amount charged

(c) the name and address of the patient / client
Provided that the condition of recording address of
the patient on the patient slip under this clause shall
not apply to general medical practitioners
 Daily appointment and engagement diary in respect of
clients and patients provided that this clause shall not
apply to general medical practitioners
30(4) Manufacturers (with  Serially numbered and dated cash-memo / invoice
turnover exceeding /receipt for each transaction of sale or receipt
Rs. 2.5 million) containing the following
(a) taxpayer’s name or the name of his business
address, national tax number or CNIC and sales
tax registration number, if any
(b) the description, quantity and, value of goods sold
(c) where a single transaction exceeds Rs. 10,000
with the name and address of the customer
 Cash book and/or bank book
 Sales day book and sales ledger (where applicable)
 Purchases day book and purchase ledger (where
applicable)
 General ledger
 Vouchers of purchases and expenses and where a
single transaction exceeds Rs. 10,000 with the name
and address of the payee;
 Stock register of stock-in-trade (major raw materials
and finished goods) supported by gate inward and
outward records and quarterly inventory of all items of
stock-in-trade including work-in-process showing
description, quantity and value.
31 Every taxpayer Salary
deriving income  Salary certificate indicating the amount of salary
chargeable under the and tax deducted there from.
head income from
Income from property
salary, property,
capital gains or other  Tenancy agreement, if executed
sources  Tenancy termination agreement, if executed
 Receipt for amount of rent received
 Evidence of deductions claimed in respect of premium
paid to insure the building, local rate, tax, charge or
cess, ground rent, profit/interest or share in rent on
money borrowed, expenditure on collecting the rent,
legal services and unpaid rent.
Capital gain
 Evidence of cost of acquiring the capital asset
 Evidence of deduction for any other costs claimed
 Evidence in respect of consideration received on
disposal of the capital asset.

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Income from other sources Dividends

 Dividend warrants
Royalty
 Royalty agreement.
Profit on debt
 Evidence and detail of profit yielding debt
 Evidence of profit on debt and tax deducted thereon,
like certificate in the prescribed form or bank account
statement; and
 Evidence of Zakat deducted, if any.
Ground rent, rent from the sub-lease of land or building,
income from the lease of any building together with plant
or machinery and consideration for vacating the
possession of a building or part thereof
(a) Lease agreement
(b) Lease termination agreement.
Annuity or Pension
 Evidence of amount received.
Prize money on bond, winning from a raffle, lottery or
cross word puzzle
 Evidence of income and tax deducted thereon, like
certificate in the prescribed form.
Provision, use or exploitation of property
 Agreement.
Loan, advance, deposit or gift
 Evidence of mode of receipt of a loan, advance,
deposit
or gift i.e., by a crossed cheque or through a banking
channel.
General
Evidence of deduction for any other expenditure claimed.

6.1.2 Books of accounts, documents and records to be kept at specified place

S. No Type of Taxpayer Records to be kept

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1. Income from business The books of accounts, documents and records required to
be maintained by a taxpayer shall be kept at the place
where the taxpayer is carrying on the business or, where
the business is carried on in more places than one, at the
principal place of business or at each of such places if
separate books of accounts are maintained in respect of
each place.
2. Income from sources Where a person derives income from sources other than
other than business from business, the books of accounts, documents and
records shall be kept at the person’s place of residence or
such other place as may be so declared by such person.

3. Place to be clearly The place or places where the books of accounts,

stated on tax returns documents and records are kept shall be clearly stated on
the tax return form in the column requiring the details of the
records maintained.

6.1.3 National Database and Registration Authority

I. The National Database and Registration Authority shall, on its own motion or upon application by the
Board, share its records and any information available or held by it, with the Board, for broadening of the
tax base.
II. The National Database and Registration Authority may identify in relation to any person, (whether a
taxpayer or not) income, receipts, assets, properties, liabilities, expenditures, or transactions that have
escaped assessment or are under-assessed or have been assessed at a low rate, or have been subjected
to excessive relief or refund or have been mis-declared or misclassified under a particular head of income.
III. The Board may use and utilize any information communicated to it by the National Database and
Registration Authority and forward such information to an income tax authority having jurisdiction.
IV.The National Database and Registration Authority may compute indicative income and tax liability of
anyone mentioned above by use of artificial intelligence, mathematical or statistical modelling or any other
modern device or calculation method.
V. The indicative income and tax liability computed by the National Database and Registration Authority shall
be notified by the Board to the person in respect of whom such indicative income and tax liability has
been determined, who shall have the option to pay the determined amount on such terms, conditions,
instalments, discounts, reprieves pertaining to penalty and default surcharge, and time limits that may be
prescribed by the Board.
VI. In case the person against whom a liability has been determined, does not pay such liability within the time
prescribed, the Board shall take action under this Ordinance, upon the basis of tax liability computed
above.
VII. If the person against whom the liability has been determined pays such liability, such payment shall be
construed to be an amended assessment order under section 120 or sub- section (1) of section 122 or
sub-section (4) of section 122 as the case may be.

6.2 Audit [Sec 177]

1) The Commissioner may call for any record or documents including books of accounts maintained
under the Ordinance or any other law for the time being in force for conducting audit of the income
tax affairs of the person.

Note:
Where such record or documents have been kept on electronic data, the person shall
allow access to the Commissioner or the officer authorized by the Commissioner for
use of machine and software on which such data is kept and the Commissioner or the
officer may have access to the required information.

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2) The Commissioner shall not call for record or documents of the taxpayer after expiry of
six years from the end of the tax year to which they relate.
3) The Commissioner may conduct audit proceedings electronically through video links, or
any other facility as prescribed by the Board.
4) Audit on the basis of sectoral Benchmark Ratios prescribed by the Board
Where a taxpayer—
i. has not furnished record or documents including books of accounts;
ii. has furnished incomplete record or books of accounts; or
iii. is unable provide sufficient explanation regarding the defects in records,
documents or books of accounts,
iv. it shall be construed that taxable income has not been correctly declared and
the Commissioner shall determine taxable income on the basis of sectoral
benchmark ratios prescribed by the Board.

Note:
The expression “sectoral benchmark ratios” means standard business sector ratios
notified by the Board on the basis of comparative cases and includes financial ratios,
production ratios, gross profit ratio, net profit ratio, recovery ratio, wastage ratio and
such other ratios in respect of such sectors as may be prescribed.

5) After obtaining the record of a person, the Commissioner shall conduct an audit of the
income tax affairs.
6) After completion of the audit the Commissioner may, if considered necessary, after
obtaining taxpayer ‘s explanation on all the issues raised in the audit, issue an audit
report containing audit observations and findings.
7) After issuing the audit report, the Commissioner may, if considered necessary, amend
the assessment under sub-section (1) or sub-section (4) of section 122, as the case
may be, after providing an opportunity of being heard to the taxpayer under sub-section
(9) of section 122.
8) The provisions of section 177 shall not apply to a person whose income tax affairs have
been audited in any of the preceding four tax years. However, Commissioner may
select a person under section 177 for audit with the approval of the Board.
9) The Board may appoint a firm of Chartered Accountants or a firm of Cost and
Management Accountants to conduct an audit of the income tax affairs of any person or
classes of persons and the scope of such audit shall be as determined by the Board or
the Commissioner on a case-to-case basis.
10) Where a person fails to produce before the Commissioner or a firm of Chartered
Accountants or a firm of Cost and Management Accountants appointed by the Board or
the Commissioner to conduct an audit, any accounts, documents and records, required
to be maintained under section 174 or any other relevant document, electronically kept
record, electronic machine or any other evidence that may be required by the
Commissioner or the firm of Chartered Accountants or the firm of Cost and
Management Accountants for the purpose of audit or determination of income and tax
due thereon, the Commissioner may proceed to make best judgment assessment under
section 121 and the assessment treated to have been made on the basis of return or
revised return filed by the taxpayer shall be of no legal effect.
11) Power of the Commissioner under section 177 is independent of the powers of the
Board under section 214C and nothing contained in section 214C restricts the power of

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the Commissioner to call for the record or documents including books of accounts of a
taxpayer for audit and to conduct audit under this section.
12) The Board may appoint as many special audit panels as may be necessary, to conduct an
audit, including a forensic audit, of the income tax affairs of any person or classes of persons and
the scope of such audit shall be as determined by the Board or the Commissioner on a case-to-
case basis. Relevant provisions in this regard are summarized below:
a) The panel shall comprise of any two or more members from:
 an officer of Inland Revenue;
 a firm of chartered accountants;
 a firm of cost and management accountants; or
 any other person as directed by the Board.
b) The Panel shall be headed by a Chairman who shall be an officer of Inland Revenue;
c) Powers under section 175 and 176 for the purpose of conducting an audit shall only
be exercised by an officer of Inland Revenue who are member or members of the
panel, and authorized by the Commissioner;
d) Where a person fails to produce before the Commissioner or a special audit panel
appointed to conduct an audit, any accounts, documents and records, required to be
maintained under section 174 or any other relevant document, electronically kept
record, electronic machine or any other evidence that may be required by the
Commissioner or the panel for the purpose of audit or determination of income and tax
due thereon, the Commissioner may proceed to make best judgment assessment
under section 121 and the assessment treated to have been made on the basis of
return or revised return filed by the taxpayer shall be of no legal effect.
e) If any member of the panel, not being the Chairman, is absent from conducting an
audit, the proceedings may continue and the audit conducted by the special audit
panel shall not be invalid or be called into question merely on account of such
absence;
f) Functions performed by the officer or officers of Inland Revenue as members of the
special audit panel to conduct audit, shall be treated as having been performed by the
special audit panel;
g) The Board may prescribe the mode and manner of constitution, procedure and
working of the special audit panel.

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1 APPEALS AND CIRCUMSTANCES GIVING RISE TO APPEAL

1.1 What is appeal?

 Most appeals arise on account of disagreement between the taxpayer and the tax
collectors (income tax department) regarding the quantification of the taxable income
and tax liability thereon as well as levy of default surcharge, penalties, etc. To resolve
such disagreements law lays down the procedure, which gives the taxpayer right of
appeal before the Commissioner (Appeals) or Appellate Tribunal Depending upon the
case amount and if the taxpayer or the tax collectors are not satisfied with the appellate
order of the Commissioner (Appeals) or Appellate Tribunal, further right of appeal before
the High Court.
 Usually, an agreement is reached through correspondence or discussion and in most
cases disputes are settled with the taxpayers at the Taxation Officer’s / Commissioner’s
level, saving time and trouble all around.

1.2 Forums of appeals

Following forums of appeal are available to an aggrieved person:
(i) Commissioner (Appeals) if value of assessment of tax and refund of tax is Rs.20 million or
less.
(ii) Appellate Tribunal if value of assessment of tax and refund of tax is more than Rs.20 million.
(iii) High Court
(iv) Supreme Court of Pakistan (against decision of reference to High Court).
(Although the Ordinance does not provide anything on the subject, but any person
can prefer to SC under the Constitution); and
(v) Alternative Dispute Resolution

1.3

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1.4 Circumstances giving rise to appeal to the Commissioner (Appeal)

Circumstances giving rise to an appeal may include:
(i) A best judgment assessment (ex-parte assessment) based on any available
information or material to the best of the Taxation Officer’s / Commissioner’s
judgment.
(ii) An amendment of assessment
(iii) An order holding an individual personally liable to pay the amount of tax, which was
required to be collected or deducted by him/her or having collected or deducted
fails to pay the same as required by the law
(iv) An order declaring or treating a person as a representative of a non-resident person
(v) An order refusing to rectify the mistake, either in full or in part
(vi) An order having the effect of enhancing the assessment or reducing a refund or
otherwise increasing the tax liability
(vii) an appeal to the Commissioner (Appeals) shall lie where the value of assessment
of tax or, as the case may be, refund of tax does not exceed twenty million rupees
No appeal in above cases, shall be made by a taxpayer against an order of assessment
unless the taxpayer has paid the amount of tax due under subsection (1) of section 137
(tax due at time of furnishing the return).

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2 Appeals to the Commissioner (Appeals)

2.1 Procedure for filing of appeal
The taxpayer may file appeal against an assessment or assessment order in addition to many other
actions prejudicial to the taxpayer, before the Commissioner (Appeals). Section 127 deals with this
issue in the following manner:
Filing of appeal to the Commissioner (Appeals)
 Any person who is aggrieved by an order passed by the Commissioner or a Taxation Officer can
file the appeal before the Commissioner (Appeals).

Note:
 If tax demanded or refund in an order passed by the Commissioner or a Taxation
Officer is more than 20 million rupees than appeal shall be filed to Appellate Tribunal
Inland Revenue. Meaning that for tax cases having a tax demand of equal or less than
20 million rupees appeal can be filed to Commissioner (Appeals).
 Any old case standing before Commissioner (Appeals) exceeding such amount shall
also be transferred to ATIR till 31 Dec 2024.
 Every appeal shall be filed in the prescribed form, verified in the prescribed manner, be
accompanied by the prescribed fee and shall precisely state the grounds upon which the appeal
is made.
 In case appeal is made against an order of assessment the application shall be accompanied by
fee of Rs.5,000 for company and Rs. 2,500 for other than company.
 In case of any other order, fee of Rs. 5,000 in case of company and Rs. 1,000 in other cases,
shall be payable.
 No appeal shall be filed if the taxpayer has not paid tax due u/s 137(1) (i.e.) tax payable with
return).
 The appeal should be filed:
a) where the appeal relates to an order of assessment or penalty, within 30 days from the
date of service of notice of demand u/s 137(2) in respect of any order of assessment or
penalty; and
b) in any other case within 30 days of the service of intimation of order against which appeal
is to be filed.
 However, Commissioner (Appeals) may condone the delay in filing of an appeal upon
application in writing by the appellant
 The Board may prescribe mechanism for electronic filing of the appeals.

2.2 Procedures for disposal of appeals

Section 128 of the Ordinance outlines the procedure for disposal of appeal in the following manner:
 The Commissioner (Appeals) shall give notice of the day fixed for the hearing of the appeal to
the appellant and to the Commissioner against whose order the appeal has been made.
 Where in a particular case, the Commissioner (Appeals) is of the opinion that the recovery of
tax levied, shall cause undue hardship to the taxpayer, he, after affording opportunity of being
heard to the Commissioner against whose order appeal has been made, may stay the recovery
of such tax for a period not exceeding thirty days in aggregate.
 The Commissioner (Appeals), after affording opportunity of being heard to the Commissioner
against whose order appeal has been made, may stay the recovery of such tax for a further
period of thirty days, provided that the order on appeal shall be pass within the said period of
thirty days.

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 The Commissioner (Appeals) may adjourn the hearing of the appeal from time to time.
 The Commissioner (Appeals) may, before the hearing of an appeal, allow an appellant
to file any new ground of appeal not specified in the grounds of appeal already filed by
the appellant where the Commissioner (Appeals) is satisfied that the omission of the
ground from the form of the appeal was not willful or unreasonable.
 The Commissioner (Appeals) may, before disposing of an appeal, call for such
particulars as the Commissioner (Appeals) may require respecting the matters arising
in the appeal or cause further enquiry to be made by the Commissioner.
 The Commissioner (Appeals) shall not admit any documentary material or evidence
which was not produced before the Commissioner unless the Commissioner (Appeals)
is satisfied that the appellant was prevented by sufficient cause from producing such
material or evidence before the Commissioner.
2.3 Decision in appeal
 In disposing of an appeal, the Commissioner (Appeals) may:
a) make an order to confirm, modify or annul the assessment order after
examining such evidence as required by him respecting the matters arising in
appeal or causing such further enquires to be made as he deems fit; or
b) in any other case, make such order as the Commissioner (Appeals) thinks fit.
 The Commissioner (Appeals) shall not increase the amount of any assessment
order or decrease the amount of any refund unless the appellant has been given a
reasonable opportunity of showing cause against such increase or decrease, as
the case may be.
 Where, as the result of an appeal, any change is made in the assessment of an
association of persons or a new assessment of an association of persons is
ordered to be made, the Commissioner (Appeals) may authorize the
Commissioner to amend accordingly any assessment order made on a member of
the association and the time limit specified in section 122(2) shall not apply to the
making of such amended assessment.
 As soon as practicable after deciding an appeal, the Commissioner (Appeals) shall
specify in the order the amount of tax upheld and serve his order on the appellant
and the Commissioner.
Provided that such order shall be passed not later than one hundred and twenty
days from the date of filing of appeal or within an extended period of thirty days, for
reasons to be recorded in writing by the Commissioner (Appeals):
Provided further that any period during which the hearing of an appeal is
adjourned at the request of the appellant or is postponed due to any appeal or
proceedings or stay order, remand or alternative dispute resolution proceedings or
for any other reason, shall be excluded in the computation of the aforementioned
periods.

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3 APPEALS BEFORE APPELLATE TRIBUNAL

3.1 Appointment of Appellate Tribunal

 This Tribunal is under the administrative control of the Ministry of Law, Justice and
Parliamentary Affairs and therefore enjoys independence from the Board and the
assessment machinery.
 The Appellate Tribunal shall consist of members and chairperson who shall be appointed
by the Federal Government in such numbers, in accordance with such procedure and on
such terms and conditions as the Federal Government may prescribe by rules.
 Existing members including Chairman of the Appellate Tribunal shall continue to hold
office, on the same terms and conditions as applicable to them prior to the commencement
of the Tax Laws (Amendment) Act, 2024, till the completion of their term of office unless
resigned or removed earlier
 A person shall be eligible to be appointed as a member of the Appellate Tribunal, if he:
i. is an advocate of a High Court for not less than fifteen years and possesses such
other qualifications as may be prescribed by rules under this section;
ii. has for a period of not less than ten years practiced professionally as a chartered
accountant within the meaning of the Chartered Accountants’ Ordinance, 1961 (X of
1961);
iii. has for a period of not less than ten years practiced professionally as a cost and
management accountant within the meaning of the Cost and Management
Accountants Act, 1966 (XIV of 1966);
iv. is an officer of the Inland Revenue in BS-21 or above; or
v. is an officer of the Inland Revenue in BS-20, having served in such grade for three
years or more.
 The Federal Government shall appoint any member possessing qualifications stated
above as Chairman of the Appellate Tribunal. The Chairman shall hold office for a period
of three years provided that the Federal Government may reappoint the Chairman for
such further term or terms as it may deem appropriate.
 The Chairman of Appellate Tribunal may resign or may be removed by the Federal
Government, on the recommendation of performance review committee, at any time
before the expiry of his term.
 The members including the Chairman shall cease to hold office on attaining the age of
sixty two years provided that the members falling under clauses (d) and (e) shall cease to
hold office on attaining the age of superannuation, under the law regulating their service:
Provided that a member including the Chairman may resign or may be removed by the
Federal Government, on the recommendation of performance review committee, to be
constituted, at any time before the expiry of his term or attaining the age of
superannuation, as the case may be, on grounds, inter-alia, of inefficiency or misconduct.
 The procedure of the Appellate Tribunal Inland Revenue including constitution of benches,
case management system, distribution of cases and other matters ancillary or incidental
thereto shall be regulated by the rules made by federal government.

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3.2 Appeal to the Appellate Tribunal

The taxpayer or tax department may file appeal before the Income Tax Appellate
Tribunal under section 131 of the Ordinance. This section provides that:
 Subject to pecuniary jurisdiction mentioned above, any person, other than an
State Owned Enterprise (SOE), aggrieved by any order passed by an officer of
Inland Revenue or Commissioner or Chief Commissioner or the Board may,
within thirty days of the receipt of such order, prefer an appeal to the Appellate
Tribunal or, as the case may be, a reference to the High Court:
 An appeal shall be:
a) In the prescribed form;
b) Verified in the prescribed manner;
c) Accompanied, except in case of an appeal preferred by the Commissioner,
by the prescribed fee and
d) Preferred to the Appellate Tribunal within thirty days of the date of service of
order of the Commissioner or Tax officer, as the case may be.
 The prescribed fee shall be Rs. 20,000 in case of company and Rs. 5,000 in cases
other than company.
 The Appellate Tribunal may, upon application in writing, admit an appeal after the
expiration of the above said thirty days if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within that period.
 Notwithstanding that an appeal has been filed before the Appellate Tribunal, tax
shall, unless recovery thereof has been stayed by the Appellate Tribunal, be
payable in accordance with the assessment made in the case:

Provided that on filing of application in a particular case, the Appellate Tribunal may after
affording an opportunity of being heard to the Commissioner having jurisdiction, for
reasons to be recorded, stay the recovery of tax for ninety days:

Provided further that the stay order shall cease to have effect, and the Commissioner shall
be entitled to recover tax, if the taxpayer does not adhere to the hearing schedule for the
appeal, as determined by the Appellate Tribunal in accordance with the rules made under
sub-section (2) of section 130:

Provided also that where an appeal is not decided within the statutory period by the
Appellate Tribunal, the stay order under the second proviso shall not cease to have effect
till finalization of the appeal by the Appellate Tribunal.]

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3.3 Procedure for decision and disposal of appeal by Appellate Tribunal

The mechanism for disposal of appeals by the Appellate Tribunal has been described in section
132 of the Ordinance in the following manner:
 At the first hearing of appeal, the Appellate Tribunal shall:
a) bring to the notice of the taxpayer, the provisions relating to alternative dispute resolution
under section 134A; and
b) if the taxpayer declines the option of alternative dispute resolution and wishes to continue
with the appeal, fix date or dates for hearing and decision of the appeal in consultation
with the taxpayer and Commissioner and in accordance with the rules.
 The Appellate Tribunal shall ensure strict adherence by the taxpayer and the Commissioner,
to the hearing schedule as prescribed, and shall hear and decide the appeal on the date or
dates fixed, and no adjournment shall be granted, except
a) where there are compelling reasons for adjournment, to be recorded by the Appellate
Tribunal; and
b) on mandatory payment of such cost as the Appellate Tribunal may deem fit, which shall
not be less than fifty thousand rupees.
 The Appellate Tribunal shall decide the appeal within 90 days of its filing; The limit for decision
of case of 180 days shall remain applicable for cases pending before amendments for Tax Year
2025.
Provided further that where an appeal is not decided within the aforesaid period, the Appellate
Tribunal shall seek condonation from the Minister of Law and Justice and such condonation
shall not extend beyond ninety days.
 Where the appeal relates to an assessment order, the Appellate Tribunal may make an order
to:
a) Affirm, modify or annul the assessment order; or
b) Remand the case to the Commissioner or the Commissioner (Appeals) for making such
enquiry or taking such action as the Tribunal may direct.
c) make such order as the Appellate Tribunal may deem fit.
 The Appellate Tribunal shall not increase the amount of any assessment or penalty or
decrease the amount of any refund unless the taxpayer has been given a reasonable
opportunity of showing cause against such increase or decrease, as the case may be.
 Where, as the result of an appeal, any change is made in the assessment of an association
of persons or a new assessment of an association of persons is ordered to be made, the
Appellate Tribunal may authorize the Commissioner to amend accordingly any assessment
order made on a member of the association and the time limit specified in of section 122(2)
shall not apply to the making of such amended assessment.
 Where the appeal relates to a decision other than in respect of an assessment, the Appellate
Tribunal may make an order to affirm, vary or annul the decision, and issue such
consequential directions as the case may require.
 The Appellate Tribunal shall communicate its order to the taxpayer and the Commissioner.
 Except as provided in section 133, the decision of the Appellate Tribunal on an appeal shall
be final.

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4 Reference Application Before High Court

4.1 Reference application before High Court

After the receipt of appellate order of the Appellate Tribunal or Commissioner (Appeals),
the taxpayer or the tax department may file a reference application in order to avail the
advisory jurisdiction of High Court on any point of law or a mixed question of law and facts
arising out of such order. Section 133 of the ordinance deals with this issue and the said
section states that:
 The taxpayer or the Commissioner who find themselves aggrieved upon the order of
the Appellate Tribunal or Commissioner (Appeals) can make an application in the
prescribed form to the High Court within thirty days of the communication of an
order.
 In case of reference to the High Court, the applicant must file complete record of
CIRA / ATIR (as the case may be) within 15 days of preferring such application.
Explanation: For the removal of doubt it is clarified that reference against order of
the Commissioner (Appeals), communicated after the date of commencement of the
Tax Laws (Amendment) Act, 2024 shall lie before the High Court notwithstanding the
proceedings pending prior to the date of commencement of the said Act.
 The application should be with a statement of case to the High Court stating any
question of law or a mixed question of law and facts arising out of the order arising out of
such order.
 The statement to the High Court referred to in above para shall set out the facts, the
determination of the Appellate Tribunal or Commissioner (Appeals) and the question
of law or a mixed question of law and facts which arises out of its order.
 Where, on an application the High Court is satisfied that a question of law or a mixed
question of law and facts arises out of the order of the Appellate Tribunal, it may
proceed to hear the case.
 A reference to the High Court shall be heard by a Special Bench or the Special
Benches to be constituted by the Chief Justice, comprises of not less than two
judges of the High Court and, in respect of the reference, the provisions of section
98 of the code of Civil Procedure, 1908, shall apply, so far as may be,
notwithstanding anything contained in any other law for the time being in force.
 The Special Bench shall decide a reference within six months from the date of its
filing
 The High Court upon hearing a reference shall decide the question of law or a mixed
question of law and facts raised by the reference and pass judgment thereon
specifying the grounds on which such judgment is based and the Tribunal’s order
shall stand modified accordingly. The Court shall send a copy of the judgment under
the seal of the Court to the Appellate Tribunal.
 Notwithstanding that a reference has been made to the High court, the amount of
tax shall be payable in accordance with the order of the Appellate Tribunal:
However, the tax recovery shall not be made by the Commissioner for thirty days
from the date of communication of the order of the Appellate Tribunal or the
Commissioner (Appeals)
However, if the amount of tax is reduced as a result of the judgment in the reference
by the High Court, and any amount of tax is found refundable, the High Court may,
on application submitted by the Commissioner, within thirty days of the receipt of the
judgement of the High Court, that he wants to prefer petition for leave to appeal to
the Supreme Court, make an order authorizing the Commissioner to postpone the
refund until the disposal of the appeal by the Supreme Court.

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 On an application in a particular reference, the High Court may grant a stay from
recovery of tax conditional upon deposit of at least 30% of the tax determined by the
CIRA or ATIR (as the case may be). Such stay order shall cease to have effect on
the expiration of a period of six months unless the reference is decided or such order
is withdrawn by the High Court.
 A Reference application by a person other than the Commissioner shall be
accompanied by a fee of Rs. 50,000 from the aggrieved person.
 No application filed by the Commissioner shall be entertained unless it is
accompanied by a written authorization by the relevant Chief Commissioner

5. Petition before Supreme Court

Supreme Court is the final forum for appeal available to the aggrieved parties against any
judgment of the High Court. Article 185 of the Constitution of Pakistan provides that any
aggrieved party to the decision of the High Court can prefer appeal before the Supreme
Court of Pakistan. Accordingly, no provision in this regard is required in the Income Tax
Ordinance, 2001.
5 Alternative Dispute Resolution Committee
Another mechanism for settling disputes provided in the income tax law is the Alternative Dispute
Resolution under section 134A. This envisages formation of an alternate Dispute Resolution
Committee. The said section is as under:
 An aggrieved person may apply for resolution of a dispute pending before any court of law or
appellate forum, through ADR mechanism in following cases:
(a) Where the liability of tax is Rs 50 million or above or admissibility of refund;
(b) The extent of waiver of default surcharge & penalty; or
(c) Any other specific relief required to resolve the dispute.
may apply to the Board for the appointment of a committee for the resolution of any hardship or
dispute mentioned in detail in the application, which is under litigation in any court of law or an
appellate authority, except where criminal proceedings have been initiated.
 The application for dispute resolution as above shall be accompanied by:
a) an initial proposition for resolution of the dispute, including an offer of tax payment.
b) an undertaking that the applicant shall accept the decision of the Committee which
shall be binding on him in all respects and shall on receipt of the decision immediately
withdraw any and all pending litigation or cases of any kind in respect of the dispute
 The Board may, after examination of the application of an aggrieved person, appoint a
committee, within fifteen days of receipt of such application in the Board, comprising, -
a) a retired judge not below the rank of a judge of a High Court, who shall also be the
Chairperson of the Committee, to be nominated by the Board from a panel notified by the
Law and Justice Division for such purpose;
b) the Chief Commissioner Inland Revenue having jurisdiction over the case; and
c) a person to be nominated by the taxpayer from a panel notified by the Board comprising
i. chartered accountants, cost and management accountants and advocates having a
minimum of ten years' experience in the field of taxation;
ii. officers of the Inland Revenue Service who stood retired in BS 21 or above; or
iii. reputable businessmen as nominated by the Chambers of Commerce and
Industry:

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Provided that the taxpayer shall not nominate a chartered accountant or an advocate if the
said chartered accountant or the advocate is or has been an auditor or an authorized
representative of the taxpayer.
 The Board shall communicate the order of appointment of Committee to the aggrieved person,
court of law or the appellate authority where the dispute is pending and to the concerned
Commissioner.
 The Committee appointed shall examine the issue and may, if it deems necessary, conduct
inquiry, seek expert opinion, direct any officer of the Inland Revenue or any other person to
conduct an audit and shall decide the dispute by majority, within forty-five days of its
appointment extendable by another fifteen days for the reasons to be recorded in writing.
 The decision by the Committee shall not be cited or taken as a precedent in any other case or
in the same case for a different tax year.
 The recovery of tax payable by a taxpayer in connection with any dispute for which a
Committee has been appointed shall be deemed to have been stayed on the constitution of
Committee till the final decision or dissolution of the Committee, whichever is earlier.
 The decision of the Committee shall be binding on the Commissioner when the
aggrieved person, being satisfied with the decision, has withdrawn the appeal pending
before the court of law or any appellate authority in respect of dispute as mentioned
above and has communicated the order of withdrawal to the Commissioner.
 Provided that if the order of withdrawal is not communicated to the Commissioner
within 60 days of the service of decision of the Committee upon the aggrieved person,
the decision of the Committee shall not be binding on the Commissioner.
 The Commissioner shall also withdraw the appeal, if any, pending before any court of
law or an appellate authority within thirty days of the communication of the order of
withdrawal by the aggrieved person to the Commissioner.
 The aggrieved person shall make the payment of income tax and other taxes and
within such time as decided by the Committee and all decisions and orders made or
passed shall stand modified to that extent.
 If the Committee fails to decide within the period of sixty days, the Board shall dissolve
the Committee by an order in writing and the matter shall be decided by the court of law
or the appellate authority where the dispute is pending under litigation.
 The Board shall communicate the order of dissolution to the aggrieved person, court of
law or the appellate authority and to the Commissioner.
 On receipt of the order of dissolution, the court of law or the appellate authority shall
decide the appeal within 90 days of the communication of the said order.
 The Board may prescribe the amount to be paid as remuneration for the services of the
members of the Committee, other than Chief Commissioner.
 The Board may, by notification in the official Gazette, make rules for carrying out the
purposes of this section.

Note:
A state-owned enterprise (SOE), shall apply mandatorily for the appointment of a committee for
the resolution of any dispute regardless of the amount of tax liability or refund involved (Limit of
50 million shall not apply).
No suit, prosecution, or other legal proceedings shall lie against the SOE or the committee in
relation to the dispute resolved under this section.
An SOE shall withdraw any and all such pending litigation and cases immediately when filing an
application for formation of a despite resolution committee.

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6 OTHER APPEAL RELATED MATTERS

6.1 Assessment giving effect to an order

 The various situations and time limitations are tabulated below:

Decision of appellate Time within which the new assessment order has to be made
authority

Direct relief provided Two months from the date the order is served on the
to taxpayer commissioner

One year from the end of the financial year in which the
Assessment order
commissioner is served with the order provided no further appeal or
wholly or partly set
reference is preferred against the order of the appellate authority
aside
either by the commissioner or the taxpayer
Two years from the end of the financial year in which the
Any other decision
commissioner is served with the order

 In case of an assessment order is set aside or modified, the proceedings may commence from
the stage next preceding the stage where the setting aside or modification took place. In these
cases, Commissioner shall not be entitled to re-issue any notice which was earlier issued or
shall not require refurnishing or re-filing of any return, statement or other particulars which were
earlier furnished or filed.
 Where in consequence of an order of any appellate forum or court any income is excluded from
the computation:
a) of taxable income of a person for any year and included in the computation of taxable
income for another year; or
b) of taxable income of one person is included in the taxable income of other person.
the assessment or amended assessment made as above shall be treated as assessment in
consequence of such order.
 In case of an assessment order passed under section 124 (Appeal effect), the tax payable shall
become payable immediately instead of payment within 30 days.

6.2 Burden of Proof

Section 136 of the Ordinance points to one very important aspect of appeal and states that in any
appeal by a taxpayer, the burden shall be on the taxpayer to prove, on the balance of probabilities:
1) In the case of an assessment order, the extent to which the order does not correctly reflect the
taxpayer’s tax liability for the tax year; or
2) In the case of any other decision, that the decision is erroneous.

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Returns, Assessments & Appeals

Summary
1. Returns
1.1 Requirement for filing return of income:
1) Company, approved NPO, approved welfare institution;
2) A person (except company) whose taxable income exceeds basic exemption;
3) Every individual whose business income exceeds Rs.300,000 but does not exceed
Rs.400,000;
4) Who has been charged to tax for any of the two immediately preceding tax years;
5) Who claims a loss carried forward;
6) Who has obtained NTN;
7) Who holds commercial or industrial connection of electricity where the annual bills
exceed Rs.500,000;
8) Resident person registered with any-chamber of commerce and Industry / trade
association / market committee / professional body.
9) Resident person required to file foreign income and assets statement.

Not Applicable on
10) Who owns immovable property of 500 square yards or more or a flat
in urban areas;  Non-Resident
11) Who owns immovable property of 500 square yards. or more in a  Widow
rating area;  Orphan below 25
12) Who owns a flat of 2,000 square feet or more in a rating area; years of age
13) Who owns a vehicle of above 1,000 CC;  Disable person

1.2 Due dates for filing return and statement of FTR:

Individual September 30
AOP September 30
Company - YE July to December September 30
Company - YE January to June December 31

Extension allowed for up to 15 days (or longer period in exceptional cases) by

commissioner due to taxpayer’s absence from Pakistan, sickness / misadventure, other
reasonable ground. However, extension is only allowed for filling of return not for payment
of tax along with return.

1.3 Notices by Commissioner

Requirement for filing return within 30 days or time defined in notice.

Filing of return Can be issued for last 5 tax years.
If return not filed in any of last 5 years, then for last 10 years.

Return of less Issued when person has died, become bankrupt, gone into liquidation
than 12 months or is about to leave Pakistan permanently.

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Given by taxpayer within 15 days of discontinuation along with return.

Discontinued
If not given commissioner may ask for the same.
business
Return filing requirement relaxed due to practical difficulty.

1.4 Electronic Filing:

Person registered under Sales Tax

Act Return of income
Non-corporate entity claiming
refund
Return of income with:
Individual having salary income  Proof of tax deduction I payment
 Wealth statement and reconciliation
 Foreign income and assets statement, if required

Federal government departments Withholding tax statements

Person claiming refund Application for refund

1.5 Consequence of not filing return on due date:

 Removal from ATL.
 C/f of losses disallowed.
 Refund disallowed.
 Additional payment for delayed refund disallowed.
1.6 Conditions for revision of return:
1) Accompanied by the revised accounts / audited accounts.
2) Reason for revision duly signed is filed.
3) Accompanied by the Commissioner's approval in writing.
4) Taxable income is not less than the income, or loss is not more than the loss,
determined earlier.
Note:
Commissioner’s approval not required if:
 Return revised within 60 days.
 Condition 4 above is satisfied.
 Commissioner does not approve / reject request within 60 days
1.7 Reduced penalty on voluntary revision

Revised before receipt of notice of audit / amendment 0% penalty

Revised during process of audit 25% penalty

Revised after issuance of notice of amendment 50% penalty

2. Assessment

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2.1 Normal Assessment

Completed return of income shall be considered as normal assessment of taxable income.

Return of income is complete when it is:

 in the prescribed form
 duly signed (on IRIS it is electronically verified when being filed)
 state prescribed information together with a declaration of the records kept
 in the context of business, copy of accounts and any other prescribed documents are
furnished
 accompanied with evidence of payment of due tax
 accompanied with a wealth statement and wealth reconciliation statement
 accompanied with foreign income and assets statement, if required.

2.2 Adjustments to be made in declared respective amounts of the return

A return of income furnished under sub-section (2) of section 114 shall be processed
through automated system to arrive at correct amounts of total income, taxable income and
tax payable by making adjustments for—
(i) Any arithmetical error in the return;
(ii) Any incorrect claim, if such incorrect claim is apparent from any information in the return;
(iii) Disallowance of any loss, deductible allowance or tax credit as specified; and
(iv) Disallowance of carry forward of any loss under clause (b) of sub-section (1) of section 182.

Note:
For the purposes of this section, —
“Arithmetical error” includes any wrong or incorrect calculation of tax
payable including any minimum or final tax payable.
"An incorrect claim apparent from any information in the return" shall mean
a claim, on the basis of an entry, in the return, —
1. of an item, which is inconsistent with another entry of the same or some
other item in such return;
2. regarding any tax payment which is not verified from the collection system; or
3. in respect of a deduction, where such deduction exceeds specified statutory
limit which may have been expressed as monetary amount or percentage or
ratio or fraction.

2.3 Assessment in case of incomplete return

In case of deficiency, Commissioner shall issue a notice within 180 days from the end of FY
in which the return was furnished to complete the return by the date mentioned in the notice.
In case of non-compliance return filed shall be treated as invalid and the taxpayer shall be
treated as not having furnished a return of income by the due date.

2.4 Best judgement assessment:

Done based on any reasonable information and best judgement of commissioner if taxpayer
fails to:
 furnish return of income in response to a notice issued by a commissioner
 file a statement for FTR
 file a wealth statement
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 produce accounts, documents, records or any other documents that the Commissioner or
special audit panel require.
Assessment order shall indicate taxable income, tax due and paid, if any, and the time,
manner and place of appealing the order and issued within following timelines.
5 years after the end of tax year to which it
Return filed during any of the last 5
relates.
years
Means Last six Tax years.
2 years from the end of the tax year in which
Return not filed during any of the last 5
notice is issued.
years Means last three Tax Years

2.5 Provisional assessment:

Issued where concealed asset is impounded or undeclared offshore asset is discovered by
commissioner or any government agency / department. Assessment is to be finalized as soon
as possible.

2.6 Concealment of income includes:

a) The suppression of any item of receipt liable to tax in whole or in part, or failure to disclose
income chargeable to tax;
b) Claiming any deduction or any expenditure not actually incurred;
c) Any act referred to in sub-section (1) of section 111; and
d) Claiming of any income or receipt as exempt which is otherwise taxable.
Explanation - For removal of doubt it is clarified that none of the aforementioned acts would
constitute concealment of income unless it is proved that taxpayer has knowingly and willfully
committed these acts;
Sec 123(3) Concealed asset means any property or asset which, in the opinion of
Commissioner, is acquired from any income chargeable to tax but could not be charged to
tax.
2.7 Assessment of disputed property:
Income shall be assessed within 1 year from the end of the financial year in which the decision
of civil court is made.

2.8 Amendment of assessment:

Done as many times as may be necessary (after providing opportunity of being heard to
taxpayer) in following cases:

1) Commissioner is of the view that the assessment order is prejudicial to the interest of
revenue or the income tax ordinance has incorrectly been applied.
2) The commissioner has definite information that income declared is incorrect including
concealment of income or furnishing of inaccurate particulars.

Within 5 years from the end of the financial year in which the
First Commissioner has issued or treated to have issued the original
assessment order.

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Within the later of:

 5 years from the end of the financial year in which the Commissioner
Subsequent has issued or treated to have issued the original assessment; and
 1 year from the end of the financial year in which the
 amendment was made.

2.9 Appeal effect order:

Within 2 months of the date the Commissioner is served with the appellate
Direct relief
order

Within 2 years from the end of the financial year in which the Commissioner
Others
is served with the appellate order.

2.10 Revisions:

Call records of any proceedings carried out by his subordinate on his

own motion or on application of taxpayer.
By Commissioner
Revise the order passed by subordinate if the matter is not in appeal
but cannot enhance the income.

By Chief Can review the matter where hardship is faced by taxpayer in

Commissioner obtaining exemption / lower rate certificate from commissioner.

2.11 Power of tax authorities to modify orders:

Where commissioner follows a decision of Tribunal or High Court for identical situations in case
of a taxpayers and subsequently the decision is reversed, the commissioner is empowered to
modify assessment within 1 year from the date of receipt of decision of higher authority. Normal
deadline of amendment does not apply in this case.

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3. Appeals

3.1 Commissioner Appeals:

Circumstances giving rise to an appeal may include:
1) Best judgment assessment
2) Amendment of assessment.
3) Order holding an individual personally liable to pay tax of others.
4) Order declaring or treating a person as a representative of a non-resident person.
5) Order refusing to rectify the mistake, either in full or in part.
6) Order enhancing the assessment or reducing a refund or otherwise increasing the
tax liability.

Documents to be submitted are as under:

1. Prescribed form of appeal
2. Grounds of appeal
3. Notice of demand and copy of order
4. Power of attorney
5. Challan for appeal fee.

Note:
If the tax required to be paid with return of income is not paid, the appeal shall become
invalid.
Other Important Information:

Time limit 30 days from receipt of order

The cases of appeal involving a tax liability or refund of equal or less

Amount of tax or than 20 million rupees shall be files to Commissioner (Appeals). If
refund involved amount involved exceeds 20 million rupees appeal shall be filed to
ATIR.
Stay of tax Automatic stay if 10% of tax demand paid.
30 days. Further 30 days allowed but case to be decided within that
demand period.

Time limit 120 days extendable by 60 days.

for decision Adjournment due to taxpayer not to be counted.

Assessment order – confirm, reduce, enhance, annul.

Decisions
Others – as the Commissioner appeals thinks fit

3.2 Appellate Tribunal:

Documents to be submitted are as under:
1. Prescribed form of appeal.
2. Grounds of appeal (including copy of grounds of first appeal).
3. Copy of order.
4. Copy of Commissioner (Appeals) decision order.
5. Board Resolution (In case of company)
6. Power of attorney.
7. Challan for appeal fee.
5 and 6 not required if appeal filed by tax department.

Other Important Information:

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Time limit 30 days from receipt of Commissioner or tax officer’s order

Amount of tax or The cases of appeal involving a tax liability or refund of more than
refund involved 20 million rupees

Stay of tax demand 90 days.

Time limit for 90 days from filing.

decision

Decisions Assessment order – confirm, reduce, enhance, annul, remand back

Others – confirm, reduce, enhance, annul.

A person shall be eligible to be appointed as a member of the Appellate

Tribunal, if he:
i. is an advocate of a High Court for not less than fifteen years and
possesses such other qualifications as may be prescribed by rules
under this section;
ii. has for a period of not less than ten years practiced professionally as a
Who can be a
chartered accountant within the meaning of the Chartered Accountants’
member of
Ordinance, 1961 (X of 1961);
ATIR?
iii. has for a period of not less than ten years practiced professionally as a
cost and management accountant within the meaning of the Cost and
Management Accountants Act, 1966 (XIV of 1966);
iv. is an officer of the Inland Revenue in BS-21 or above; or
v. is an officer of the Inland Revenue in BS-20, having served in such
grade for three years or more.
The case shall be decided on the opinion of the majority. In case of difference, chairperson shall
refer the case to one or more members. Again dispute, then federal government shall appoint
additional member.

3.3 High Court:

Appeal can be filed for question of law only. Whether question of law arises, shall be decided by
High Court.

Time limit 30 days from receipt of Appellate order or Commissioner (Appeals)

order.
Stay of tax demand 6 months on deposit of 30% of tax demand created by ATIR or CIR (A).

Commissioner may postpone refund if:

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 Tax department intends to file appeal to the Supreme Court;

 Tax department files an application to HC within 30 days for permission to postpone the
refund; and
 HC makes an order authorizing the commissioner to postpone the refund till the decision
of the Supreme Court.

3.4 Alternative Dispute Resolution

An aggrieved person may apply for resolution of a dispute pending before any
court of law or appellate forum, through ADR mechanism in following cases:
Eligible Case a) Where the liability of tax is Rs 50 million or above or admissibility of refund
b) The extent of waiver of default surcharge & penalty; or
c) Any other specific relief required to resolve the dispute.

1. a retired judge not below the rank of a judge of a High Court, who shall also
be the Chairperson of the Committee, to be nominated by the Board from a
panel notified by the Law and Justice Division for such purpose;
2. the Chief Commissioner Inland Revenue having jurisdiction over the case;
and
3. a person to be nominated by the taxpayer from a panel notified by the
Board comprising –
Composition
 chartered accountants, cost and management accountants and
advocates having a minimum of ten years’ experience in the field of
taxation
 officers of the Inland Revenue Service who stood retired in BS 21 or
above; or
 reputable businessmen as nominated by the Chambers of
Commerce and Industry:

Stay of tax Auto stay up to the final decision or dissolution of the Committee, whichever is
demand earlier.

Time limit for 45 days and extension of 15 days may be given by giving reasons in writing.
decision If not decided in 60 days, ARDC shall dissolve and case would be decided by
appellate authority or high court where the dispute is pending

Decision Binding on taxpayer and commissioner.

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FORUMS OF APPEALS
SUMMARY OF IMPORTANT PROVISIONS
Appellate
Authorities
Commissioner Appellate
High Court Supreme
(Appeals) Tribunal
Court
Appeal Against
the Order of CIR CIR AT High Court
30 30 30 As per CPC
1908
Days for Appeal
The appellate authority to which an appeal is being preferred may, on
sufficient grounds, extend the period for filing of the appeal.
Assessment cases
Rs.5,000 for
Company and Rs.
2,500 for other
Rs.20,000 for
Taxpayer
Company and
Appeal Fee Rs. 5,000 for
All other cases: As per CPC
other Taxpayers Rs. 50,000
Rs.5,000 for 1908
Company and Rs.
1,000 for other
Taxpayers
• Appeal lies
only if 'point of
law' or a mix of
Admitted tax liability Tax determined point of law
has been paidor by CIR (A) has and point of
Any Other Injunction against been paid or fact is involved. As per CPC
Condition its stay against its 1908
payments have payments have • Tax as per
been obtained. been obtained. ATIR decision
is to be paid or
stay is to be
obtained.
120 days from the
date of filing of 90 days from
Decision Period appeal. May be filling of Not fixed Not fixed
extended up to appeal.
further 60 days.

Limits of
amount for Equal or Less than More than 20
Not fixed Not fixed
handling of 20 million rupees million rupees
cases

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Practice Questions
Q.1
Haider, a filer, was carrying on business as a cloth trader. On 28 October 2024 there was a fire in his
shop and the entire stock of clothes costing Rs. 1,550,000 was destroyed. The insurance company
refused to pay the claim. Consequently, Haider ceased his business on 31 January 2025.

After cessation of business, Haider filed an appeal against the insurance company and was able
to recover Rs. 1,300,000 as full and final settlement from the insurance company in tax year
2025.

Required:
Under the Income Tax Ordinance, 2001:

(i) State the requirements that Haider should comply with, on cessation of his business on 31 January
2025.
(ii) Briefly discuss the treatment of the recovered amount in the tax year 2025.

Ans.1
(i) Haider should give to the Commissioner a notice in writing regarding the discontinuance of
business within fifteen days of the discontinuance i-e by 15 February 2025.

He is also required to furnish the return of income under the provisions of the ITO 2001 or on being
required by the Commissioner by notice in writing.

The return should cover the period commencing from 1 July 2024 to 31 January 2025.

(ii) Under the ITO-2001, if there is any income that has been derived by a person in a tax year
from a business that has ceased before the commencement of that year and if that income
would have been taxable had there been no cessation, then the provision of the tax statute
would apply as if there was no cessation.

In the light of above provision, the receipt of Rs. 1,300,000 shall be included in his
income from business for the tax year 2025, provided that the write off has been
claimed/allowed in the previous year(s).

Q.2
Imran, a resident person, is filing the return of his business income for the first time. He has
been informed by his friend that he will also be required to file a wealth statement. In this
respect, he seeks your advice about the particulars which he should disclose in his wealth
statement.

Ans.2
Particulars to be disclosed in the wealth statement:
 Imran would be required to disclose following particulars in his wealth statement:
 Total assets and liabilities as on 30 June;
 Total assets and liabilities of his spouse, minor children, and other dependents as on 30 June;
 Any assets transferred by him to any other person during the tax year 2025
and the consideration for the transfer;
 Total expenditure incurred by him, his spouse, minor children and other dependents
during the tax year and the details of such expenditure; and 296 of 545
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 The wealth reconciliation statement.

Q.3

a) Under the Income Tax Ordinance, 2001 identify four situations under which an appeal may
be filed with the Commissioner (Appeals).

b) Sadiq Ali has received an ex-prate assessment order from the income tax department under
which he is required to pay Rs. 5.2 million on account of tax not withheld from certain
payments. He does not agree with the contention of the income tax department and would
like to file an appeal to the Commissioner (Appeals).

Required:
State the procedure that he should follow for filing of appeal to the Commissioner (Appeals).

c) Abid is the legal representative of his grandfather since his death on 10 July 2023 and
manages his estate worth Rs. 28 million. On 22 January 2025, he received a notice from the
Income Tax Department requiring him to make payment of Rs. 0.8 million against his
grandfather’s income for the tax year 2022. The notice also required him to submit details of
his grandfather’s income for the tax year 2024.

Required:
Advise Abid about his obligations relating to the tax assessment proceedings pending/arising against
his grandfather.

Ans.3

a) An appeal may be filed with the Commissioner if a person is dissatisfied with the order
passed as follows:

i. A best judgment assessment (ex-parte assessment) based on any available information

or material to the best of the Taxation Officer’s / Commissioner’s judgment.
ii. An amendment of assessment issued by the Commissioner.
iii. An order holding an individual personally liable to pay the amount of tax, which was
required to be collected or deducted by him/her or because of failure to pay the collected
or deducted amount as required by the law.
iv. An order declaring or treating a person as a representative of a non-resident person.

b) A amount is not more than 20 million so Sadiq Ali shall file the appeal in the prescribed form,
verified in the prescribed manner, be accompanied by the prescribed fee and shall precisely
state the grounds upon which the appeal is made.

The appeal should be filed within 30 days of the service of intimation of the order. However,
Commissioner (Appeals) may condone the delay in filing of an appeal upon application in
writing by the appellant.

c) As a legal representative, any proceedings pending against Abid’s grandfather shall

continue against Abid from the stage at which it stood on the date of his grandfather death.
Further, any proceedings which could have been initiated against the deceased if he had
survived, may now be initiated against Abid. Abid is also liable for any tax, which would have 297 of 545
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been payable by his deceased grandfather. However, such liability is limited to the extent of
Rs. 28 million i.e., value of his deceased grandfather’s estate.

Q.4
Specify the circumstances under which the Commissioner of Income Tax has powers to issue
notice demanding a return of income from certain person(s) for a period of less than twelve
months. Also state the powers of the Commissioner if such person fails to furnish the return as
required, within the specified time.

Ans.4
The Commissioner may, by notice in writing, require the following persons or their representatives to
furnish a return of income for a period of less than twelve months:

 a person who has died;

 a person who has become bankrupt or gone into liquidation;
 a person who is about to leave Pakistan permanently;
 where the Commissioner otherwise considers it appropriate to require such a
return to be furnished.

If a person fails to furnish the return, the Commissioner may, based on any available information
or material and to the best of his judgment, make an assessment of the taxable income of the
person and the tax due thereon. Under such a case, the assessment, if any, treated to have
been made on the basis of return or revised return filed by the taxpayer shall be of no legal
effect.

Q.5
a) Under the provisions of the Income Tax Ordinance, 2001 briefly discuss the following:

i. The term ‘Concealed assets’.

ii. The powers of Commissioner relating to the concealed assets of any person
when these are impounded by the Federal Government.

b) Anwar had filed his return of income for the tax year 2018 on 31 August 2019. Discuss the
following in the light of provisions of the Income Tax Ordinance, 2001:
i. By which date the Commissioner of Income Tax could make the first amendment of
the assessment, if required.
ii. By which date any further amendment can be made if the first amendment was made
on 15 February 2023.

Ans.5
a)
i. Under the Income Tax Ordinance, 2001 if in the opinion of the Commissioner, an asset is
acquired from any income chargeable to tax but could not be charged to tax, it is considered
to be a concealed asset.
ii. Where a concealed asset of any person is impounded by any department or agency of the
Federal Government, the Commissioner may at any time, before making a best judgement or
any amended assessment order, issue to the person a provisional assessment order or
provisional amended assessment order, as the case may be, for the last completed tax year
during which the concealed asset was accounted for.
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b)
i. The Commissioner of income tax is empowered to amend the assessment of the taxpayer
within five years from the end of the financial year in which the Commissioner has issued or
treated to have issued the assessment order to the taxpayer Accordingly, in this case
amendment can be made by 30 June 2025.

ii. Where the Commissioner has issued the amended assessment order to the taxpayer, the
limitation period should be later of:

 Five years from the end of the financial year in which the original assessment order is
issued or treated as issued by the Commissioner; or
 One year from the end of the financial year in which the amended assessment order is
issued or is treated as issued to the tax payer. The time limitation for the next
assessment will therefore to be by 30 June 2025.

Q.6
Identify due date of filing of tax return in each of the following cases, under the provisions of the Income
Tax Ordinance, 2001:
i. An individual whose entire income falls under final tax regime
ii. An individual who derives his income from business which falls under normal tax regime.
iii. An individual filing return in response to a notice received from the Commissioner who
believes that he is likely to discontinue his business.
iv. An individual filing return in response to a notice received from the Commissioner for not
filing return of income of the previous tax year.
v. A company.

Ans.6

i. On or before 31 August next following the end of tax year.

ii. On or before 30 September next following the end of the tax year.
iii. Due date fixed for submission of tax return by the Commissioner.
iv. Due date specified in the notice for submission of tax return or thirty days from the
date of issuance of notice.
v.
If tax year ends between 1 January On or before 31 December next following the
to 30 June end of tax year.

If tax year ends between 1 July to On or before 30 September next following the
31 December end of tax year.

Q.7

List the situations under which an original assessment can be amended or an amended
assessment can be further amended by the Commissioner of Income Tax. Also state the time
period within which the original or the previously amended assessment order can further be
amended.

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Ans. 7

When the Commissioner has definite information acquired from an audit or otherwise, the
Commissioner is satisfied that:

 Any taxable income has escaped assessment;

 Total income has been under assessed or assessed at too low tax rate or has been the
subject of excessive relief or refund; or
 Any amount under a head of income has been misclassified.

The Commissioner considers that the assessment order is erroneous in so far as it is prejudicial
to the interest of revenue.

Time period within which assessment can be amended:

The Commissioner is empowered to amend the assessment order within the later of:

 Five years from the end of financial year in which the original assessment order is
issued or treated as issued by the Commissioner; or
 One year from the end of financial year in which the amended assessment order is
issued or treated as issued.

Q.8

a) List the persons who are required to file a tax return under the provisions of the
Income Tax Ordinance, 2001.

b) In the light of the provisions of the Income Tax Ordinance, 2001:

i. Identify the circumstances under which the Commissioner of Income Tax may require a
person to furnish a return of income for a period of less than twelve months.
ii. State the consequences if a person fails to furnish the return as required in (i) above.

Ans.8
a)
Persons liable to file a tax return
The following persons are required to file the return of income:

i. Every company;
ii. Every individual (whether salaried or non-salaried) whose taxable income for any
tax year exceeds the maximum amount which is not chargeable to tax.
iii. Every AOP which has a taxable income for the tax year exceeding the threshold.
iv. Any non-profit organization as defined in section 2(36).
v. persons or classes of persons notified by the Board with the approval of the Minister in charge.
vi. Every person whose income for the year is subject to final taxation under any
provision of the Ordinance;
vii. Every person who has been charged to tax for any of the two immediately preceding tax years;
viii. Every person who claims a loss carried forward for a tax year;
ix. Every person who fulfils any of the following conditions:
1. Owns immovable property with land area of 500 square yards or more,
2. Owns any flat located within the Municipal limits existing immediately before the
commencement of Local Government laws in the provinces or areas in a
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Cantonment Board or the Islamabad Capital Territory;

3. Owns immoveable property with a land area of 500 square yards or more located
in a rating area;
4. Owns a flat having covered area of 2,000 square feet or more located in a rating area;
5. Owns a motor vehicle having engine capacity above 1000 CC;
6. Has obtained National Tax Number; or
7. Has a commercial or industrial connection of electricity and the amount of
annual bill exceeds Rs. 500,000.

Following persons are not required to file return of income solely by reason of owning
immovable property located within municipal limits or cantonment areas or a motor
vehicle:
 A widow;
 An orphan below the age of 25 years;
 A disable person; and
 A non-resident person.

x. Every person who is a resident person and registered with any:

 Chamber of Commerce and Industry;
 Trade or business association;
 Market committee; or
 Professional body including:
a) Pakistan Engineering Council;
b) Pakistan Medical and Dental Council;
c) Pakistan Bar Council or any Provincial Bar Council;
d) Institute of Chartered Accountants of Pakistan; or
e) Institute of Cost and Management Accountants of Pakistan.

xi. Every resident individual required to file foreign income and assets statement u/s 116A.
xii. Every individual whose income under the heading ‘Income from business’ exceeds Rs.300,000
but does not exceed Rs. 400,000 is also required to file tax return.

b)
i. The Commissioner may, by notice in writing, require the following persons or their
representatives to furnish a return of income for a period of less than twelve months:
 a person who has died;
 a person who has become bankrupt or gone into liquidation;
 a person who is about to leave Pakistan permanently;
 where the Commissioner otherwise considers it appropriate to require such a return
to be furnished.

ii. If a person fails to furnish the return as required in (i) above then the Commissioner may,
based on any available information or material and to the best of his judgment, make a
provisional assessment of the taxable income of the person and issue a provisional
assessment order specifying the taxable income and the tax due thereon. The provisional
assessment order is treated as the final assessment order after the expiry of forty-five days
from the date of service of order of provisional assessment.

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Q.9
Maroof filed his return of income for Tax Year 2023 on 30 September 2023. On 15 August 2024 he
received a show cause notice from the Commissioner Inland Revenue u/s 122 for amendment of the
assessment order issued on self-assessment basis.

Required:
Under the provisions of the Income Tax Ordinance, 2001 briefly describe:

a) the circumstances under which an assessment order treated as issued on self-assessment basis may
be amended by the Commissioner.
b) the situations in which the Commissioner may be barred from amending the original
assessment order.

Ans.9
a) Revision of assessment by the Commissioner:
An assessment order shall only be amended by the Commissioner where, on the basis of
definite information acquired from an audit or otherwise, the Commissioner is satisfied that: -
i. Any income chargeable to tax has escaped assessment; or
ii. Total income has been under-assessed, or assessed at too low a rate, or has been the
subject of excessive relief or refund; or
iii. Any amount under a head of income had been mis-classified.

The Commissioner may also amend the assessment if the assessment order is prejudicial to the
interest of revenue.

b) Situations in which the Commissioner may be barred from revising the assessment order:

(i) After the expiry of five years from the end of the financial year in which the order
was issued or treated as issued.
(ii) If an appeal against the order lies to the Commissioner (Appeals) or to the Appellate
Tribunal and the time within which such appeal may be made has not expired; or
(iii) The order is pending in appeal before the Commissioner (Appeals) or has been made
the subject of an appeal to the Appellate Tribunal.

Further an assessment shall not be amended unless the taxpayer has been provided with an
opportunity of being heard.

Q.10
The Income Tax Department initiating a proceeding against Mobeen, issued a demand note requiring him
to pay the outstanding amount of his tax liability for tax year 2021 along with default surcharge. However,
before settlement of his tax liability, Mobeen died in a car accident.

Required:
Under the provisions of the Income Tax Ordinance, 2001:
i. Describe whether tax authorities would be able to recover the amount of tax after Mobeen’s
death and what would be the extent of such recovery.
ii. Comment on the status of the proceedings initiated against Mobeen.

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Ans.10

i. Deceased individual:
Yes, the tax authorities would be able to recover the amount of outstanding liability from the
legal representative of Mobeen.

The legal representative is liable for: -

 any tax that Mobeen would have become liable for if he had not died; and
 any tax payable in respect of the income of Mobeen’s estate.

The liability of the legal representative shall be limited to the extent to which Mobeen’s
estate is capable of meeting the liability and such liability shall be the first charge on
Mobeen’s estate, in preference to any other outstanding liability of the deceased.

ii. Comment on the status of the proceedings:

Any proceeding taken against Mobeen before his death shall be treated as taken against the legal
representative and may be continued against him from the stage at which the proceeding stood on
the date of Mobeen’s death.

Q.11
Emma Watson, the sole proprietor of FG and company, is a resident individual and is in the process of filing
his wealth statement for the Tax Year 2025. The relevant information is as under:

(i) Assets and liabilities disclosed in the wealth statement for the tax year 2024 were as follows:
Particulars Amount (Rs. 000)
Assets
Agriculture land in Faisalabad 10,000
Residential property in DHA Lahore 6,000
Investment in shares of listed companies 2,200
Business capital – FG & Co. 8,000
Motor vehicle 3,080
Cash at bank 1,200
Cash in hand 600
Total Assets (30 June 2024) 31,080
Bank Loan -3,000
Net Assets (30 June 2024) 28,080

(ii) Details of Business FG and Company:

Particulars Amount (Rupees)
Income from business for the Tax Year 2025 5,080,000
Drawings during the year 900,000

(iii) Balance of cash in hand and at bank, as on 30 June 2025 amounted to Rs. 415,000 and Rs.
1,460,000 respectively.

(iv) Transactions carried out by Emma Watson during the year were as follows:
 Paid an advance of Rs. 2,000,000 against purchase of a bungalow for Rs. 20,000,000.
 Sold shares of a listed company for Rs. 700,000. The shares were purchased on 1 May
2024 for Rs. 100,000. Capital gain tax collected by NCCPL amounted to Rs. 75,000.

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 Gifted shares of a listed company to his brother. The shares were purchased by Emma
Watson in 2020 at a cost of Rs. 200,000 whereas market value of the shares at the time
of gift was Rs. 300,000.
 Paid Rs. 400,000 towards principal amount of the bank loan.
 Personal expenses amounted to Rs. 4,150,000.
 Net receipts against agricultural income amounted to Rs. 5,000,000.
 Sold motor vehicle for Rs.100,000 having value of Rs.80,000.

Required:
Prepare Emma Watson’s wealth statement and wealth reconciliation statement for the Tax Year 2025.

Ans.11

Mr. Emma Watson

2025
Wealth as on 30 June 2025
Rupees

Agriculture land in Faisalabad 10,000

Residential property in DHA Lahore 6,000
Investment in shares of listed companies (2,200 - 100 - 200) 1,900
Business capital – FG & Co. (8,000 + 5,080 - 900) 12,180
Advance against bungalow 2,000
Motor vehicle (3,080 - 80) 3,000
Cash at bank 1,460
Cash in hand 415
Total Assets 36,955
Less: Liabilities
Bank loan (Closing Balance) -2,600
Net Wealth as on 30 June 2025 34,355

Wealth Reconciliation Statement for the Tax Year 2025

2025
Particulars
Rupees
Wealth as on 30 June 2025 34,355
Wealth as on 30 June 2024 28,080
Net Increase in Wealth 6,275
Inflows
Income from business 5,080
Agricultural income (Exempt) 5,000
Sale of motor vehicle (100 - 80) 20
Capital gain on sale of shares (700 - 100 - 75) 525
Total Inflows 10,625
Outflows
Gift to brother – listed company shares 200
Personal expenses 4,150
Total Outflows 4,350
Net Increase 6,275

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Q.12
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
I. Briefly discuss the terms ‘Normal assessment’ and ‘Best judgement assessment’.
II. State the requirements that should be complied with by a sole proprietor on discontinuance of
business.
III. List the additional records which are required to be kept by a sole proprietor whose business income
exceeds Rs. 500,000 as compared to a sole proprietor whose business income is up to Rs. 500,000.

Ans.12
I. Normal assessment: If a taxpayer has furnished a complete return of income other than a revised
return, the Commissioner shall be treated to have assessed the income and tax due thereon.

Best judgment assessment:

 This type of judgment is made where a person fails to:
 Furnish return of income in response to notice of a commissioner; or
 Furnish a return as required to be filed by air carrier or shipping companies; or
 Furnish the wealth statement; or
 Produce before the commissioner, or a special audit panel or any person employed by a firm of
chartered accountants or a firm of cost and management accountants, accounts, documents and
records required to be maintained or any other relevant document or evidence that may be
required by him for the purpose of making assessment of income and determination of tax due
thereon.

Under any of the above cases, the Commissioner may, based on any available information or material
and to the best of his judgment, make an assessment of the taxable income of the person and the tax
due thereon.

II. Notice of discontinued business: Sole proprietor shall give the Commissioner a notice in writing to that
effect within fifteen days of the discontinuance of business.
He 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.

III. Following additional records are required to be kept by sole proprietor whose business income
exceeding Rs. 500,000 as compared to a sole proprietor whose business income is upto Rs. 500,000.
 In case of a wholesaler, distributor, dealer and commission agent, where a single transaction
exceeds Rs. 10,000, the name and address of the customer;
 Cash book and/or bank book;
 General ledger or annual summary of receipts, sales, payments, purchases and expenses under
distinctive heads;
 Where a single transaction exceeds Rs. 10,000 with the name and address of the payee; and
 Where the taxpayer deals in purchase and sale of goods, quarterly inventory of stock-in-trade
showing description, quantity and value.

Q.13
a) Briefly explain the term “Sectoral benchmark ratios”. Also, explain the circumstances in which a
Commissioner shall determine taxable income on the basis of sectoral benchmark ratios.

b) Riaasat Limited (RL) is a manufacturing company. With effect from 1 July 2025, RL is considering to
change its tax year from the normal to the special tax year ending on 31 December.

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Required:
Identify the due/last date of filing of RL’s tax return in respect of the following:
 Filing of tax return for the year ended 30 June 2025.
 Filing of tax return for the transitional period.
 Filing of first tax return for the special tax year.

c) Assume that RL has changed its tax year from normal to special and filed its tax returns for relevant tax
years, as discussed in (b) above.
Required:
Identify the due/last date of amendment of assessment related to:
 Normal tax year for the year ended 30 June 2025.
 First special tax year.

Ans.13
a) ‘Sectoral benchmark ratios’ means standard business sector ratios notified by the Board on the basis
of comparative cases and includes financial ratios, production ratios, gross profit ratio, net profit ratio,
recovery ratio, wastage ratio and such other ratios in respect of such sectors as may be prescribed.
Where a taxpayer:
 Has not furnished record or documents including books of accounts;
 Has furnished incomplete record or books of accounts; or
 Is unable to provide sufficient explanation regarding the defects in records, documents or books of
accounts,

it shall be construed that taxable income has not been correctly declared and the Commissioner shall
determine taxable income on the basis of sectoral benchmark ratios prescribed by the Board.

b)
Particulars Due/last date
Filing of normal tax year return for the year ended 30 June 2024 31 Dec 2024
Filing of transitional tax year return 30 Sep 2025
Filing of first special tax year return 30 Sep 2026

c)
Particulars Due/last date
Amendment of assessment related to normal tax year for the year 30 June 2030
ended 30 June 2024
Amendment of assessment related to first special tax year 30 June 2031

Q.14
Aoun has discovered an error in his annual income tax return which was submitted on the due date. Now
he intends to file a revised return voluntarily.

Required:
Under the provisions of Income Tax Ordinance, 2001 state the conditions which Aoun must comply with for
filing valid revised return.

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Ans.14
Aoun has to comply with the following conditions in order to submit a valid revised return:
 The revised return should be accompanied by the revised accounts.
 The reasons for revision of return, in writing duly signed by the taxpayer, should be filed with the
return.
 Permission of the Commissioner in writing for revision of return should be obtained. However, this
condition shall not apply if revised return is filed within 60 days of filing of return.
 Taxable profit declared is not less than profit determined by an order or loss declared is not more than
loss determined by an order.
 Approval required from Commissioner shall be deemed to have been granted by the Commissioner if:
– The Commissioner has not made an order of approval in writing for revision of return, before the
expiration of 60 days from the date when the revision of return was sought; or
– Taxable income declared is more than or the loss declared is less than the income or loss, as the
case may be determined under Assessments.

Q.15
a) Consider the following independent situations:
(i) Hasan, a Pakistani citizen, has been working in the UK since 2017. In tax year 2024, Hasan
invested in shares of a company, listed on the Pakistan Stock Exchange. Within the same tax
year, he subsequently sold these shares and realized a gain of Rs. 500,000. However, during
the Tax Year 2024, he did not earn any Pakistan source income.

(ii) Mehjabeen, a US citizen, got married in Pakistan five years ago and has since been residing in
the country. In January 2025, Mehjabeen’s father passed away in the USA, bequeathing her a
property worth USD 400,000, situated within the USA. She neither earns income nor holds any
assets in Pakistan in her name, which has resulted in her not being required to file a return of
income until tax year 2024.

(iii) XYZ (Pvt.) Limited ceased its business operations indefinitely on 31 August 2024. XYZ
submitted a notice of discontinued business to the Commissioner in accordance with regulatory
requirements. XYZ’s year-end falls on 31 December.

Required:
Discuss whether the above persons are required to furnish the return of income for the tax year 2025
under the provisions of the Income Tax Ordinance, 2001.

b) Under the provisions of the Income Tax Ordinance, 2001, specify the time period within which the
Commissioner may amend an assessment order.

Ans.15
a)
(i) Although Hasan did not earn any Pakistan source income during tax year 2025, he had been
charged to tax in respect of his capital gain income in tax year 2024. Therefore, he is required to
furnish a return of income for tax year 2024.

(ii) In tax year 2025, Mehjabeen, a resident individual, has become an owner of foreign assets worth
USD 400,000, which is above the threshold of USD 100,000, requiring her to file a foreign income
and assets statement. Consequently, Mehjabeen is required to file a return of income in tax year
2025.

(iii) XYZ (Pvt.) Ltd is required to furnish a return of income for the period from 1 January 2024 to 31
August 2024. This period will be considered a separate tax year.

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b) Amendment of assessment by the Commissioner shall not be made after the expiry of five years, from
the end of the financial year in which the order is issued or treated as issued.

Commissioner is empowered to amend further as many times as may be necessary, the original
assessment order as amended previously within the later of:
 five years from the end of the financial year in which the original assessment order is issued or
treated as issued by the Commissioner; or
 one year from the end of the financial year in which the amended assessment order is issued or is
treated as issued.

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CHAPTER
Miscellaneous

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Exercise:

ABC & Co. is an AOP with annual turnover under normal tax regime of Rs. 116,000,000 during the tax
year 2025. If the taxable profit of the AOP is Rs. 1,570,000. Compute the tax liability of the AOP for the
tax year 2025.

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 12

CHAPTER
Income Tax practice questions

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Income Tax Practice Questions

01 DR. A.A. QURESHI
Dr. A. A. Oureshi, a medical-practitioner, furnishes his following receipt and payment account for the
period; 1st July 2023 to 30th June 2025:
Payments Amount Receipts Amount
Rupees Rupees
Rent of clinic 24,000 Consultation fees 450,000
Household expenses 996,000 Visiting fees 100,000
Purchase of motor car 300,000 Remuneration from articles
Purchase of surgical published in magazines 12,000
Equipment 40,000 Rental income 720,000
Salary to assistant 36,000
Advance income tax 60,000
Car running expenses 30,000

Depreciation of motorcar 80,000

Stationery 5,000
Utilities 25,000
Required:
Compute the income for the relative tax year and tax thereon after taking into account the following facts:
(i) Two-third of car running expense is in-connection with personal use.
(ii) Depreciation on car should be charged according to the tax laws.

02 MR. QAIS MANSOOR

Mr.Qais Mansoor is a Director-cum-Company Secretary of Badar Salam Ltd., for several years.
His monthly remunerations are as follows:
Rs.
Basic salary 120,000
House rent allowance 50,000
Utility allowance 20,000
Medical allowance 20,000
210,000
He was paid maintenance cost of his private car valuing Rs 1,350,000 used wholly for the company
business on actual basis aggregating to Rs. 50,000. He received a bonus equivalent to three basic
salaries and a special merit reward equal to two basic salaries during the year.
The company disbursed funeral expenses of his parents in the amount of Rs. 20,000 and also medical
costs on birth of his twin sons in the sum of Rs. 100,000/-, latter being as per employment terms.
The company has also provided him with free furnished accommodation costing Rs. 600,000 per annum.
The company also paid his tax liability of Rs 50,000
He was awarded with the President's Award in March 2025 worth Rs. 500,000.
He earned capital gains on sale of listed shares held since June 2020 (Rs. 200,000) and on sale of land
(Rs. 1,000,000) acquired on July 01, 2022.
Tax deducted from salary Rs. 200,000
He paid the following amounts evidenced by receipts bearing payees N.T.N number, wherever,
applicable:

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1. School fees @ Rs.30,000 per month, for each of his two daughters.
2. Fee to personal solicitor & tax adviser Rs. 20,000.
3. Prior year income and penalties Rs. 50,000.
4. Donations to approved institutions paid through crossed cheques Rs. 500,000.
5. Purchase of second hand car for Rs. 1,000,000 for family use.
Required:
As a tax consultant, you are required to calculate total income, taxable income and tax liability of Mr.Qais
Mansoor for tax year 2025.

03 MR. A. D. CHUGHTAI
Being a Tax Consultant you have been provided with the following information in respect of Mr. A. D.
Chughtai, a Senior Manager of a local company for the period 1st July. 2024 to 30th June, 2025 (Tax Year
2025):
Rupees
Basic pay/wages 2,100,000
House rent 600,000
Medical allowance 100,000
Cost of living allowance 70,000
Utilities 60,000
Servant allowance 30,000
Bonus 210,000
Company car 1300 CC valuing 1,800,000
(Partly used for company's business)
Leave fare assistance 50,000
Employer's contribution to provident fund 80,000
Employer's contribution to pension fund 80,000
Income tax deducted u/s 149 100,000
In addition to the above you have been provided with the following data:
(I) Dividend income 30,000
(withholding tax deducted Rs. 3,000, Zakat deducted Rs. 750)
(ii) Profit on PLS Account 50,000
(withholding tax deducted Rs: 5,000; Zakat deducted Rs. 1,250)
(iii) Professional fee received 50,000
(iv) School Fee paid for two children 200,000
(Receipts show National Tax Number)'
(v) Legal expenses (consultant fee) 60,000
(Receipt show National Tax Number)
(vi) There is no time scale for this position.

Required:
Work out the taxable income and tax liability of Mr. A. D. Chughtai for the tax year 2025 (ignore minimum
tax liability on professional fee.)

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04 MR. ZAMEER ANSARI

Mr.Zameer Ansari is working as a Chief Executive Officer in Wimpy (Private) Limited (WPL).
Following are the details of his income / receipts during the tax year 2025:
(a) His monthly cash remuneration in WPL is as follows:

Rupees
Basic salary 200,000
Medical allowance 30,000
Utilities allowance 10,000
(b) In addition to the above, he was also provided the following benefits in accordance with his terms
of employment:
(i) Medical insurance for hospitalization and surgery, limited to Rs. 1,500,000 per annum.
(ii) Payment of his child’s school fees of Rs. 15,000 per month. The fee is deposited directly
into the school’s bank account.
(iii) Rent free furnished accommodation on 1000 square yards. The accommodation is located
within the municipal limits of Karachi.
(iv) Two company-maintained cars. One of the cars was purchased by WPL for Rs. 3,000,000
and is exclusively for his business use. The second car was obtained on lease on February
1, 2019 and is used partly for official and partly for personal purposes. The fair market value
of the leased vehicle at the time of lease was Rs. 1,800,000.
(v) Leave encashment amounting to Rs. 100,000 was paid to Mr.Zameer on July 5, 2025.
(vi) An amount equal to one basic salary was paid by WPL to an approved pension fund.
(c) Mr.Zameer had received 15,000 shares of WPL on December 1, 2022 under an employee share
scheme. He had the option to transfer the shares on or after January 1, 2024. However, he sold
all the shares on April 1, 2025. Fair value of the shares was as follows:
 Rs. 35 per share on December 1, 2022
 Rs. 42 per share on January 1, 2024
 Rs. 48 per share on April 1, 2025

(d) An apartment owned by Mr.Zameer was rented on July 1, 2023 to Mr. Abdul Ghaffar at a monthly
rent of Rs. 22,000. He received a non-adjustable security deposit of Rs. 150,000 which was partly
used to repay the non-adjustable security deposit amounting to Rs. 90,000 received from the
previous tenant in July 2021. He also incurred Rs. 20,000 on account of repairs to the apartment.
(e) He earned profit amounting to Rs. 75,000 on fixed deposit account maintained with a bank. The
bank withheld income tax amounting to Rs. 7,500 and Zakat amounting to Rs. 2,500.
(f) Tax deducted at source from his salary, amounted to Rs. 250,000.
Required:
Compute the taxable income, tax liability and tax payable by Mr.Zameer Ansari for the tax year 2025.

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05 MS. SAIMA
Ms.Saima is a telecommunication engineer working with a leading GSM operator as their chief technical
officer for the last many years. She has provided you with the following information relating to her
assessment for the year ended June 30, 2025.
(i) Monthly salary of Rs. 500,000 was paid to her by the company consisting of the following:
Rupees
Basic salary 400,000
Medical allowance 40,000
Conveyance allowance 60,000
The salary was credited to her bank account on the 25th of every month. She incurred actual
medical expenses of Rs. 100,000 during the year. These expenses were reimbursed to her by the
company in accordance with the terms of her employment.
(ii) Due to her excellent performance, she received a bonus of two month’s basic salary and tax paid
by the GSM amounting to Rs. 200,000 during the last month of tax year 2025.
(iii) Apart from her employment with a GSM operator, she also served as a visiting faculty member at
a local engineering university and received a total of Rs.522,222. Ms.Saima incurred an
expenditure of Rs. 70,000 towards this service.
(iv) In August 2024, she participated and won a quiz competition arranged by Pakistan Urdu Academy.
The prize money of Rs. 200,000 was paid to her after deduction of a tax of Rs. 40,000.
(v) She inherited a plot of land from her father on his death in July 2016. On October 1, 2024 she
entered into a contract of sale with Mr.Moin for a consideration of Rs. 50.0 million. Mr.Moin paid a
deposit of Rs. 1.0 million and agreed to pay the balance within one month of the date of contract.
On due date, Mr.Moin defaulted in making the payment upon which Ms.Saima forfeited the deposit
in accordance with the terms of the contract. Later on, the plot was sold to Mr.Parkash at a price
of Rs. 50.0 million on 1 August, 2025.
(vi) Ms.Saima purchased another plot of land for a consideration of Rs. 56 million. She borrowed Rs.
5.0 million from her sister for the purchase of this plot. The amount was received in cash.
(vii) Ms.Saima also inherited a painting from her father on his death in July 2016. The painting was
purchased by her father at Rs. 500,000. On April 1, 2025 she sold the painting for Rs.1.0 million.
Required:
Compute the taxable income of Ms.Saima for the tax year 2025. Give brief reasons under the Income
Tax Ordinance, 2001 in support of your treatment of each of the above items.

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06 TAQI AHMED
Taqi Ahmed is working as Director Marketing with Zee Textiles Limited (ZTL) for the last twenty-five years.
Details of his monthly emoluments during the year ended 30 June 2025 are as under:
Rupees
Basic Salary 440,000
Conveyance allowance 44,000
Medical allowance 44,000

In addition to the above, Taqi Ahmed has provided the following information:
(i) He and his family members are covered under the health insurance policy in accordance with
the terms of employment. The amount of annual premium paid by ZTL was Rs. 200,000.
(ii) During the year, daily allowance of Rs. 400,000 was received to meet the expenses for working
on assignments at ZTL’s factories located in Lahore and Multan.
(iii) On 31 July 2025, the HR Committee approved a performance bonus for all employees for the
year ended 30 June 2025. Taqi received Rs. 1,200,000 as performance bonus on 15 August
2025.
(iv) On 31 March 2025, in recognition of completion of twenty five years of his service with ZTL, the
board of directors approved to waive the outstanding amount of loan taken by Taqi Ahmed.
This interest free loan of Rs. 2,500,000 was taken on 1 January 2022 and was repayable in fifty
equal monthly instalments commencing from May 2022. The prescribed benchmark rate is 10%
per annum.
(v) During the year, he received Rs. 100,000 for attending board meetings of ZTL. No tax was
withheld from this amount.
(vi) Amount of tax withheld by ZTL from his salary amounted to Rs. 2,000,000.
Other information relevant to tax year 2024 is as under:
(i) Salary is transferred to the bank account on 10th of the following month.
(ii) 10% annual increase was given to him effective 1st July in each of the last three years.
(iii) Taqi has given his house on rent to his cousin at annual rent of Rs. 1,500,000. The rent was
inclusive of amenities and utilities of Rs. 25,000 per month. However, annual rent for a similar
house with same amenities and utilities, in the vicinity, is Rs. 1,800,000.
(iv) He acquired 15,000 shares of a listed company from Privatization Commission of Pakistan at
a price of Rs. 60 per share on 15 January 2023 . On 15 June 2025, he sold all the shares at
the rate of Rs. 85 each.
(v) On 31 August 2024, he was entitled to receive 5,000 interim bonus shares from Arian Limited
(AL) a listed company. The market value of these shares on that date was Rs. 22 per share.
(vi) He also received Rs. 150,000 as cash dividend declared by AL. The share registrar incorrectly
treated Taqi as non-active taxpayer and deducted 30% withholding tax accordingly.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder computer under
correct head of income, the total income, the taxable income and net tax payable by or refundable to Taqi
Ahmed for the year ended 30 June 2025.

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07 BABER – HI FI LIMITED
Baber is working as General Manger Finance with HI FI Limited (HFL) for the past two years, The details
of his monthly emoluments during the year ended 30 June 2025 are as under:
Rupees
Basic salary 250,000
Medical allowance 28,000
House rent allowance 120,000
In addition to above, Baber was also provided the following:
(i) Rs. 900,000 for signing a bond with HFL. According to the bond Baber would not resign from
his employment before the expiry of 30 June 2026.
(ii) Company maintained car for both official and private use. The car was purchased on 1 August
2024 at a fair market value of Rs. 1,500,000.
(iii) On 1 January 2025, HFL sold an item of inventory to Baber for Rs. 12,000. The net realizable
value of the item of inventory at the end of 31 December 2024 and 30 June 2025 was Rs.
22,000 and Rs. 24,000 respectively. HFL had acquired it in July 2023 at a cost of Rs. 35,000.
(iv) An option was granted to Baber in August 2023 to acquire 2,500 shares in HFL’s parent
company, Mamoo plc, (MP),. However, the option was exercisable after completion of one
year of service with HFL, Baber paid an amount equivalent to Rs. 200,000 to acquire the
option when the fair market value of the option was Rs. 250,000.
On 1 September 2024, he paid an amount equivalent to Rs. 300,000 to acquire the shares in MP. The
shares were issued to him on 15 September 2024, when the market value of each share was equivalent
to Rs. 375.
On 15 June, 2025, Baber sold 2,000 shares in MP and received net proceeds equivalent to Rs. 875,000
in his bank account in Pakistan. This amount was received after deduction of bank charges of Rs. 5,000
and brokerage commission equivalent to Rs. 10,000.
Other information relevant to tax year 2025 is as under:
(i) On 1 July 2024, Baber received following payments from his previous employer Sultan Hospital
Limited:
 Rs. 600,000 in respect of termination benefits under an agreement.
 Rs. 485,000 against gratuity under an unapproved scheme.
(ii) On 1 November 2024, Baber fell ill and was admitted to Sultan Hospital Limited. The hospital
incurred Rs. 65,000 on his treatment but did not charge anything to Baber.
(iii) On 1 December 2024, he paid a premium of Rs. 300,000 on a life insurance policy.
(iv) On 1 January 2025, Baber purchased 35,000 listed shares in Muft Limited (ML) at a price of
Rs. 25 per share. On 20 March 2025, he fully subscribed 15% right shares offered by ML to its
existing shareholders at a price of Rs. 20 per share.
(v) Withholding tax deducted from Baber’s salary during tax year 2025 amounted to Rs. 1,105,000
(vi) His total assessed taxable income and total taxes paid thereon during the three preceding tax
years amounted to Rs. 10,500,000 and Rs. 1,260,000 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, computer the
taxable income and net tax payable by or refundable to Baber for tax year 2025.

08 LONE TRADERS
Lone Traders (LT), a sole proprietorship, is engaged in the business of buying and selling of Maize and
Wheat in bulk quantities. Following information has been extracted from LT’s records for the year ended
31 December 2024:
i. Wheat sold to food companies in Punjab amounted to Rs. 13,000,000. The sale was made after
allowing discount of Rs. 680,000 to some of the new customers. The gross profit margin was
25% on gross sales

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ii. LT paid Rs. 600,000 to a research institute for the development of a formula which is likely to
improve the quality of wheat it purchases from the growers.
iii. In August 2024, LT signed a future contract with Mubarak Enterprises (ME) for the purchase of
500 metric tons of maize at Rs. 15,800 per metric ton. The delivery was expected to be made
in October 2024. ME also agreed to repurchase the entire lot at the price prevailing on the date
of sale.
iv. In October 2024, price of maize increased to Rs. 18,240 per metric ton and LT sold the entire
lot to ME without taking delivery.
v. LT incurred expenditure of Rs. 25,000 in respect of above future contract.
vi. Administrative, selling and distribution expenses amounted to Rs. 2,500,000. These included a
penalty of Rs. 45,000 which was imposed due to late payment of sales tax on wheat.
vii. Assessed losses brought forward from previous year were as follows:

Rupees
Trading business loss 550,000
Speculation business loss 300,000
Capital loss 250,000
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute LT’s
taxable income/(loss) and the amount of loss to be carried forward, if any, for tax year 2025.

09 MR. NAUMAN
Nauman has been working as manager finance in Dua Limited (DL), a public listed company, for many
years. He received following monthly emoluments from DL during the year ended 30 June 2025:

Rupees

Basic salary 120,000

Medical allowance 20,000

House rent allowance 60,000

In addition to the above, the employer also provided him the following benefits:
(i) Company maintained car for both official and personal use. The car was purchased on 1 July 2020
at the cost of Rs. 1,400,000. As per company policy, Nauman purchased this car at its book value
of Rs. 450,000 on completion of five years i.e. 30 June 2025. Fair market value of this car on the
date of sale to Nauman was Rs. 1,000,000.
(ii) Provident fund contribution of Rs. 18,000 per month to a recognized provident fund. An equal
amount was also contributed by Nauman to the fund. Interest income of Rs. 540,000 at the rate of
18% of accumulated balance of the fund was credited to Nauman’s account.
(iii) On 1 July 2024, he was transferred to Lahore and was paid relocation allowance of Rs. 300,000.
(iv) HR Committee approved a performance bonus for the year ended 30 June 2025 for all employees.
Nauman received Rs. 400,000 as performance bonus on 15 July 2025.
(v) On 1 April 2025, Nauman obtained a loan of Rs. 5,000,000 @ 6% per annum from DL to purchase
a new house for his own use. First instalment of the loan was paid on 30 June 2025. He incurred
legal expenses of Rs. 20,000 for obtaining the loan.
Other information relevant to tax year 2025:
(i) During the year, Nauman received interest income of Rs. 510,000 on his investments in defence
savings certificates. The amount was net of withholding income tax at the rate of 15% and Zakat of
Rs. 200,000 was deducted under the Zakat and Usher Ordinance, 1980.

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(ii) On 1 October 2024, Nauman received advance rent of Rs. 1,200,000 for 12 months for renting
office premises. This amount includes Rs. 400,000 for utilities, cleaning and security. During the
tax year 2025, Nauman incurred following expenditures in relation to the premises:
Rupees
Repair and maintenance 70,000
Insurance premium 50,000
Administration and collection charges of rent 30,000
Utility, cleaning and security 250,000
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income and taxable income of Nauman for the tax year 2025. Show all relevant exemptions, exclusions
and disallowances.

10 MS. AYESHA
Following information pertains to Ms. Ayesha for the tax year 2025:
Rs. in million

Income from non-speculation business 15.0

Income from property 3.0
Gain on sale of jewellery 2.5
Gain on sale of listed securities 4.0

Loss from speculation business (4.5)

Loss on sale of shares of a private company (3.6)
Loss on sale of antique (1.6)

Loss on sale of listed securities (6.0)

Loss from agriculture (8.0)
Loss from other sources (19.0)
Required:
Under the Income Tax Ordinance, 2001, discuss how the above losses can be set off against her
aforesaid incomes. Also discuss the amount of losses that can be carried forward for adjustment against
her future incomes.

11 BASIT
For the purpose of this question, assume that the date today is 31 August 2025.
Basit, a senior manager at Master Limited (ML), resigned on 31 January 2025 after completion of
three and a half year of service. During the tax year 2025, he received the following emoluments from
ML:
(i) Salary of Rs. 610,000 per month.
(ii) Allowance of Rs. 60,000 per month for services of domestic servant. Out of which, he paid Rs.
36,000 per month in respect of these services.
(iii) Allowance equal to 5% of salary solely expended in the performance of his duties of employment.
Additional information:
(i) On 1 July 2024, he leased a car having fair market value of Rs. 4,800,000 at a monthly rental
of Rs. 120,000. He pays lease rentals from his own sources but has used this vehicle for both
official and personal purposes.

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(ii) On 1 July 2024, 13000 shares of ML were allotted to Basit under an employee share scheme,
against the payment of Rs. 30 per share. According to the scheme, he was not allowed to sell
/ transfer the shares upto 31 December 2024. On 31 May 2025, he sold 5000 shares of ML at
its fair market value (FMV). FMV of each share on different dates are as follows:

1 July 2024 31 December 2024 31 May 2025

Rs. 50 Rs. 90 Rs. 80

(iii) On 15 February 2025, he received the following payments from ML as final settlement:
 Rs. 320,000 on account of leave encashment.
 Rs. 2,200,000 under gratuity scheme approved by the board.
 Rs. 700,000 salary arrears related to tax year 2024.
(iv) Withholding tax deducted by ML from Basit’s salary during the tax year 2025 amounted to
Rs.1,400,000.
Other information:
(i) On 31 January 2025, he received gold worth Rs. 200,000 as a gift from his old friend.
(ii) On 1 February 2025, he purchased mutual fund units of Rs. 2,500,000.
(iii) On 1 April 2025, he left for United Kingdom and joined Oliver Limited (OL) as an employee at
a monthly salary of GBP 3,200. He remained abroad till end of the tax year 2025. No withholding
tax was deducted by OL from his salary.
(iv) While residing in UK, Basit served as a visiting faculty member at a University. He earned GBP
1,500 from the university and incurred an expenditure of GBP 500 for providing services at the
university. Withholding tax deducted by the university
amounted to GBP 225.
(v) Average exchange rate during 1 April 2025 to 30 June 2025 was GBP 1 = Rs. 250.

Required:

Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(a) compute the total income, taxable income and net tax payable by or refundable to Basit for the
tax year 2025. (Show all relevant exemptions, exclusions and disallowances)
(b) what other option is available to Basit for the taxation of salary arrears of Rs. 700,000 received
from ML as part of final settlement. (Revised computation is not required)
(c) identify the additional statement that Basit needs to file in respect of his foreign source income.
Also briefly discuss the particulars to be mentioned in the additional statement.

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12 WAJAHAT
Wajahat, aged 48 years, is a marketing manager in Nayaab (Pvt.) Limited (NPL), a company engaged in
the manufacture and supply of tissue papers. The details of his monthly emoluments during the year
ended 30 June 2025 are as under:

Rupees
Basic salary 70,000
Dearness allowance 10,000
Conveyance allowance 8,000

In addition to the above, Wajahat was also provided the following:

(i) Provident fund (PF) contribution of Rs.8,400 per month.An equal amount per month was contributed
by Wajahat to the fund. Interest income of Rs. 391,000 at the rate of 20% of accumulated balance
of PF was credited to his PF account.
(ii) Reimbursement of electricity bills during the year amounting to Rs. 60,000.
Following further information is also available:
(i) Wajahat received net dividend of Rs. 78,200 from BEE Limited, a company listed on Pakistan Stock
Exchange Limited. Withholding tax and zakat deducted from dividend amounted to Rs.9,200 and
Rs. 4,600 respectively. He also received dividend of Rs. 65,000 from a company in U.A.E through
normal banking channels. However, no tax was withheld either in Pakistan or U.A.E.
(ii) Wajahat contributed Rs. 890,000 in an approved pension fund under the Voluntary Pension System
Rules, 2005.
(iii) On 1 September 2024, Wajahat started a tuition centre for the students of finance in a posh locality.
He received tuition fees of Rs. 2,198,000 and incurred following expenses:
Monthly salary of Rs. 50,000 paid to himself and Rs. 35,000 to his friend Yousuf who taught financial
accounting at the centre.
Travelling, boarding and lodging expenses of Rs. 300,000. These expenses were incurred by Wajahat in
Sri Lanka for attending teachers training workshop.
(iv) Rs. 250,000 against purchase of used computers for the centre.
(v) Other miscellaneous expenses amounting to Rs. 195,000.
(vi) Wajahat’s total taxable income during the previous tax year was Rs. 1,850,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute thetotal
income, taxable income and net tax payable by/refundable to Wajahat during the tax year 2025.
Note: Show all relevant exemptions, exclusions and disallowances. Tax rates are given on the last page.

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13 SHAHID
Shahid is a resident filer and has provided following information pertaining to tax year 2025:
(i) On 16 June 2022, he inherited a bungalow having a fair market value of Rs. 50 million from
his father on his death. On 1 January 2025, he decided to sell the bungalow to Zamin for Rs. 60
million and received a deposit of Rs. 6 million. On 14 February 2025, he forfeited the deposit on
refusal of Zaminto purchase the bungalow in accordance with the terms of the contract.

On 31 March 2025 he sold and transferred the bungalow to Kazim forRs. 54 million.

(ii) He owns a factory building at Faisalabad. On 1 July 2024, he let out this factorybuilding along with
the plant and machinery at a monthly rent of Rs. 1 million.During the year, he incurred expenses
of Rs. 3.5 million on the repair and maintenance of the factory.

(iii) He owns an agricultural land in Punjab. On 1 January 2025, he rented out the agriculture land at
an annual rent of Rs. 4 million. The fair market value of the annual rent was Rs. 5 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
and taxable income of Shahid under appropriate heads of incomefor the tax year 2025. Also compute his
tax liability for the tax year 2025.
Note: Show all relevant exemptions, exclusions and disallowances.

14 TAHA
Taha who has recently joined a tax consultancy firm, prepares the following table with regard to taxability
of interest income earned by various persons during the tax year 2025:
Amount of Taxability of interest income
Name of Status interest Mode of Head of Tax Admissibility
person income(Rs. in investment income regime of related
million)
expense
Aatif Resident 1.1 Term Deposit Income from FTR Yes
Individual Receipts of a other
bank sources
Bilal Resident 5.5 Term Deposit Income from NTR Yes
Individual Receipts of a other
bank sources
Seema Resident 5.2 Bahbood Income from Exempt No
Individual Savings other
Certificate sources
Non- Securities Income from
Kamal resident *3.3 issuedby the other NTR Yes
Individual resident person sources
Loan agreement
Sikandar Resident 4.4 with Association Income from NTR Yes
Individual of Persons being business
its member
Dream Resident Term Finance Income from
Bank Banking 10.1 Certificates of a other NTR Yes
Limited Company company sources

*Profit was paid outside Pakistan on approved securities which were widely issued outside Pakistan.
Required:
Prepare the corrected ‘Taxability of interest income’ columns in the table.

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15 AB ASSOCIATES (AOP)
AB Associates is an AOP (a registered firm) having 2 partners A and B sharing profit and loss in the ratio
of 60:40, respectively. Profit and loss account for the tax year 2025 is as under:
Sales (without tax deduction) 2,000,000
Less: Cost of sales
Purchases 850,000
Salary to production manager 120,000
Depreciation 180,000
Other manufacturing expenses 150,000 (1,300,00
0)
Gross profit 700,000
Less: Salary to partner A 80,000
Commission to partner B 10,000
Rent of business premises to partner A 240,000
Depreciation on owned assets 20,000
Depreciation on assets subject to finance lease 15,000
Financial charges on leased assets 2,500
Advertisement 8,500
Provision for doubtful debts 10,000
Expense on scientific research 15,000
Other expenses 30,000 (431,000)
Net profit 269,000

Additional information
(a) Salary to production manager consists of:

Basic salary 60,000

Bonus 10,000
House rent allowance 27,000
Overtime 5,000
Utility allowance 18,000
120,000

(b) Lease rentals for the year Rs.18,000

(c) Information for tax depreciation purposes is:

Opening tax WDV of Sale

Purchases
WDV Disposal Proceed

Plant and machinery 250,000 80,000 90,000 40,000

Vehicles 400,000 1,300,000

(one car)

Furniture and fixtures 80,000 10,000 7,500 7,000

Purchased plant and machinery is eligible for initial allowance.

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(d) Other expenses represent the following:

Loss on disposal of fixed assets 13,000

Miscellaneous expenses 40,000
Interest expense on loan utilized for purchase of fixed assets 5,000
Residential telephone bills of partner A 5,000
Bad debts recovered (33,000)

30,000

Bad debts recovered were disallowed by the tax department in the previous year when it was
claimed as bad debt expense.
(e) Analysis of the liabilities reveals that the following amounts are outstanding for more than 3 years:

Liability against purchases 80,000

Bank Loan 200,000

Interest on the above bank loan 40,000

Advance from customers 60,000

(f) Mr.A claimed property related expenses of Rs.56,000 including actual repairs expense of Rs.16,000.

Required:
Calculate taxable income of AOP, share of profit of each partner and tax payable by Mr. A for the tax year
2025.

16 AB & CO.
AB & Co. is a registered firm; having 2 partners viz; A and B, sharing profit and loss equally. The net profit
of the firm for the tax year 2025 was Rs.600,000 after accounting for the following disbursements to
partners:

A B
Rs. Rs.
(a) Salary per month 50,000 25,000
(b) Monthly house rent 20,000 10,000
(c) Hotel bills 5,000 5,000

Other information relating to accounts is as under:

(i) Commission of Rs.50,000 paid to a non-resident on which tax was not deducted at source.
(ii) A vehicle was sold for Rs.1,200,000. WDV as per books was Rs.690,000 but as per tax records, it
was Rs.600,000.
(iii) Manager of the firm has been paid basic salary of Rs.20,000 p.m, conveyance allowance of
Rs.5,000 and house rent allowance of Rs.10,000 p.m.
(iv) Partners have declared the following income from their own sources:

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A B
Rs. Rs.
Dividend from companies 40,000 20,000
Gain on public listed companies' shares 200,000 150,000
holding period more than a year but less than
two years.

Required:
(i) Compute the taxable and divisible income of the firm.
(ii) Work-out the taxable income of each partner.
(iii) Compute tax liability of each partner

17 MS. HAMEEDA & MS. KASHMALA

(a) In May 2025, Ms.Hameeda sold certain personal assets at the following prices:
Rupees
Plot in DHA Karachi 10,000,000
Paintings 2,000,000
Jewellery 5,000,000
Additional information:
(i) Plot in DHA Karachi was inherited by her from her father in May 2014. It was purchased by
her father for Rs. 4,000,000 and market value at the time of inheritance was Rs. 5,000,000.
(ii) Paintings were inherited from her mother in July 2019. These paintings were purchased by
her mother for Rs. 2,350,000 and market value at the time of inheritance was Rs.4,000,000.
(iii) Jewellery costing Rs. 3,000,000 was purchased and gifted to her by her husband in March
2016.
Required:
Discuss the taxability of Ms.Hameeda in respect of the above gains/ losses on sale of assets in the
context of Income Tax Ordinance, 2001.

(b) On 1 July 2023, Ms. Kashmala and Ms.Shumaila formed an Association of Persons (AOP) with the
objective of providing information technology support services to corporate clients. They
contributed Rs. 1.2 million and Rs. 0.8 million respectively in their capital accounts and agreed to
share profits and losses in the ratio of their capitals.
For the year ended 30 June 2024, business loss and unabsorbed depreciation of Rs. 0.4 million
and Rs. 0.3 million respectively were assessed and carried forward. The total turnover of the AOP
in 2024 was Rs. 40 million.
During the year ended 30 June 2025, the AOP incurred a net loss of Rs. 0.8 million on a turnover
of Rs. 50 million. The loss for the year was arrived after adjustment of the following:
(i) Salaries amounting to Rs. 0.5 million and Rs. 0.3 million were paid to Ms.Kashmala and
Ms.Shumaila respectively.
(ii) Accounting depreciation on office assets amounted to Rs. 0.3 million.
(iii) The taxes withheld by the clients, for the year ended 30 June 2025 amounted to Rs. 0.55
million. AOP is entitled to claim tax depreciation of Rs. 0.25 million in respect of the office
assets.
Required:
Calculate the taxable income, net tax payable and unabsorbed losses (including unabsorbed
depreciation), if any, to be carried forward by the AOP for the year ended 30 June 2025. Ignore
any working of minimum tax.

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18 T & H ENTERPRISES
T & H Enterprises is a registered firm comprising of two equal members named Mr.Tariq and Mr.Hamid.
During the tax year 2025 the partners, besides their shares in the firm, sustained losses from the sources
given below:
Mr.Tariq Rupees
(a) Income accrued abroad but not remitted to Pakistan 72,000
(b) Share of a loss from another association of person 5,000
(c) Zakat paid 26,500
Mr.Hamid
(a) Speculation loss 25,000
(b) Profit on sale of car 13,000
(c) Income tax refund 5,000
(d) Zakat paid 14,000
The profit and loss account of the registered firm for the year shows the following position:
Rs. Rs.
Salaries 300,000 Gross profit b/d 480,000
Office maintenance 5,000 Dividend from public co. 250,000
Repairs 38,000
Provision for bad debts 14,000
Income tax paid for last year 5,000
Legal expenses 15,000
Commission to Tariq 16,000
Premium of life policies of
Partners 5,000
Depreciation 34,000
Net profit:
Mr.Tariq 149,000
Mr.Hamid 149,000 298,000
730,000 730,000

Notes
(i) Mr.Tariq and Mr.Hamid are paid Rs.45,000 and Rs.55,000 respectively as salary. This is included
in total salary expense.
(ii) Repairs include Rs.18,000 being cost of a typewriter.
(iii) Legal expenses include Rs.6,000 on which no tax deducted.
(iv) Tax depreciation excluding typewriter Rs.14,000.
Required:
(a) The taxable income of the firm and taxes payable by it for the tax year 2025.
(b) The taxable income of each member and tax thereon for the tax year 2025.

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19 MR. SOHAIL, MR. KHALED AND MR. QAZI
Mr.Sohail, Mr.Khaled and Mr.Qazi are members of an association of persons (AOP) and share profit and
loss in the ratio of 2:2:1. The principal activity of the AOP is trading of rice and wheat. Following are the
details of the annual income / (loss) of the AOP and its members:
(i) The AOP suffered loss before tax amounting to Rs. 1,500,000. The loss has been arrived at after
adjusting rental income earned by the AOP, the details of which are as follows:
Rupees
Rental income 2,000,000
Related expenses:
Property tax 40,000
Depreciation 457,500 497,500
Net rental income 1,502,500
No tax was withheld on the rental income.
(ii) The expenses debited to profit and loss account include the following amounts paid to the members
of the AOP:
Mr.Sohail Mr.Khaled Mr.Qazi
Salary (Rs.) 900,000 600,000 -
Interest on capital (Rs.) 300,000 300,000 500,000
(iii) Mr.Sohail earned Rs. 800,000 from another business, of which he is the sole proprietor.
(iv) Mr.Khaled received an amount of Rs. 255,000 as share of income before tax, from another AOP
where he is entitled to 40% of the total profit. The tax on annual income of that AOP amounted to
Rs. 112,500. He also earned income of Rs. 900,000 from a sole proprietorship concern owned by
him.
(v) Mr.Qazi works as a freelance IT Consultant and provides consultancy services to corporate clients.
He received Rs.1,000,000 from his clients. The total expenses incurred in providing the
consultancy services amounted to Rs. 150,000.
Required:
Assuming that the above data pertains to the tax year 2025, compute the taxable income of the AOP and
each of its members. Ignore any minimum tax computation.

20 KAMKAJ & CO.

Kamkaj & Co. is an association of persons (AOP) with three members namely Baqir, Omer and
Sadabahar (Pvt.) Limited (SPL), sharing profit and loss in the ratio of 20:30:50 respectively.
Following information is available with regard to AOP and its members for the tax years 2024 and 2025:

(i) AOP’s income for tax years 2024 and 2025:

2024 2025
---------- Rupees -----------
Income from business* (18,000,000) 25,000,000
Dividend income - 4,000,000
*Net of annual fixed commission of Rs. 7,000,000 to SPL
(ii) On 1 February 2025, Baqir earned capital gain of Rs. 5,200,000 on sale of his property which
was purchased on 1 January 2022.
(iii) Omer also operates a sole proprietor business from which he earned profits of Rs. 6,000,000
and Rs. 2,500,000 in tax years 2024 and 2025 respectively.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the following for the tax years 2024
and 2025:
 Taxable income of AOP
 Taxable income and tax liability of Baqir and Omer

Note: – Show all relevant exemptions, exclusions and disallowances.

– Tax rates for tax year 2024 are the same as tax year 2025.
– Ignore minimum tax under section 113.
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21 AZAADI & CO. (AC)

Azaadi & Co. (AC) is an association of persons engaged in the business of manufacturing disposable
products. Following information has been extracted from AC’s records for the year ended 30 June 2025:

Rs. in million

Sales 380

Less: Sales tax (45)

Less: Trade discount (15)

Net sales 320

Less: Cost of sales (240)

Gross profit 80
Less: Operating expenses (146)
Loss before tax (66)
Additional information:
(i) Cost of sales includes:
 payment of Rs. 12 million (including sales tax of Rs. 2 million) to Hashim Limited(HL) for the
purchase of a new machine for making plastic container in exchangeof an old machine
having a book value and a fair market value of Rs. 5 million and Rs. 4 million respectively
on exchange date. The transaction was carried out on 1 July 2024.
 Old machine was purchased on 1 January 2023. Disposal of old machine and depreciation
of new machine were not recorded in AC’s books of accounts. Tax WDV of old machine was
the same as accounting WDV on the disposal date.
 purchase of raw materials of Rs. 40 million against which no withholding tax wasdeducted at
the time of payment. During the year, AC purchased total raw material of Rs. 120 million.
 closing inventory of damaged finished goods of Rs. 18 million. Due to heavy rain,these goods
were damaged and it is expected to fetch Rs. 12 million only.
(ii) Operating expenses include:
 salary of Rs. 0.275 million paid to office boy in cash. He was paid a monthly salary of Rs.
25,000 for eleven months.
 warehouse rent of Rs. 1.6 million paid through credit card linked to notified business
bank account.
 bad debt of Rs. 2.8 million written off against receivable from a customer on his insolvency.
 commission of Rs. 3.2 million paid to one of the members of AC, by crediting the amount to
his bank account.
 scholarship of Rs. 4.5 million paid to Sara, one of AC’s staff members, for higher studies in
accordance with the terms of the employment.
 payment of Rs. 6.4 million for the purchase of a specialized software for AC’s manufacturing
department on 1 April 2025. The software is expected to be used for five years. Although the
software is available for use from the date of purchase,AC’s members have decided to
implement this software from 1 July 2025.
 depreciation and financial charges of Rs. 2.1 million and Rs. 1.5 million respectively in
respect of a car which was acquired on financial lease.
On 1 July 2024, AC entered into a lease agreement with a bank for a car of Rs. 10.5 million against the
annual lease rentals of Rs. 3.0 million, payable in arrears. The car has been used 80% for business
purposes and 20% for personal use of members.

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Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(a) compute the total income, taxable income and tax liability of Azaadi & Co. for the tax year 2025.
(b) discuss the tax implication in respect of scholarship received by Sara in her return of income
for tax year
Note: Show all relevant exemptions, exclusions and disallowances

22 AAKASH KUMAR
For the purpose of this question, assume that the date today is 31 August 2025.
Aakash Kumar owns an industrial undertaking under the name and style of Premjee & Co. (PJC) which
is engaged in the business of manufacturing fast moving consumer goods. Following information is
available from PJC’s records for the year ended 30 June 2025:
(i) Loss before tax for the year was Rs. 87 million.
(ii) Operating expenses include:
 a penalty of Rs. 2 million for late delivery of goods to acustomer.
 commission of Rs. 2.5 million which was paid to a distributor, Liaquat Bashir, on sale of
PJC’s products of Rs. 50 million. These products are covered in the Third Schedule of the
Sales Tax Act, 1990. Name of Liaquat Bashir is not appearing in the active taxpayers’ list
under the Income Tax Ordinance, 2001.
 freight charges of Rs. 1.2 million which were paid in cash to a freight forwarding company in
Karachi.
 accounting depreciation of Rs. 40 million.
(iii) Other income includes:
 an insurance claim of Rs. 6 million, equivalent to accounting book value, received on 8
November 2024 in respect of a vehicle which was completely destroyed by fire. The cost
and fair market value of the vehicle before fire incident were Rs. 10 million and Rs. 8 million
respectively. This vehicle was purchased on 1 October 2022.
 amounts recovered during the year from two debtors i.e. Shameem and Faheem. These
amounts had been written off in the last year. Details are as follows:

Shameem Faheem
---- Rs. in million ----
Bad debts claimed in the last tax return 19.2 28.8
Bad debts allowed by tax authorities last year 13.2 14.8
Amounts recovered during the year 16.8 10.6
 rent of Rs. 21.6 million. On 1 July 2024, Aakash leased one of its factory buildings alongwith
the plant to Kamran at a monthly rent of Rs. 1.8 million, payable in advance. The building
was purchased for Rs. 85 million on 16 August 2022 whereas a second hand locally
purchased plant was installed at a cost of Rs. 34 million on 1 July 2024. During the year,
Aakash incurred Rs. 3.2 million on repair and maintenance of the factory building.
(iv) PJC’s liabilities include amounts of Rs. 14 million and Rs. 17 million in respect of purchases made
on 18 March 2022 and 1 August 2022 respectively. These purchases were allowed as admissible
deductions while computing income from business in their relevant tax years.
(v) During the year, outstanding financial charges of Rs. 2.8 million were waived by the bank on
rescheduling the loan. These charges were claimed as admissible deduction in the tax year 2023.
(vi) Tax depreciation for the year on all fixed assets, other than factory building and plant which were
leased out to Kamran, amounted to Rs. 48 million.

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Other information:
(i) On 15 August 2023, Aakash entered into a derivative contract for the purchase of gold. The
contract was to be expired on 15 November 2024. Aakash sold the contract before the settlement
date and earned a net gain of Rs. 23 million on the contract.
(ii) On 30 June 2025, Aakash earned capital gains of:
 Rs. 20 million on sale of his immovable property which was purchased on 1 June2022.
 Rs. 3.6 million on sale of shares in a private company. These were acquired on 1 June 2024.
(iii) During the year, Aakash received his share of profit from an AOP of Rs. 70 million.

Required:

Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute total
income, taxable income and net income tax payable by or refundable to Aakash for the tax year 2025.
Note:  Ignore minimum tax under section 113.
 Show all relevant exemptions, exclusions and disallowances.

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01 DR. A. A. QURESHI
RESIDENT INDIVIDUAL
TAX YEAR 2025
COMPUTATION OF TAXABLE INCOME

Particulars Rupees
Taxable income from business N-1 441,000
Rental income net of repair allowance (720,000 – 1/5x720,000) 576,000
Taxable income 1,017,000
Computation of tax liability (Non-Salaried Case)
Tax on Rs. 1,017,000 (1,017,000 – 600,000)x 15% 62,550
Total tax
Tax deducted 60,000
Balance tax Payable 2550

Note 1
INCOME AND EXPENDITURE ACCOUNT

Payments Amount Receipts Amount

Rent of clinic 24,000 consultation fees 450,000
Salary to assistant 36,000 visiting fees 100,000
Car running expenses
(30,000 x1/3) 10,000 remuneration from articles
Stationery 5,000 published in magazines 12,000
Depreciation of motorcar
(300,000 x 15% x 1/3) 15,000
Utilities 25,000
Depreciation on
Surgical Equipment
(40,000 x 15%) 6,000
Balance Income 441,000
Total 562,000 562,000
Note:
EXPLANTORY NOTES:
1. Under the law, the admissible depreciation on the vehicle is 15%, whereas the rate of depreciation
on the surgical equipment is 15% of cost.
2. It is assumed that advance tax has been deducted on rent, therefore, consultancy and visiting fee
has been offered to tax under the normal tax regime. In case tax was deducted on consultancy and
visiting fee, tax deductible @ 10% would have been treated as minimum tax and compared against
the proportionate income tax liability calculated under the normal tax regime.

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02 MR. QAIS MANSOOR
RESIDENT INDIVIDUAL
TAX YEAR 2025

Exemption/adm
Gross Taxable
Particulars issible Remarks
amount income
deductions
Income from salary
Basic salary 1,440,000 - 1,440,000
House rent allowance 600,000 - 600,000 HR allowance is totally
taxable under Rule
4under section 12(2)(c)
Utility allowance 240,000 - 240,000
Medical allowance 240,000 - 240,000 Medical allowance in
addition to expenses
borne according to
terms of employment,
therefore, the medical
allowance is not
exempt from tax.
Bonus 360,000 - 360,000
Special merit award 240,000 - 240,000

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Exemption/adm
Gross Taxable
Particulars issible Remarks
amount income
deductions
Co maintained car - - - Reimbursement of car
maintenance expenses
used for official purpose
is not to be added to
salary income.
Funeral expenses of parents 20,000 - 20,000
Medical expenses 100,000 100,000 - Exempt U/c 139 Part I,
2nd Sch.
Free furnished 648,000 - 648,000 Higher of Rs.648,000
accommodations (i.e. 45% of
Rs. 1,440,000) or
Rs. 600,000
Tax borne by employer 50,000 - 50,000 Section 13(10)

Income from Salary 3,838,000

Income from other source 500,000 500,000 To be added for
President award calculation of total
income Section 45
Capital gains
Gain on disposal of listed 200,000 - 200,000 Gain on disposal of
company shares securitiejs shall be
chargeable to tax under
separate block income
Gain on disposal of land 1,000,000 - 1,000,000 Gain on disposal of
land within 6 years’
time is taxable under
Separate block of
income.
Total Income 5,538,000
Less gain on sale of listed shares and land (1,200,000)
Less exempt income (President award) (500,000)
Taxable Income 3,838,000

Computation of income tax liability on the taxable income

Tax on normal rates for salaried individual
Tax on Rs. 3,838,000 [Rs.430,000 + 30% of amount
exceeding Rs.3,200,000] 621,400
Tax credit on approved donations 621,400/3,838,000 x
500,000 (80,954)
Tax after tax credit 540,446
Tax on gain on disposal of land [(Rs. 1,000,000 x 10%) 100,000
Listed company shares Rs.200,000 x 12.5% 25,000
Tax liability 665,446
Less: Tax paid by employer on behalf of employee (50,000)
Less: Tax deducted from Salary (200,000)
Tax payable (with tax return) 415,446

Note: Tax credit on donation is only available to a maximum of 30% of taxable income of an individual.

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No tax credit is available on children education expenses paid and fee to solicitor.
Prior year income is not taxable in the current year as it is taxable in the relevant year by revising the last
year tax returns.
Purchase of car is increase in assets and it is not allowable as an expense.
No deductible allowance on education expenses will be admissible as taxable income is greater than
Rs. 1.5 million.
03 MR. A. D. CHUGHTAI
RESIDENT INDIVIDUAL
TAX YEAR 2025
COMPUTATION OF TAXABLE INCOME
Exemption/
Taxable
Particulars Gross amount admissible Remarks
income
deductions
Income from salary
Basic pay 2,100,000 - 2,100,000
House rent allowance 600,000 - 600,000
Utility allowance 60,000 - 60,000
Medical allowance 100,000 100,000 - Medical allowance is
exempt up 10% of basic
salary from tax u/c 139 part
I, 2nd Sch.
Bonus 210,000 - 210,000
Cost of living allowance 70,000 - 70,000
Co. maintained car 90,000 - 90,000 [Rs. 1,800,000 x 5%]
Servant allowance 30,000 - 30,000
Leave fare assistance 50,000 - 50,000
Employer contribution to 80,000 80,000 - It is assumed that provident
Provident fund fund is recognized. Lesser
of 10% of (basic salary +
cost of living allowance)
(2,100,000 + 70,000) =
Rs.2,170,000 x 10% or
Rs. 150,000 is exempt.
Employer contribution to 80,000 80,000 - Exempt
pension fund
Income from Salary 3,210,000
Income from other sources
Dividend (FTR) 30,000
Profit on PLS account (FTR) 50,000
Professional fee 50,000 50,000
Total income 3,340,000

Less: Zakat deducted (750+1,250) (2,000)

Dividend (FTR) (30,000)
Profit on PLS account (FTR) (50,000)
Taxable income 3,258,000

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Computation of income tax liability on the taxable income (salaried case)

Tax on Rs.3,258,000 [Rs.430,000 + 30% of amount 447,400
exceeding Rs.32,00,000]
Tax on Profit on PLS account Rs. 50,000 @15% 7,500
Total tax 454,900
Tax on dividend income (assumed gross) (30,000 @ 15%) 4,500
Total tax 459,400
Less: tax deducted from:
Salary (100,000)
Dividend (3,000)
Profit on PLS account (5,000)
Balance tax payable 351,400

Note: Profession fee income has been offered to tax under the normal tax regime. In case tax was
deducted on the same, tax deductible @ 10% would have been treated as minimum tax and compared
against the proportionate income tax liability calculated under the normal tax regime.
No deductible allowance on education expenses will be admissible as taxable income is greater than
Rs. 1.5 million.

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04 MR. ZAMEER ANSARI
Computation of taxable income and tax thereon
For the tax year 2025

Income from salary (A) Rupees

Basic salary (Rs. 200,000 x 12) 2,400,000

Medical allowance (Rs. 30,000 x 12) [Note 2] 360,000

Utilities allowance (Rs. 10,000 x 12) 120,000

School fees (Rs. 15,000 x 12) 180,000

Rent free furnished accommodation (Rs. 2,400,000 x 45%) 1,080,000

Car used for business purposes only (exempted) -

Car used for personal as well as business purposes (Rs.1,800,000x5%) 90,000

Payment to an approved pension fund (exempted) -

Employee share option - charged to salary in tax year 2022 and Leave encashment (paid -
after tax year 2025)
Payment to approved pension fund-exempt

Income from Salary 4,230,000

Income from property (B)

Rental income 264,000

Add: Un-adjustable security deposits {132,000 (W-1) x 1/10} 13,200

–Chargeable Rent 277,200

Less: 1/5th repair allowance (277,200 x1/5) (55,440)

Taxable Income from property 221,760

Capital gain (C) Rupees

Gain on sale of shares [15,000 shares x Rs. (48-42) 90,000

Income from other sources (D)

Profit on fixed deposit (FTR) 75,000

Total income (A+B+C+D) 4,616,760

Less: Zakat (2,500)

Less: Profit on fixed deposit (FTR) (75,000)

Taxable income 4,539,260

Computation of tax liability (Salaried Case)

Tax on Rs. 4,539,260 [700,000+(4,539,260 – 4,100,000) x 35%] 853,741

Tax liability on profit on debt under FTR (Rs.75,000 x 15%) 11,250

Total tax liability 864,991

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Less: Tax deducted at source

On salary income (250,000)

On profit on debt (7,500)

Balance tax payable 607,491

W-1: Un-adjustable security deposits

Received from new tenants 150,000

Amount charged to tax in 2022 & 2023 (Rs. 90,000 x 2/10) (18,000)

132,000

Note 1: No addition in salary income is needed for car provided by the employer solely for business use.
Note 2: As medical facility was also available, medical allowance is fully chargeable.
Note3: The deductible allowance u/s 60D on child’s educational expenses shall not be allowed as the
taxable income is more than Rs.1,500,000.

05 MS. SAIMA
Computation of taxable income
For the Tax year 2025
Income from salary (A) Rupees
Basic salary (Rs.400,000 x 12) 4,800,000
Medical allowance (Note 1 - Rs.40,000 x 12) 480,000
Medical reimbursement - fully exempt
Conveyance allowance (Rs.60,000 x 12) 720,000
Bonus 800,000
Tax borne by the employer 200,000
Income from salary (A) 7,000,000

Capital gain Rupees

Consideration received 1,000,000
Less: Cost of the painting to be taken as original cost of transferor (500,000)
500,000
Capital gain (B) (Note 2) 500,000
Sale of plot-not taxable
Income from property 1,000,000
Income from other source
Teaching fee 522,222
Less expenses (70,000)
452,222
Loan received from sister (Note 3) 5,000,000
Prize and winnings 200,000
Income from other sources (D) 5,652,222
Total Income (A+B+C+D) 14,152,222

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Less: Pri and winnings (200,000)

Taxable income (A+B+D) 13,952,222
Income from property
Forfeited deposit under the agreement for sale of land is covered by the definition of rent, therefore taxed
accordingly.
Gain on the sale of plot by Ms. Saima would not be taxable as the plot is being sold after six years from
the date of acquisition.
Prizes and winnings
The tax deducted on a prize won in quiz competition is subject to final tax and, therefore, the related
income is not included in the taxable income.
Note 1
No exemption shall be allowed on medical allowance as she is also eligible for medical reimbursement
under the terms of the employment. Such reimbursement is, however, not taxable.
Note 2
Where the capital asset becomes the property of the person by inheritance, the cost of original transferor
is treated to be the cost of the asset.
Note 3
Any amount received as a loan, advance, deposit or gift by a person in a tax year from another person
(not being a banking company or financial institution) otherwise than by a crossed cheque drawn on a
bank or through a banking channel from a person holding a National Tax Number shall be treated as
income chargeable to tax under the head “Income from Other Sources” for the tax year in which it was
received. Therefore, the amount received by Ms. Saima from her sister would be chargeable to tax as
income from other sources.
Note 4
Teaching fee has been offered to tax under the normal tax regime. In case tax was deducted on the
same, tax deductible @ 10% would have been treated as minimum tax and compared against the
proportionate income tax liability calculated under the normal tax regime.

06 TAQI AHMED
Taqi Ahmed
Computation of total income, taxable income and net tax payable/refundable
For the tax year 2025
Income from Salary: Rupees
Basic Salary [(400,000+(440,000 × 11)] 5,240,000
Conveyance allowance [(40,000+(44,000 × 11)] 524,000
Medical allowance [(40,000+(44,000 × 11)] 524,000
Health insurance benefit - Exempt as it is per terms of employment -
Daily allowance (Special allowance) [Sec 12(2c)] 400,000
Performance bonus for tax year 2024 but received in August 2024 -
Director's fees for attending board meeting – ZTL 100,000
Loan waived by ZTL (Rs.2,500,000 × 15/50) (Repayment is made in advance for each
month) 750,000
Imputed/deemed interest on loan (Note-1) 75,000
7,613,000

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Income from property Rupees

Rental amount (1,800,000−300,000) 1,500,000
Less 1/5th
repair allowance (300,000)
Net property income 1,200,000
Income from other sources
Bonus shares received taxable as FTR 110,000
Dividend income (FTR) (Rs.150,000/0.7) 214,286
Value of amenities and utilities included in rent 300,000
624,286
Capital gain
Consideration received on disposal [15,000×85] 1,275,000
Less: cost of acquisition [15,000×60] (900,000)
Gain on disposal of 15,000 shares 375,000
Total income for the year from all sources 9,812,286
Less:
Gain on disposal of 15,000 shares - Covered under separate block of income (375,000)
Dividend income (FTR) (214,286)
(110,000)
Bonus shares-FTR (699,286)
Taxable income under NTR (Salaried Case) 9,113,000
Tax liability
Tax on Rs. 41,00,000 700,000
Tax on exceeding amount [(9,113,000-4,100,000) x 35%] 1,754,550
2,454,550
Capital Gain - Separate block income
Listed company shares (Rs. 375,000 x 10%) 37,500
Dividend income (Rs. 214,286 @ 15%) 32,143
Bonus shares (Rs.110,000 x 10%) 11,000
Tax payable 2,535,193
Less: Tax deducted by ZTL (2,000,000)
Tax wrongly deducted on dividend @ 30% (64,287)
Net tax payable (with tax return) 470,906

Note:-1

Installment Taxable
Date Installment Balance Due Interest
No Income
26 Jun-23 50,000 1,200,000 X 10% x 1/12 10,000
27 Jul-23 50,000 1,150,000 X 10% x 1/12 9,583
28 Aug-23 50,000 1,100,000 X 10% x 1/12 9,167
29 Sep-23 50,000 1,050,000 X 10% x 1/12 8,750
30 Oct-23 50,000 1,000,000 X 10% x 1/12 8,333
31 Nov-23 50,000 950,000 X 10% x 1/12 7,917
32 Dec-23 50,000 900,000 X 10% x 1/12 7,500
33 Jan-24 50,000 850,000 X 10% x 1/12 7,083
34 Feb-24 50,000 800,000 X 10% x 1/12 6,667
35 Mar-24 50,000 750,000 X 10% x 1/12 -
75,000

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Note:- Because the loan amount exceeded 1 million, interest was calculated even as the balance
decreased. Alternatively, interest could cease once the loan amount falls below 1 million.
26 Jun-23 50,000 1,200,000 10,000
27 Jul-23 50,000 1,150,000 9,583
28 Aug-23 50,000 1,100,000 9,167
29 Sep-23 50,000 1,050,000 8,750
30 Oct-23 50,000 1,000,000 8,333
31 Nov-23 50,000 950,000
32 Dec-23 50,000 900,000
33 Jan-24 50,000 850,000
34 Feb-24 50,000 800,000
35 Mar-24 50,000 750,000 45,833

07 BABER – HI FI LIMITED
Name of Taxpayer : Mr. Bader
Income year ended : 30th June, 2025
Tax Year : 2025
Personal Status : Individual
Residential Status : Resident
INCOME FROM SALARY U/S 12 (Rs.) (Rs.)
Basic Salary (250,000 x 12) 3,000,000
Medical allowance (28,000 x 12) 336,000
Exempt upto 10% of Basic Salary (300,000) 36,000
House rent allowance (120,000 x 12) 1,440,000
Bond amount on restriction of resigning before 30 June, 2025 900,000
Conveyance facility for both official and private use (1,500,000 x
5% x 11/12) 68,750
Perquisites in the shape of inventory provided by the employer
(22,000 – 12,000) 10,000
Fair market value of shares at the time of issue of shares (2,500 x
375) 937,500
Less: Amount already paid as consideration (200,000 + 300,000) (500,000) 437,500
Gratuity under an unapproved scheme 485,000
Less: Exemption upto 75,000 or 50% of the amount payable (75,000) 410,000
Termination benefit from previous employer 600,000
Medical facility free of cost from previous employer-exempt being
benefit without marginal cost -
Salary 6,902,250
CAPITAL GAIN (Section 37)
FMV of shares at the time of sale 875,000
Less: Amount paid against option and shares (200,000 + 300,000)
x 2,000 / 2,500 (400,000)
Amount taxable under the head of Salary (437,500 / 2500 x 2000) (350,000)
Capital Gain 125,000
TOTAL INCOME 7,027,250
Less
Terminal benefits (600,000)
Taxable income 6,427,250

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Since salary income is more than 75% of the taxable income, therefore, the slab applicable to salaried
individuals shall be applied:
Computation of net tax liability:
Tax on Rs. 4,100,000 700,000
Tax @ 35% on the amount exceeding Rs. 4,100,000 (i.e. on 2,327,250) 814,538
Tax payable on taxable income 1,514,538
Tax on terminal benefit amount:
(tax of last 3 years / Taxable Income of last 3 years x 100) x
Amount of golden hand shake Rs. (1,260,000 / 10,500,000 x
600,000) 72,000
Tax payable under NTR 1,586,538
Tax liability
Tax credit on investment in shares and life insurance- Not allowed
from tax year 2023 onwards
Tax Liability 1,586,538
Total tax payable
Less: tax already paid or deducted at source
Tax deducted on salaries (1,105,000)
Tax payable (with tax return) 481,538

08 LONE TRADERS
Lone Traders (Sole proprietorship)
Computation of taxable income and income tax liability
For the tax year 2025 Speculation Trading
Total
Business Business
----------- Rupees -----------
Sales Ratio 40% 60% 100%
Gross sales [18,240 x 500] & [13,000,000 + 680,000] 9,120,000 13,680,000 22,800,000
Less: Discount - (680,000) (680,000)
Net sales 9,120,000 13,000,000 22,120,000
Gross profit [9,120,000 - 7,900,000] & [13,680,000 x 25%] 1,220,000 3,420,000 4,640,000
Less: Exp. – Direct
Scientific research - (600,000) (600,000)
Expenditure in respect of future contract (25,000) - (25,000)
Less: Common expenses [gross sales basis i.e. 40:60]
Admin., selling and distribution 2,500,000
Less: inadmissible - penalty (45,000)
Allowable common expenses 2,455,000
Admin., selling and distrib. [2,455,000 x 40% & 60%] (982,000) (1,473,000) (2,455,000)
Net business income 213,000 1,347,000 1,560,000
Brought forward losses (300,000) (550,000)
Taxable income/(loss) for the year [Notes] (87,000) 797,000
(Note 1) Speculation loss of Rs. 87,000 would be carried forward to next year for adjustment against
speculation income.

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(Note 2) Speculation loss cannot be set off against trading business income of Rs. 797,000.
(Note - 3) Similarly, capital loss of Rs. 250,000 would be carried forward to next year as it cannot be set
off against any other heads of income.

09 MR. NAUMAN
Computation of total income, taxable income and net tax payable/refundable for tax year 2025

Rupees
Income from salary
Basic salary [120,000×12] 1,440,000
Medical allowance [240,000(20,000×12) –144,000(1,440,000×10%)] 96,000
House rent allowance (60,000×12) 720,000
Company maintained car for both official and personal use (1,400,000×5%) 70,000
Purchase of car on book value (1,000,000 – 450,000) 550,000
Employer’s contribution to provident fund [18,000×12=216,000 –144,000 (1,440,000
72,000
× 10%) (Allowed limit is 1/10 of the basic salary OR 150,000 whichever is lower)
Interest on provident fund [540,000–480,000{higher of: interest @ 16% i.e. 480,000
60,000
(540,000÷18%)×16% OR 480,000(1/3rd of basic salary i.e. (1,440,000÷3)}]
Relocation allowance – exempt -
Bonus – [not taxable in TY2025 as it is received in July 2025) -
Loan obtained on concession rate [5,000,000×4%(10%-6%)×(3÷12)] 50,000
Legal expenses – Not deductible being no deduction shall be allowed for expenses
-
incurred in earning salary income
Total income from salary 3,058,000
Income from property
Rent income 800,000(1,200,000‒400,000)×9/12 600,000
Less: Repair allowance (600,000÷5) (120,000)
Insurance premium (50,000)
Administration and collection charges to the extent of 4% of chargeable rent
600,000×4% (24,000)
406,000
Income from other sources
Interest income (510,000÷0.85)+200,000 800,000
Income from utility, cleaning and security 400,000
Less: Expenditure (250,000)
150,000
950,000
Total income from all sources 4,414,000
Less: Separate block of income (interest income) (800,000)
3,614,000
Less: Deductible allowances
Zakat (200,000)
Profit on debt Not allowed -
Taxable income under NTR 3,414,000

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10 MS. AYESHA
Nature Rs. in million Set off Carried forward
Loss from (4.5) It cannot be set off against It can be carried forward against
speculation any other head of income. future speculation gain upto next 6
business OR tax years following the tax year in
which the loss occurred.
It can only be set off against
any other gain
From speculation business.
Loss on sale (3.6) This is a capital loss and it The loss of Rs. 1.1m (3.6–2.5) can
of shares of can be set off against capital be carried forward only against
private gain on sale of jewellery of future capital gain upto 6 tax years
company Rs. 2.5m. next following the tax year in which
the loss occurred.
Loss on sale of (1.6) This loss shall not be recognized. So no question of set off or
antique carried forward of this loss arises.
Loss on sale of (6.0) This is a capital loss and it The loss of Rs.2m (6–4) can be
listed can only be set off against carried forward only against future
securities capital gain on sale of listed capital gain on disposal of
securities of Rs. 4m. securities under section 37A upto 3
subsequent tax years.
Loss from (8.0) Since agriculture income is exempt from tax, this
agriculture loss cannot be adjusted against any other income.
Loss from (19) It can be set off with income The loss of Rs.1m (19–18) cannot
other sources from normal (other than be carried forward.
speculation) business of
Rs.15m and income from
property of Rs. 3m be set off
with income from property.

11 BASIT
(a) Mr. Basit
Computation of total income, taxable income and net tax payable/refundable
For tax year 2025
Salary Rupees

Pakistan source income:

Salary [610,000×7] 4,270,000
Allowance for services of domestic servant [60,000×7] 420,000
Allowance @ 5% of salary solely expended in the performance of his duties
of employment (4,270,000×5%) 213,500

Acquired car on lease -

Shares acquired under employee share scheme [1,170,000(13,000×90)–
390,000(13,000×30)] 780,000
Leave encashment 320,000

Gratuity (2,200,000–300,000) 1,900,000

Salary arrears of tax year 2024 700,000

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Foreign source income: Rupees

Salary (3,200×250×3) 2,400,000
Total income from salary 11,003,500

Capital gain
Loss on sale of ML’s shares [400,000(5,000×80)–450,000(5,000×90)]
(50,000) C/F
Income from other sources
Pakistan source income:
Gift received 200,000
Foreign source income:
Income earned from university [1,000(1,500–500)×250] 250,000
450,000

Total income 11,453,500

Less: Foreign source salary – Exempt (2,400,000)
Taxable income 9,053,500

Tax liability (Salaried Case)

On Rs. 4,100,000 700,000
On remaining Rs. 4,953,500 @ 35% 1,733,725
2,433,725
Less: Foreign tax credit [250,000×26.88%(2,433,725/9,053,500×100) =
67,200] OR [225×250 = 56,250] whichever is lower. (56,250)
2,377,475
Less: Withholding tax (1,400,000)
Tax payable (with tax return) 977,475

(b) arrears amount may be taxed at the rates of tax year 2024 that would have been applicable if the
salary had been paid to the Basit in tax year 2024.
(c) Basit is required to furnish a foreign income and assets statement giving particulars of:
(i) his total foreign assets and liabilities as on 30 June 2025;
(ii) any foreign assets transferred by him to any other person during tax year 2025 and the
consideration for the said transfer; and
(iii) complete particulars of foreign income, the expenditure derived during the tax year 2025
and the expenditure wholly and necessarily for the purposes of deriving the said income.

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12 WAJAHAT
Computation of Income Tax Liability
For the Year 2025

Income from Salary Rupees

Basic salary (70,000 x 12) 840,000

Dearness allowance (10,000 x 12) 120,000

Conveyance allowance (8,000 x 12) 96,000

PF contrib. [(8,400 x 12) - (lower of Rs. 150,000 or 1/10th of basic + DA)] 4,800
Working: (100,800) or (lower of Rs.150,000 or (840,000+120,000)/10= 96,000
Interest on PF [391,000 - (higher of: interest @16% or 1/3rd of basic + DA)] 71,000

Working: (391,000/20% x 16% = 312,800 or ((840,000+120,000)/3= 320,000)

Reimbursement of electricity bill 60,000

Income from Salary 1,191,800

Income from Business

Tuition fees (for ten months ended 30 June 2025) 2,198,000

Less: Admissible expenses:

Salaries paid: Wajahat (inadmissible being the owner) -

Friend (35,000 x 10) (350,000)

Training expenses (300,000)

Dep.: Used computers (250,000 x 30%) [no initial allowance is (75,000)

admissible]

Other misc. expenses (195,000)

Income from Business 1,278,000

Income from other source Rupees

Dividend received from BEE Limited (78,200 + 9,200 + 4,600) 92,000

Dividend received from a company in UAE 65,000

157,000

Total income 2,626,800

Less FTR income: Dividend (157,000)

Deductible allowance: Zakat (4,600)
Taxable income 2,465,200

Since salary income is less than 75% of the taxable income, therefore,
the slab applicable to non-salaried individuals shall be applied

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Computation of net tax liability: Rupees

Tax on Rs. 1,600,000 170,000
Tax @30% on the amount exceeding Rs. 1600,000 (i.e. on 865,200) 259,560
Tax payable under NTR 429,560
Less: Tax credit on investment in pension: (493,040 x 429,560 / (85,912)
2,465,200)
Which is lesser of (A), (B) or (C):
• Total contribution paid by Wajahat (A) 890,000
• 20% of taxable income (2,465,200 x 20%)(B) 493,040
A or B whichever is lower 493,040
343,648
Add: Tax payable on dividend income (157,000 x 15%) (FTR) 23,550
Total tax liability for the year 367,198
Less: Tax withheld at source (Dividend) (9,200)
Balance tax payable 357,998
(Note 1) As the turnover during the tax year 2025 is less than Rs. 100 million hence minimum tax u/s
113 is not applicable on the taxpayer.

13 SHAHID
Computation of total and taxable income for the tax year 2025
Rs. in million
Income from property
Forfeited deposit 6.00
Less: Repair allowance @ 1/5 (1.20)
4.80
Capital gain
Disposal of bungalow (54–50) 4.00

Income from other sources

Rent of factory building along with plant and machinery (1×12) 12.00
Less: Repair & maintenance (3.50)
8.50
Exempt income
Rental income of agricultural land [5÷2] 2.50
Total income 19.8
Less: Exempt income (rental of agricultural land) (2.50)
Less: Separate block of income (capital gain) (4.00)
Taxable income 13.30

Tax Liability (Non-Salaried Case)

On 5.6 million 1.61
Above 5.6 million @ 45% 3.465
5.075
As Taxable income is above Rs. 10 million so surcharge @ 10% of the taxable 0.5075
income is applicable
Tax on capital gain (4×7.5%) 0.30
Total tax liability 5.8825

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14 TAHA
Name of Admissibility
Head of income Tax regime
person of related expenses
Atif - FTR No
Bilal Income from othersources NTR Yes
Seema Income from othersources NTR Yes
Kamal - Exempt No
Sikandar - Exempt (Include in incomejust No
for rate purpose)
Dream Bank Income from business NTR Yes

15 AB ASSOCIATES (AOP)
INCOME YEAR ENDED 30.6.2025
TAX YEAR 2025
COMPUTATION OF TAXABLE AND DIVISIBLE INCOME

Net profit as per accounts 269,000

Add: Inadmissible items
Depreciation (180,000 + 20,000) 200,000
Salary to partner A 80,000
Commission to partner B 10,000
Depreciation on assets subject to finance lease 15,000
Finance charge on leased assets 2,500
Provision for doubtful debts 10,000
Accounting loss on disposal of fixed assets 13,000
Residential telephone bills of partner A 5,000
Liabilities outstanding for more than one year
Liability against purchases 80,000
Interest on bank loan 40,000 120,000
Tax gain on disposal of plant (90,000 – 80,000) 10,000
734,500
Less: Tax depreciation 306,550
Tax loss on disposal of furniture (7,500 – 10,000) 2,500
Lease rentals 18,000
Already taxed bad debts recovered 33,000 (360,050)
Taxable income 374,450
Income tax nil
Divisible income-Profit before tax 374,450

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TAX DEPRECIATION
Plant and machinery
Opening tax WDV 250,000
Less: WDV of disposal 80,000
170,000
Addition (cost as reduced by initial allowance) 30,000
200,000
Initial allowance 25% of Rs.40,000 10,000
Opening WDV (Rs.170,000 x 15%) 25,500
Addition (Rs.30,000 x 15% ) 4,500
30,000
40,000
Vehicles
Opening tax WDV 400,000@
15%=60,000
Addition 1,300,000@
15%=195,000
1,700,000
Normal depreciation @ 15% 255,000
Furniture and Fixtures
Opening tax WDV 80,000
Less: WDV of disposal (10,000)
70,000 @
15%=10,500
Addition 7,000@15%=
1,050
77,000 11,550
Normal depreciation @ 15%
306,550
Share of Profit from AOP
A B Total
Salary 80,000 - 80,000
Commission - 10,000 10,000
Residential telephone bills 5,000 - 5,000
Balance (60:40) 167,670 111,780 279,450
Share of profit for the year 252,670 121,780 374,450
TAXABLE INCOME AND TAX LIABILITY OF Mr. A
Income from property
Chargeable rent (given in P&L Account) to be taxed separately 240,000
Less 1/5threpair allowance (48,000)
Other property related expenses (40,000)
Net property income 152,000
Share of profit of AOP 252,670
Total income inclusive of AOP share 404,670
Tax on income inclusive of AOP share Nil
Actual tax liability- No taxable as income is less than Rs. 600,000 Nil

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16 AB & CO.
TAX YEAR 2025
INCOME YEAR ENDED 30-06-2025 Rs.
i. Computation of total and divisible income

Accounting profit 600,000

Add:

Salary to partner A 600,000

Salary to partner B 300,000

House rent to partner A 240,000

House rent to partner B 120,000

Hotel Bills to partner A (assumed to be personal) 60,000

Hotel Bills to partner B (assumed to be personal) 60,000

Commission without tax deduction 50,000

Gain on sale of vehicle as per tax 600,000

Less: accounting gain on disposal of vehicle [1,200,000-690,000] (510,000)

Divisible Taxable income 2,120,000

Less: income tax [Rs.170,000 + (2,120,000-1600,000) @30%] (326,000)

Profit after tax 1,794,000

ii. Taxable income of each partner

Distribution of divisible income

Partner A Partner B Total

Salary 600,000 300,000 900,000

House rent 240,000 120,000 360,000

Hotel bills 60,000 60,000 120,000

Balance (equal share) 370,000 370,000 740,000

Total income of each Partner 1,270,000 850,000 2,120,000

From sources other than share of AOP

Gain on public listed company’s shares (covered 200,000 150,000

under SBI)

Dividend from company 40,000 20,000

Share of profit from AOP 1,270,000 850,000

Mr. A and B does not have any other normal taxable income, therefore, share of profit before tax from
AOP cannot be included in their income for rate purpose.

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iii. Tax liability of partners

Partner A Partner B

Tax on capital gain u/s 37A

(200,000 x 12.5%) –
(150,000 x 12.5%) - 25,000 18,750

Tax on dividend income (15%) 6,000 3,000

Total tax liability 31,000 21,750

17 MS. HAMEEDA & MS. KASHMALA

(a) Tax implications in respect of sale of assets by Ms. Hameeda are as under:
i. Capital gain on disposal of immoveable properties where holding period exceeds 6 years is
taxable @ 0%; therefore, disposal of plot in DHA Karachi shall not be taxable.
ii. Painting
The cost of the painting for Ms. Hameeda is Rs. 2,350,000 i.e. the cost of her mother.
However, no loss can be recognized on such assets.
iii. Jewelry
The cost of jewelry for Ms. Hameeda is Rs. 3,000,000 i.e. cost of her husband. The gain of
Rs. 2,000,000 is taxable under the head capital gains.
(b) Ms. Kashmala & Ms. Shumaila
Computation of taxable income & tax there on for the tax year 2025

Rupees

Net loss (800,000)

Add: Inadmissible expenses

Salary to members of AOP (500K+300K) 800,000

Accounting depreciation 300,000

Business Income before depreciation and amortization 300,000

Less: Brought forward business loss from the year 2024 (400,000)

Un-adjusted Business loss (100,000)

Business loss carried forward to next year (100,000)

Tax depreciation for the year 250,000

Unabsorbed depreciation B/F 300,000

Unabsorbed depreciation to be carried forward 550,000

as there is loss under NTR & minimum tax liability ignored therefore no tax is
payable by the AOP under the given case.

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18 T & H ENTERPRISES
TAX YEAR 2025
INCOME YEAR ENDED 30-06-2025
COMPUTATION OF TOTAL INCOME AND TAX PAYABLE
Net profit (149,000+149,000) 298,000
Add: in-admissible expenditures
Salary to Tariq 45,000
Salary to Hamid 55,000
Cost of typewriter 18,000
Legal expense on which tax in not to be deducted 6,000
Provision for bad debts 14,000
Income tax paid for last year 5,000
Commission to Tariq 16,000
Premium of life policies of members 5,000
Accounting depreciation 34,000
496,000
Less: Tax depreciation [14,000 + (2,700=18,000x15%)) 16,700
Dividend income to be taxed separately 250,000 (266,700)
Taxable income excluding dividend income 229,300
Income tax -
Divisible income excluding dividend income 229,300
Income tax (0% upto Rs. 600,000) -
Dividend income to be taxed under FTR 250,000
Tax on dividend @ 15% 37,500
Total divisible income 229,300

 FBR has clarified that it is the divisible income (profit before tax) of AOP that will be included in the
taxable income of its members for rate purpose.
 If AOP has any income that falls under final tax regime (FTR) then members share from such income
shall not be added in the taxable income of the member. Section 4(4) read with Section 169(2) clearly
states that income falling under FTR is not to be included in any taxable income.
 Tax depreciation of Rs. 2,700 on type writer is computed @ 15% as per third schedule
Share of profit from AOP

Tariq Hamid
Total
60% 40%
Salary 45,000 55,000 100,000
Commission 16,000 - 16,000
Life insurance premium 2,500 2,500 5,000
Balance in equal share 64,980 43,320 108,300
128,480 100,820 229,300
Share of each partner Tariq 1.2/2 = 60% and Hamis 0.8/2=40%

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Taxable income of Mr. Tariq

Income accrued abroad but not remitted to Pakistan
(Resident person is taxable in Pakistan for his world over income subject to agreement for the

Avoidance of double taxation 72,000

Less: Zakat (26,500)
Taxable income 45,500
Add: Share of profit from AOP for rate purpose 64,980
Taxable income for rate purpose 110,480

Tax Liability
Income tax on 110,480 @ 0% 0
Taxable income of Mr. Hamid
 Speculation loss (can be set-off only against speculation gain) 0
 Profit on sale of car – capital receipt
(It is assumed that car was for personal use) 0
As Mr. Hamid does not have any other normal taxable income, share of profit from AOP cannot be
included for rate purpose.
Note:
Loss of AOP will be carried forward only in the hands of AOP, hence no effect of share of loss of from
another AOP has been given in the hands of Mr. Tariq.

19 MR. SOHAIL, MR. KHALED AND MR. QAZI

Computation of taxable income and tax liability of association of persons
For Tax year 2025
Income from business Rupees
Business loss for the year (1,500,000)
Less: Accounting income from property (1,502,500)
Add: Inadmissible expenses
Salary to Mr. Sohail 900,000
Salary to Mr. Khaled 600,000
Interest to Mr. Sohail 300,000
Interest to Mr. Khaled 300,000
Interest to Mr. Qazi 500,000
Business loss (set off) (402,500)
Taxable income from property (Rs.2,000,000-400,000 (repair allowance)-40,000 1,560,000
Net income before tax (only for computation of divisible profit) 1,157,500
Tax liability on AOP income of Rs. 1,157,500 83,625
Share from AOP will be worked in the following manner:
Sohail Khalid Qazi Total
2/5 2/5 1/5
Salaries 900,000 600,000 - 1,500,000
Interest paid to partners 300,000 300,000 500,000 1,100,000
Balancing share 2:2:1 (577,000) (577,000) (288,500) (1,442,500)
Total 623,000 323,000 211,500 1,157,500

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Computation of taxable income and tax liability of each member

Mr. Sohail Mr. Khaled Mr. Qazi
Income under NTR
Rupees
Income from other businesses 800,000 900,000 -
Income from consultancy (1,000,000 –150,000) - - 850,000
Taxable income 800,000 900,000 850,000
Divisible profit from another AOP - 255,000 -
Share of AOP 623,000 323,000 211,500
Income including share of AOPs 1,423,000 1,478,000 1,061,500
Income tax 134,600 145,600 69,225
Income tax payable u/s 88 by Partners
[income Tax ÷ Total income] × Taxable Income 75,671 88,660 55,432

Note: Consultancy services by Mr. Qazi has been offered to tax under the normal tax regime. In case tax
was deducted on the same, tax deductible @ 10% would have been treated as minimum tax and
compared against the proportionate income tax liability calculated under the normal tax regime.

20 KAMKAJ & CO.

Computation of Taxable Income

Tax Year 2024 Tax Year 2025

----------- Rupees -----------
Income from Business (18,000,000) 25,000,000
Add: Commission to SPL 7,000,000 7,000,000
(11,000,000) 32,000,000
Dividend income - 4,000,000

Total income (11,000,000) 36,000,000

Less: FTR income - (4,000,000)

Taxable income (11,000,000) 32,000,000

B/F loss (11,000,000)

Taxable income 21,000,000

Less: SPL’s share of 50% (10,500,000)
Taxable income of AOP after deducting SPL’s share 10,500,000
Tax liability of AOP:
Upto 5,600,000 1,610,000
On balance @ 45% 2,205,000

3,815,000
As Taxable income is above Rs. 10 million so surcharge @ 10% of the taxable 381,500
income is applicable
4,196,500

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Computation of taxable income and tax liability of Baqir:

Tax Year 2024 Tax Year 2025

----------- Rupees -----------
Capital gain on sale of property (5,200,000 (Separate block of
income) - 5,200,000
Tax liability on capital gain related to sale of immoveable property
[5,200,000×7.5%] 390,000
Computation of taxable income and tax liability of Omer:
Tax Year 2024 Tax Year 2025
----------- Rupees -----------
Income from Business 6,000,000 2,500,000
Taxable income 6,000,000 2,500,000
Share of profit of AOP - 6,300,000
10,500,000×60% (30/50)
Taxable income for rate purpose 6,000,000 8,800,000

On 5,600,000 1,610,000 1,610,000

On balance @ 45% 180,000 1,440,000
1,790,000 3,050,000
Tax rate to be charged (3,050,000/8,800,000 x 100) = 34.65% 34.65%
Tax liability of Omer 1,790,000 1,056,825

21 AZAADI & CO. (AC)

(a) Azadi and Co.
Computation of total taxable income and tax liability for tax year 2025
Rs. in million
Loss before tax (66.00)
Add: Inadmissible expenses / admissible income
Payment for purchase of machine 12.00
Purchase of raw material for which no withholding tax was deducted
(120×20%) 24.00
Salary paid to office boy in cash -
Warehouse rent -
Bad debt written off -
Commission paid to member of AOP 3.20
Payment for purchase of accounting software 6.40
Depreciation on leased car 2.10
Lease financial charges 1.50
49.20

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Less: Admissible expenses and inadmissible income Rs. in million

Tax depreciation on machine [3.5(W-1)+1.57(W-1)] (5.07)
Loss on disposal of old machine (4–5) (1.00)
NRV adjustment (18–12) (6.00)
Scholarship given to Sara -
Amortization of ERP software [6.4÷5×(91÷365)] (0.32)
Lease rentals [0.71(3×2.5÷10.5)×80%] (0.57)
(12.96)
Business Loss (29.76)

Computation of minimum tax:

Turnover (380 – 45 – 15) 320.00

Tax liability @ 1.25% x 320 million 4.00

W-1: New Machine

Cost: Rs. in million
Payment through cheque 12.00
Sales tax on purchase (2.00)
Fair market value of old machine 4.00
Cost for tax purposes 14.00
Initial allowance @ 25% (3.50)
10.50
Depreciation for the year @ 15% (1.57)
8.93
(b) As Sara is an employee of AC and employee is not considered as an associate of employer, the
scholarship received by Sara from AC is exempt from tax.

22 AAKASH KUMAR
Computation of total income, taxable income and net tax payable/refundable
For tax year 2025

Income from business Rs. in million

Loss before tax (87.0)
Add: Inadmissible expenses / admissible income
Commission expense disallowed due to sale to inactive tax payer 2.4
[2.50.1(50×0.2%)]
Accounting depreciation 40.0
Bad debts recovered from Shameem [16.86(19.213.2)] 10.8
Outstanding payments for more than 3 years 14.0
Financial charges waived by the bank 2.8
70.0

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Less: Admissible expenses and inadmissible / FTR income Rs. in million

Penalty -
Freight charges paid in cash -
Tax depreciation (48.0)
Insurance claim received (6.0)
Loss on disposal of vehicle (W-1) (1.2)
Reversal of Bad debts recovered recorded as other income (16.8+10.6) (27.4)
Bad debts recovered from Faheem [10.6◻14(28.8◻14.8)] (3.4)
Rental income – Chargeable under income from other sources (21.6)
(107.6)
Income from non-speculation business (124.6)

Income from speculation business

Net gain from derivative contract 23.0
Income from business (A) (101.6)

Capital gain
Sale of property (20) 20
Sale of private company shares (3.6) 3.6
(B) 23.6
Income from other sources
nd
Rental income from leasing of property comprised of building and 2 hand
locally purchased plant (1.8×12) 21.6
Less: Deductions
Repair and maintenance (actual) (3.2)
Depreciation of building (85×90%×90%×10%) (6.9)
Depreciation of plant (34×15%) (5.1)
(C) 6.4
Gross Loss (A+B+C) (71.6)
Less: Capital gain on sale of property (separate block of income) (20)
Net Loss under NTR (91.6)
Since Aakash’s taxable income for tax year 2025 is negative, his share of profit from associate is
ignored.
Tax Liability
Tax on capital gain on sale of property (separate block of income) (20×5%) 1
W-1: Loss / Gain on disposal of vehicle
Insurance claim 6.0
Cost 10
Depreciation TY 2023 (10× 15%) (1.5)
TY 2024 (10×85%×15%) (1.3)
TY 2025 -
7.2
Loss on disposal of vehicle (1.2)
Note: Answers in which loss has been computed by treating the vehicle as passenger transport
not plying for hire, has also been considered correct.

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 13

CHAPTER
System of taxation in Pakistan
From ICAP Book

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1 OBJECTIVES OF TAX LAWS

Section overview

 Definition of taxation
 Revenue & Non-revenue objectives
 Taxes as mean for development

1.1 Definition of taxation

Taxation is defined in many ways, common definition is as under:

 It is the process by which the sovereign, through its law making body, raises revenues in
order to use it for expenses of government.

 It is a means for the government in increasing its revenue under the authority of the law,
purposely used to promote welfare and protection of its citizenry.

 It is the collection of the share of individual and organizational income by a government

under the authority of the law.

1.2 Revenue & Non-revenue objectives

Taxes are primary revenue yielding tools of the Government of modern ages. The government
levies taxes in order to achieve following objectives:

 For collection of revenue to run and administer the Government;

 To use as a tool for implementation of its policies; and
 For fair distribution of wealth.
Aside from purely financing government operational expenditures, taxation is also utilized as a tool
to carry out the national objective of social and economic development.

 To strengthen anemic enterprises by granting them tax exemptions or other conditions or

incentives for growth;

 To protect local industries against foreign competition by increasing local import taxes;
 As a bargaining tool in trade negotiations with other countries;
 To counter the effects of inflation or depression;
 To reduce inequalities in the distribution of wealth;
 To promote science and invention, finance educational activities or maintain and improve
the efficiency of local forces;

 To implement laws which eliminate discrimination among various elements in the

markets/businesses.

 To discourage certain undesirable sectors and activities.

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Illustration: Objectives of Taxation Laws

Explain what are the objectives of following tax laws:

Tax Law Objective

Tax on salary income Revenue Collection
Any amount transferred otherwise than banking Documentation of economy
channel will be deemed as income
Tax on moveable assets of the taxpayers Fair distribution of wealth

Tax Law Objective

Higher taxes on import of luxury goods Reduction in imports of unnecessary goods
and create good balance of trade
Allowability of expenditure of research & Promotion of research & developments
developments
Zero rating on Exports Promotion of Exports
Tax credit on Donations to approved institutions To promote culture of payment of donation
to only organised and regulated institutions
Tax credit on investments Promote investments in listed companies

Tax exemptions to software exports Promote software industry

1.3 Taxes as mean for development

Taxes are one of the main sources for development. This is not because revenue collected by the
state is used on developmental projects. Rather, taxes can be used in many different ways for
development of the country. Some examples are as under:
 The Government can declare some areas as free zone, industrial zone, and economic zone
and provide tax incentives to such areas. Such incentives could attract
businessman/industrialist who may opt to establish business concerns/industrial units that
would bring employment, opportunities and overall prosperity in these under developed
areas.
 Taxing the rich at higher rates while taxing the low income groups at lower tax rates.
 Imposition of high custom duty rates on luxury items. This promotes local manufacturing
industry.
 Tax credits on charitable donations to promote welfare activities.
 Tax exemptions to charity organisation/educational institutions to promote these activities.
 Exemption of tax to Agriculture sector to promote agriculture.

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2 BASICS OF TAXATION LAWS

Section overview

 Basics of tax laws

2.1 Basics of tax laws

Adam Smith’s in his famous book “Wealth of Nations” has elaborated following canons of Taxation:
 Equality
Tax payments should be proportional to income and applied equally to all concerned areas
 Certainty
Tax liabilities should be clear and certain
 Convenience of payment
Taxes should be collected at a time and in a manner convenient for taxpayer
 Economy of collection
Taxes should not be expensive to collect and should not discourage business.
Principles for levy of tax
Following are some broad principles for levy of taxes:
 The Benefit Principle
This principle holds that the individuals should be taxed in proportion to the benefits they
receive from the governments and that taxes should be paid by those people who receive
the direct benefit of government programs and projects out of the taxes paid.
 The Ability-to-Pay Principle
This principle holds that taxes should relate with the person’s income or the ability to pay,
that is, those with greater income or wealth who can afford to pay should be taxed. Similarly,
even rate of tax could increase with higher income.
 The Equal-Distribution Principle
Income, wealth and transaction may be taxed at a fixed percentage; that is, people who earn
more and spend more should pay more taxes, but not pay a higher rate of tax.
Kinds of taxes
 Proportional tax/Flat Tax
A tax system that requires the same percentage of income from all taxpayers regardless of
their earnings. A proportional tax applies the same tax rate across low, middle and high-
income taxpayers. The proportional tax is in contrast to a progressive tax, where taxpayers
with higher incomes pay higher tax rates than taxpayers with lower incomes. A proportional
tax is also called a flat tax.
 Regressive tax
A tax that takes a larger percentage from a person’s low-income than from another person’s
high-income. A regressive tax is generally a tax that is applied uniformly. This means that it
hits lower-income individuals harder.
 Progressive tax
A tax that takes a larger percentage from high-income earners than it does from low-income
earners. In other words, the more one earns, the more tax he would have to pay. The tax
amount is proportionately equal to someone’s status in the society. A rich man should pay
more than a poor man.

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Characteristics of tax laws

Following are major characteristics of a taxation system:

 Tax is an enforced contribution
Tax payment is not voluntary in nature and the imposition is not dependent upon the will of
the person taxed.
 Tax is generally payable in cash (bank)
This means that payment by cheques, promissory notes, or in kind is not accepted.
 Tax is proportionate in character
Payment of taxes should be based on the ability to pay principle; higher income of the tax
payer, the bigger amount of the tax paid.
 Tax is levied (to impose; collect) on income, transactions or property
There are taxes that are imposed or levied on acts, rights or privileges.
 Tax is levied by the state which has jurisdiction over the person or property
As a general rule, only persons, properties, acts, right or transaction within the jurisdiction
of the taxing state are subjects for taxation.
 Tax is levied by the law making body of the state
This means that law must be enacted first by the Parliament in Pakistan.
 Tax is levied for public purposes
Taxes are imposed to support the government in implementation of projects and programs.

The principles of a sound tax system

 Fiscal adequacy

The sources of revenue taken as a whole should be sufficient to meet the expenditures of
the government, regardless of business, export taxes, trade balances and problems of
economic adjustments. Revenues should be capable of expanding or contracting annually
in response to variations in public expenditures.

 Equality or Theoretical Justice

Taxes levied must be based upon the ability of the citizen to pay.

 Administrative Feasibility

In a successful tax system, tax should be clear and plain to taxpayers, capable of
enforcement by the adequate and well-trained public officials, convenient as to the time and
manner of payment and not unduly burdensome to discourage business activity.

 Consistency or Compatibility with Economic Goals

Tax laws should be consistent with economic goals or programs of the government which
pertain to basic services intended for the masses.

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3 INTRODUCTION TO DIFFERENT TAXATION LAWS OF PAKISTAN

Section overview

 Brief overview of different direct and indirect taxes

3.1 Brief overview of different direct and indirect taxes

Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad
categories, viz., direct and indirect taxes. A broad description regarding the nature of administration
of these taxes is explained below:

DIRECT TAXES
Direct taxes are those that are levied directly on the income or wealth of individuals or organizations
and are paid directly to the government by the taxpayer. The burden of a direct tax cannot be
shifted to another person or entity.

Income Tax
Direct taxes primarily comprise of Income Tax. In the Income Tax Ordinance, 2001, tax is levied
generally on the net income of a taxpayer earned during a tax year computed by applying the
specified tax rates as applicable to respective taxpayer.
For the purpose of the charge of tax and the computation of total income, all income is classified
under the following heads:
 Salary
 Income from property
 Income from business
 Capital gains; and
 Income from other sources

Capital Value Tax

Capital value tax on different transaction such as transfer of immoveable property, transfer of rights
etc.

INDIRECT TAXES
Indirect taxes are imposed on the sale or consumption of goods and services. The indirect tax is
transferred from the supplier or seller to the end consumer, who pays the tax as part of the
purchase price.
Example: In the case of sales tax, the importer pays the tax to the customs department and then
recovers it from the manufacturer. The manufacturer, in turn, recovers it from the distributor, who
passes it on to the wholesaler. The wholesaler then recovers the tax from the retailer, and
ultimately, the retailer recovers the tax from the consumer.
Following are the indirect taxes under the Pakistani Taxation System.

Custom Duty
Goods imported and exported from Pakistan are liable to rates of customs duties as prescribed in
Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute
a major part of the total tax receipts. The rate structure of customs duty is determined by a large
number of socio-economic factors. However, the general scheme envisages higher rates on luxury
items as well as on less essential goods. The import tariff has been given an industrial bias by
keeping the duties on industrial plants and machinery and raw material lower than those on
consumer goods.

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Federal Excise Duty

Federal Excise duties are levied on a limited number of goods produced or manufactured, and
services provided or rendered in Pakistan. On most of the items Federal Excise duty is charged on
the basis of value or retail price. Some items are, however, chargeable to duty on the basis of
weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity
Description and Coding system which is being used all over the world. All exports are subject to a
zero percent Federal Excise Duty. Additionally, any duty paid on these goods is refundable from
the tax department in accordance with the applicable rules. Examples include duty on tobacco,
cigarettes, and cigarette substitutes.

Sales Tax
Sales tax is levied at various stages of economic activity:
 All taxable goods imported into Pakistan, payable by the importers;
 All taxable supplies made in Pakistan by a registered person in the course of furtherance of
any business carried on by him; and
 All taxable services provided in Pakistan.
There is an in-built system of input tax adjustment and a registered person can make adjustment
of tax paid at earlier stages against the tax payable by him on his supplies. Thus, the tax paid at
any stage does not exceed 18% of the total sales price of the supplies. In Pakistan, the government
has the flexibility to levy sales taxes at varying rates, which may be higher or lower than 18%.

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4 HISTORY OF TAX LAWS IN PAKISTAN

Section overview

 History of tax laws in Pakistan

4.1 History of tax laws in Pakistan

In Pakistan, Federal Government is empowered to levy and collect tax on the income of a person.
The history of modern income taxation dates back to the year 1860. The British Empire introduced
first formal Income Tax Act of 1860 in an effort to end the budgetary deficit faced due to the war of
independence of 1857. The tax was not intended to be permanent and was repealed in 1865.
The Income Tax Act of 1886 was a general income tax that had been imposed on traders by some
of the provinces. This Act of 1886 was a great improvement on earlier enactments. Its basic
scheme, by and large, survives till today. It introduced the definition of “agricultural income” which
is almost the same as in the Income Tax Ordinance 2001. This Act continued in force for 32 years.
The 1918 Act consolidated a number of wartime amendments. A graduated super tax on income
over Rs.50,000 and on the undistributed profits of the corporation and other entities was introduced
by the Super Tax Act of 1917 and continued in force through modifications by the Super Tax Act
of 1920. The Income Tax Act and the Super Tax Act were later on consolidated in another act i.e.
the Income Tax Act of 1922, which remained in force in Pakistan till 30th June 1979; when the new
law was promulgated i.e. the Income Tax Ordinance, 1979 with effect from 1st July 1979.
Income Tax Ordinance 1979 was amended through innumerable presidential ordinances, annual
finance acts/ordinances and statutory regulatory orders (SROs) and most of its lacunas were
removed over a long period of time. However, after approximately 23 years of its existence when
substantive amendments and judicial pronouncements made it a universally understandable and
acceptable piece of legislation for everybody, a new ordinance (i.e.) Income Tax Ordinance, 2001
was promulgated on 13th September 2001.

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 14

CHAPTER
Constitutional provisions on taxes
From ICAP Book

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Constitutional provisions on taxes

1 FEDERAL FINANCIAL PROCEDURES

Section overview

 Introduction
 Federal consolidated fund and public account and expenditure to be charged to Federal
constitutional fund

1.1 Introduction
Constitution of Pakistan is the prime source for all legislations in Pakistan. It provides that tax shall
only be levied by or under the authority of Act of (Majlis-e-Shoora) Parliament (Article 77). The
Constitution distributes powers among Federation and Provinces. It provides procedures for levy
and collection of taxes as well as procedures for use of funds received from taxes or by the
Federation from any other source. This chapter is divided into three main areas which are as
follows:
 Federal Financial Procedures
 Provincial Financial Procedures
 Distribution of Revenues between Federation & Provinces
These areas are now explained in detail in the upcoming paragraphs.

1.2 Federal consolidated fund and public account and expenditure to be charged to
Federal constitutional fund

1.2.1 Federal consolidated fund and public account [Article 78]

 All revenues received by the Federal Government, all loans raised by that
Government and all monies received by it in repayment of any loan, shall form
part of a consolidated fund, to be known as the Federal Consolidated Fund.
 All other monies:

 received by or on behalf of the Federal Government; or

 received by or deposited with the Supreme Court or any other court

established under the authority of the Federation;

shall be credited to the Public Account of the Federation.

1.2.2 Custody of federal consolidated fund and public account [Article 79]

The custody of the Federal Consolidated Fund, the payment or monies into that Fund,
the withdrawal of monies there from, the custody of other monies received by or on
behalf of the Federal Government, their payment into, and withdrawal from, the Public
Account of the Federation, and all matters connected with or ancillary to the matters
aforesaid shall be regulated by Act of Majlis-e-Shoora (Parliament) or, until provision
in that behalf is so made, by rules made by the President.

1.2.3 Annual budget statement [Article 80]

 The Federal Government shall, in respect of every financial year, cause to be

laid before the National Assembly a statement of the estimated receipts and
expenditure of the Federal Government for that year, in this Part, referred to as
the annual budget statement.

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 The annual budget statement shall show separately:

 the sums required to meet expenditure described by the Constitution as
expenditure charged upon the Federal Consolidated Fund; and

 the sums required to meet other expenditure proposed to be made from

the Federal Consolidated Fund; and
 The annual budget statement shall distinguish expenditure on revenue account
from other expenditure.

1.2.4 Expenditure charged upon federal consolidated fund [Article 81]

The following expenditure shall be expenditure charged upon the Federal Consolidated
Fund:-
 the remuneration payable to the President and other expenditure relating to his
office, and the remuneration payable to-

 the Judges of the Supreme Court and the Islamabad High Court

 the Chief Election Commissioner;

 the Chairman and the Deputy Chairman;

 the Speaker and the Deputy Speaker of the National Assembly;

 the Auditor-General;
 The administrative expenses, including the remuneration payable to officers and
servants, of the Supreme Court, the Islamabad High Court, the department of
the Auditor-General, the Office of the Chief Election Commissioner and of the
Election Commission and the Secretariats of the Senate and the National
Assembly;
 All debt charges for which the Federal Government is liable, including interest,
sinking fund charges, the repayment or amortisation of capital, and other
expenditure in connection with the raising of loans, and the service and
redemption of debt on the security of the Federal Consolidated Fund;
 Any sums required to satisfy any judgment, decree or award against Pakistan by
any court or tribunal; and
 Any other sums declared by the Constitution or by Act of Majlis-e-Shoora
(Parliament) to be so charged.

1.2.5 Procedure relating to Annual Budget Statement [Article 82]

 So much of the Annual Budget Statement as relates to expenditure charged
upon the Federal Consolidated Fund may be discussed in, but shall not be
submitted to the vote of, the National Assembly.
 So much of the Annual Budget Statement as relates to other expenditure shall
be submitted to the National Assembly in the form of demands for grants, and
the Assembly shall have power to assent to, or to refuse to assent to, any
demand, or to assent to any demand subject to a reduction of the amount
specified therein;
However, for a period of ten years from the commencing day or the holding of the
second general election to the National Assembly, whichever occurs later, a demand
shall be deemed to have been assented to without any reduction of the amount
specified therein, unless, by the votes of a majority of the total membership of the
Assembly, it is refused or assented to subject to a reduction of the amount specified
therein.
 No demand for a grant shall be made except on the recommendation of the
Federal Government.

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1.2.6 Authentication of schedule of authorised expenditure [Article 83]

1) The Prime Minister shall authenticate by his signature a schedule specifying:
a) the grants made or deemed to have been made by the National Assembly
under Article 82, and
b) the several sums required to meet the expenditure charged upon the
Federal Consolidated Fund but not exceeding, in the case of any sum,
the sum shown in the statement previously laid before the National
Assembly.
2) The schedule so authenticated shall be laid before the National Assembly, but
shall not be open to discussion or vote thereon.
3) Subject to the Constitution, no expenditure from the Federal Consolidated Fund
shall be deemed to be duly authorised unless it is specified in the schedule so
authenticated and such schedule is laid before the National Assembly as stated
above.

1.2.7 Supplementary and excess grants [Article 84]

If in respect of any financial year it is found that:
a) the amount authorized to be expended for a particular service for the current
financial year is insufficient, or that a need has arisen for expenditure upon some
new service not included in the Annual Budget Statement for that year; or
b) any money has been spent on any service during a financial year in excess of the
amount granted for that service for that year;
the Federal Government shall have power to authorize expenditure from the Federal
Consolidated Fund, whether the expenditure is charged by the Constitution upon that
Fund or not, and shall cause to be laid before the National Assembly a Supplementary
Budget Statement or, as the case may be, an Excess Budget Statement, setting out
the amount of that expenditure, and the provisions of Articles 80 to 83 shall apply to
those statements as they apply to the annual budget statement.

1.2.8 Votes on account [Article 85]

Notwithstanding anything contained in the foregoing provisions relating to financial
matters, the National Assembly shall have power to make any grant in advance in
respect of the estimated expenditure for a part of any financial year, not exceeding four
months, pending completion of the procedure prescribed in Article 82 for the voting of
such grant and the authentication of the schedule of authorized expenditure in
accordance with the provisions of Article 83 in relation to the expenditure.

1.2.9 Power to authorise expenditure when assembly stands dissolved [Article 86]
Notwithstanding anything contained in the foregoing provisions relating to financial
matters, at any time when the National Assembly stands dissolved, the Federal
Government may authorize expenditure from the Federal Consolidated Fund in respect
of the estimated expenditure for a period not exceeding four months in any financial
year, pending completion of the procedure prescribed in Article 82 for the voting of
grants and the authentication of the schedule of authorized expenditure in accordance
with the provisions of Article 83 in relation to the expenditure

1.2.10 Secretariats of Majlis-e-Shoora (Parliament) [Article 87]

 Each House shall have a separate Secretariat:
 Provided that nothing in this clause shall be construed as preventing the creation
of posts common to both Houses.
 Majlis-e-Shoora (Parliament) may by law regulate the recruitment and the
conditions of service of persons appointed to the Secretarial staff of either
House.

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 Until provision is made by Majlis-e-Shoora (Parliament) under clause (2), the

Speaker or, as the case may be, the Chairman may, with the approval of the
President, make rules regulating the recruitment and the conditions of service,
of persons appointed to the secretarial staff of the National Assembly or the
Senate.

1.2.11 Finance committees [Article 88]

 The expenditure of the National Assembly and the Senate within authorised
appropriations shall be controlled by the National Assembly or, as the case may
be, the Senate acting on the advice of its Finance Committee.
 The Finance Committee shall consist of the Speaker or, as the case may be, the
Chairman, the Minister of Finance and such other members as may be elected
thereto by the National Assembly or, as the case may be, the Senate.
 The Finance Committee may make rules for regulating its procedure.

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2 PROVINCIAL FINANCIAL PROCEDURES

Section overview

 Introduction
 Provincial consolidated fund and public account and expenditure to be charged to Provincial
consolidated fund

2.1 Introduction
Provincial Financial Procedures are almost the same as Federal Financial Procedures. However,
these are discussed in detail for clarity on the issue

2.2 Provincial consolidated fund and public account and expenditure to be charged to
Provincial consolidated fund

2.2.1 Provincial consolidated fund and public account [Article 118]

 All revenues received by the Provincial Government, all loans raised by that
Government, and all monies received by it in repayment of any loan, shall form
part of a consolidated fund, to be known as the Provincial Consolidated Fund.

 All other monies:

 received by or on behalf of the Provincial Government; or

 received by or deposited with the High Court or any other court established
under the authority of the Province;
Shall be credited to the Public Account of the Province.

2.2.2 Custody of provincial consolidated fund and public account [Article 119]

The custody of the Provincial Consolidated Fund, the payment of moneys into that
Fund, the withdrawal of monies therefrom, the custody of other monies received by or
on behalf of the Provincial Government, their payment into, and withdrawal from, the
Public Account of the Province, and all matters connected with or ancillary to the
matters aforesaid, shall be regulated by Act of the Provincial Assembly or, until
provision in that behalf is so made, by rules made by the Governor.

2.2.3 Annual budget statement [Article 120]

 The Provincial Government shall, in respect of every financial year, cause to be

laid before the Provincial Assembly a statement of the estimated receipts and
expenditure of the Provincial Government for that year, in this Chapter referred
to as the Annual Budget Statement.

 The annual budget statement shall show separately:

 The sums required to meet expenditure described by the Constitution as
expenditure charged upon the Provincial Consolidated Fund; and

 The sums required to meet other expenditure proposed to be made from

the Provincial Consolidated Fund;
and shall distinguish expenditure on revenue account from other expenditure.

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2.2.4 Expenditure charged upon provincial consolidated fund [Article 121]

 The following expenditure shall be expenditure charged upon the Provincial
Consolidated Fund:
 The remuneration payable to the Governor and other expenditure relating
to his office, and the remuneration payable to:

 the Judges of the High Court; and

 the Speaker and Deputy Speaker of the Provincial Assembly;
 the administrative expenses, including the remuneration payable
to officers and servants, of the High Court and the Secretariat of
the Provincial Assembly;
 All debt charges for which the Provincial Government is liable, including
interest, sinking fund charges, the repayment or amortization of capital,
and other expenditure in connection with the raising of loans, and the
service and redemption of debt on the security of the Provincial
Consolidation Fund;
 Any sums required to satisfy any judgment, decree or award against the
Province by any court or tribunal; and
 Any other sums declared by the Constitution or by Act of the Provincial
Assembly to be so charged.

2.2.5 Procedure relating to annual budget statement [Article 122]

 So much of the Annual Budget Statement as relates to expenditure charged
upon the Provincial Consolidated Fund may be discussed in, but shall not be
submitted to the vote of, the Provincial Assembly.
 So much of the Annual Budget Statement as relates to other expenditure shall
be submitted to the Provincial Assembly in the form of demands for grants, and
that Assembly shall have power to assent to, or to refuse to assent to, any
demand, or to assent to any demand subject to a reduction of the amount
specified therein:
 No demand for a grant shall be made except on the recommendation of the
Provincial Government.

2.2.6 Authentication of schedule of authorised expenditure [Article 123]

 The Chief Minister shall authenticate by his signature a schedule specifying:
 The grants made or deemed to have been made by the Provincial
Assembly under Article, 122 and
 The several sums required to meet the expenditure charged upon the
Provincial Consolidated Fund but not exceeding, in the case of any sum,
the sum shown in the statement previously laid before the Assembly.
 The schedule so authenticated shall be laid before the Provincial Assembly, but
shall not be open to discussion or vote thereon.
 Subject to the Constitution, no expenditure from the Provincial Consolidated
Fund shall be deemed to be duly authorized unless it is specified in the schedule
so authenticated and such schedule is laid before the Provincial Assembly as
stated above.

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2.2.7 Supplementary and excess grants [Article 124]

If in respect of any financial year it is found that:
 the amount authorized to be expended for a particular service for the current
financial year is insufficient, or that a need has arisen for expenditure upon some
new service not included in the annual budget statement for that year; or
 any money has been spent on any service during a financial year in excess of
the amount granted for that service for that year;
the Provincial Government shall have power to authorize expenditure from the
Provincial Consolidated Fund, whether the expenditure is charged by the Constitution
upon that Fund or not, and shall cause to be laid before the Provincial Assembly a
Supplementary Budget Statement or, as the case may be, an Excess Budget
Statement, setting out the amount of that expenditure, and the provisions of Article 120
to 123 shall apply to those statements as they apply to the annual budget statement.

2.2.8 Votes on account [Article 125]

Notwithstanding anything contained in the foregoing provisions relating to financial
matters, the Provincial Assembly shall have power to make any grant in advance in
respect of the estimated expenditure for a part of any financial year, not exceeding
three months, pending completion of the procedure prescribed in Article 122 for the
voting of such grant and the authentication of the schedule of expenditure in
accordance with the provisions of Article 123 in relation to the expenditure.

2.2.9 Power to authorise expenditure when assembly stands dissolved [Article 126]
Notwithstanding anything contained in the foregoing provisions relating to financial
matters, at any time when the Provincial Assembly stands dissolved, the Provincial
Government may authorize expenditure from the Provincial Consolidated Fund in
respect of the estimated expenditure for a period not exceeding four months in any
financial year, pending completion of the procedure prescribed in Article 122 for the
voting of grants and the authentication of the schedule of authorized expenditure in
accordance with the provisions of Article 123 in relation to the expenditure.

2.2.10 Provisions relating to Provincial Assembly, etc., to apply to provincial assembly, etc.
[Article 127]
 Subject to the Constitution, the provisions of clauses (2) to (8) of Article 53,
clauses (2) and (3) of Article 54, Article 55, Articles 63 to 67, Article 69, Article
77, Article 87 and Article 88 shall apply to and in relation to a Provincial Assembly
or a committee or members thereof or the Provincial Government, but so that:
 any reference in those provisions to Majlis-e-Shoora (Parliament), a
House or the National Assembly shall be read as a reference to the
Provincial Assembly;
 any reference in those provisions to the President shall be read as a
reference to the Governor of the Province;
 any reference in those provisions to the Federal Government shall be,
read as a reference to the Provincial Government;
 any reference in those provisions to the Prime Minister shall be read as a
reference to the Chief Minister.
 any reference in those provisions to a Federal Minister shall be read as a
reference to a Provincial Minister.
 any reference in those provisions to the National Assembly of Pakistan
shall be read as a reference to the Provincial Assembly in existence
immediately before the commencing day.

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3 DISTRIBUTION OF REVENUES BETWEEN FEDERATION AND PROVINCES

Section overview

 Introduction
 National Finance Commission [Article 160]
 Natural gas and hydro-electric power [Article 161]
 Prior sanction of President required to Bills affecting taxation in which provinces are interested
[Article 162]
 Provincial taxes in respect of professions, etc. [Article 163]
 Grants out of consolidated fund [Article 164]
 Exemption of certain public property from taxation [Article 165]
 Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain corporations, etc.
[Article165A]

3.1 Introduction
It is essential to know who authorises which revenues. Federation can only tax to the extent the
Constitution authorises it to legislate for collection of revenues. Similarly, Provinces can only
legislate for levy of taxes to the extent authorised in the Constitution of Pakistan. This part of the
chapter describes the mechanism for determination of distribution of revenue among Federation
and Provinces.

3.2 National Finance Commission [Article 160]

(1) Within six months of the commencing day and thereafter at intervals not exceeding five
years, the President shall constitute a National Finance Commission consisting of the
Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial
Governments, and such other persons as may be appointed by the President after
consultation with the Governors of the Provinces
(2) It shall be the duty of the National Finance Commission to make recommendations to the
President as to:
a) the distribution between the Federation and the Provinces of the net proceeds of the
taxes;
b) the making of grants-in-aid by the Federal Government to the Provincial Governments;
c) the exercise by the Federal Government and the Provincial Governments of the
borrowing powers conferred by the Constitution; and
d) any other matter relating to finance referred to the Commission by the President.
(3) The taxes referred above are the following taxes raised under the authority of Majlis-e-
Shoora (Parliament), namely:
i. taxes on income, including corporation tax, but not including taxes on income consisting
of remuneration paid out of the Federal Consolidated Fund;
ii. taxes on the sales and purchases of goods imported, exported, produced, manufactured
or consumed;
iii. export duties on cotton, and such other export duties as may be specified by the
President;
iv. such duties of exercise as may be specified by the President; and
v. such other taxes as may be specified by the President.

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(3A) The share of the Provinces, in each Award of National Finance Commission shall not
be less than the share given to the Provinces in the previous Award.
(3B) The Federal Finance Minister and Provincial Finance Ministers shall monitor the
implementation of the Award biannually and lay their reports before both Houses of
Majlis-e-Shoora (Parliament) and the Provincial Assemblies.
(4) As soon as may be after receiving the recommendation, of the National Finance
Commission, the President shall, by Order, specify, in accordance with the
recommendations of the Commission, the share of the net proceeds of the taxes mentioned
above which is to be allocated to each Province, and that share shall be paid to the
Government of the Province concerned, and, notwithstanding the provision of Article 78 shall
not form part of the Federal Consolidated Fund.
(5) The recommendations of the National Finance Commission, together with an explanatory
memorandum as to the action taken thereon, shall be laid before both Houses and the
Provincial Assemblies.
(6) At any time before the above Order is made, the President may, by Order, make such
amendments or modifications in the law relating to the distribution of revenues between the
Federal Government and the Provincial Governments as he may deem necessary or
expedient.
(7) The President may, by Order, make grants-in-aid of the revenues of the Provinces in need
of assistance and such grants shall be charged upon the Federal Consolidated Fund.

3.3 Natural gas and hydro-electric power [Article 161]

Notwithstanding the provisions of Article 78:
 the net proceeds of the Federal duty of excise on natural gas levied at well-head and
collected by the Federal Government, and of the royalty collected by the Federal
Government, shall not form part of the Federal Consolidated Fund and shall be paid to the
Province in which the well-head of natural gas is situated.
 the net proceeds of the Federal duty of excise on oil levied at well-head and collected by
the Federal Government, shall not form part of the Federal Consolidated Fund and shall be
paid to the Province in which the well-head of oil is situated.
 the net profits earned by the Federal Government, or any undertaking established or
administered by the Federal Government from the bulk generation of power at a hydro-
electric station shall be paid to the Province in which the hydro-electric station is situated.
Explanation: for the purposes of this clause "net profits" shall be computed by deducting from the
revenues accruing from the bulk supply of power from the bus-bars of a hydro-electric station at a
rate to be determined by the Council of Common Interests, the operating expenses of the station,
which shall include any sums payable as taxes, duties, interest or return on investment, and
depreciations and element of obsolescence, and over-heads, and provision for reserves.

3.4 Prior sanction of President required to Bills affecting taxation in which provinces
are interested [Article 162]
No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds
whereof is assigned to any province, or which varies the meaning of the expression "agricultural
income" as defined for the purposes of the enactments relating to income-tax, or which affects the
principles on which under any of the foregoing provisions of this chapter monies are or may be
distributable to provinces, shall be introduced or moved in the National Assembly except with the
previous sanction of the President

3.5 Provincial taxes in respect of professions, etc. [Article 163]

A Provincial Assembly may by Act impose taxes, not exceeding such limits as may from time to
time be fixed by Act of Majlis-e-Shoora (Parliament), on persons engaged in professions, trades,
callings or employments, and no such Act of the Assembly shall be regarded as imposing a tax on
income.

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3.6 Grants out of consolidated fund [Article 164]

The Federation or a Province may make grants for any purpose, notwithstanding that the purpose
is not one with respect to which Majlis-e-Shoora (Parliament) or, as the case may be, a Provincial
Assembly may make laws.

3.7 Exemption of certain public property from taxation [Article 165]

 The Federal Government shall not, in respect of its property or income, be liable to taxation
under any Act of Provincial Assembly and, subject to clause (2), a Provincial Government
shall not, in respect of its property or income, be liable to taxation under Act of Majlis-e-
Shoora (Parliament) or under Act of the Provincial Assembly of any other Province.
 If a trade or business of any kind is carried on by or on behalf of the Government of a
Province outside that Province, that Government may, in respect of any property used in
connection with that trade or business or any income arising from that trade or business, be
taxed under Act of Majlis-e-Shoora (Parliament) or under Act of the Provincial Assembly of
the Province in which that trade or business is carried on.
 Nothing in this Article shall prevent the imposition of fees for services rendered.

3.8 Power of Majlis-e-Shoora (Parliament) to impose tax on the income of certain

corporations, etc. [Article 165A]
 For the removal of doubt, it is hereby declared that Majlis-e-Shoora (Parliament) has, and
shall be deemed always to have had, the power to make a law to provide for the levy and
recovery of a tax on the income of a corporation, company or other body or institution
established by or under a Federal law or a provincial law or an existing law or a corporation,
company or other body or institution owned or controlled, either directly or indirectly, by the
Federal Government or a Provincial Government, regardless of the ultimate destination of
such income.
 All orders made, proceedings taken and acts done by any authority or person, which were
made, taken or done, or purported to have been made, taken or done, before the
commencement of the Constitution (Amendment) Order 1985, in exercise of the powers
derived from any law referred to in above paragraph, or in execution of any orders made by
any authority in the exercise or purported exercise of powers as aforesaid, shall,
notwithstanding any judgment of any court or tribunal, including the Supreme Court and a
High Court, be deemed to be and always to have been validly made, taken or done and-
shall not be called in question in any court, including the Supreme Court and a High Court,
on any ground whatsoever.
 Every judgment or order of any court or tribunal, including the Supreme Court and a High
Court, which is repugnant to the provisions stated above shall be, and shall be deemed
always to have been, void and of no effect whatsoever.

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4 FEDERAL LEGISLATIVE LIST

Section overview

 Introduction
 Powers of the Federation to legislate on taxes
 Powers of the Provinces to legislate on taxes

4.1 Introduction
Federal Legislative List defines the areas whereby Federal Government can legislate to collect
revenue. This is a long list, however, we herein discuss the areas which relate to taxation.

4.2 Powers of the Federation to legislate on taxes

Following entries in the Federal legislative list as contained in the Constitution of Pakistan relates
to taxes:

Entry No Taxes which can be imposed by the Federation

43. Duties of customs, including export duties.
44. Duties of excise, including salt, but not including alcoholic liquors, opium or other
narcotics;
47. Taxes on income other than agricultural income;
48. Taxes on corporations.
49. Taxes on the sales and purchases of goods imported, exported, produced,
manufactured or consumed, except sales tax on services.
50. Taxes on the capital value of the assets, not including taxes on immovable property.
51. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear
energy.
52. Taxes and duties on the production capacity of any plant, machinery, undertaking,
establishment or installation in lieu of any one or more of them.
53. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their
fares and freights.

Keeping in view the above provisions, following laws are enacted by the Federal Government:

Legislative powers of Federation Laws enacted thereunder

Taxes on income other than agricultural income; Income Tax Ordinance, 2001
Taxes on corporations.
Taxes on mineral oil, natural gas and minerals for
use in generation of nuclear energy.
Taxes on the sales and purchases of goods Sales Tax Act, 1990, Federal Excise Act,
imported, exported, produced, manufactured or 2005, Customs Act, 1969
consumed, except sales tax on services
Taxes and duties on the production capacity of
any plant, machinery, undertaking, establishment
or installation in lieu of any one or more of them.
Taxes on the capital value of the assets, not Capital Value Tax levied through Finance
including taxes on immovable property. Act, 1989

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4.3 Powers of the Provinces to legislate on taxes

All taxes other than the mentioned in above list of Federal legislative list as contained in the
Constitution of Pakistan are covered in the scope of legislation of Provinces. Accordingly, various
types of taxes are introduced by the Provinces:
 Sales tax on services
 Taxes on transfer of immoveable property
 Professional tax
 Tax on luxury houses
 Tax on registration of luxury vehicles etc.
 Property tax

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 15

CHAPTER
Ethics
From ICAP Book

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1 ETHICS
Section overview

 Ethics – meanings and application

1.1 Ethics – meanings and application

The word ethics is derived from the Greek word ethos, which means "character," and from the Latin
word mores, which means "customs." Aristotle was one of the first great philosophers to study
ethics. To him, ethics was more than a moral, religious, or legal concept. He believed that the most
important element in ethical behaviour is knowledge that actions are accomplished for the
betterment of the common good. He asked whether actions performed by individuals or groups are
good both for an individual or a group and for society. To determine what is ethically good for the
individual and for society, Aristotle said, it is necessary to possess three virtues of practical wisdom:
i. temperance,
ii. courage, and
iii. justice.

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2 ETHICS FOR TAX LEGISLATORS

Section overview

 Ethics for tax legislators

 Canons of taxation

2.1 Ethics for tax legislators

"Legislative office is a public trust, and every effort to realise personal gain through official conduct
is a violation of that trust"
The constitution mandates the legislature to enact a code of ethics prohibiting conflicts between
the public duty and private interests of members of the legislature, disclosure of prohibited conduct
and financial interest (if any) and post-service restrictions. In addition, the constitution requires that
the legislature enact a code of ethics for all officials and employees of the state and its political
subdivisions

2.2 Canons of taxation

They are the basic principles (i.e.) rules set to build a 'Good Tax System'. Canons of Taxation were
first originally laid down by economist Adam in his famous book "The Wealth of Nations". These
canons of taxation were discussed in Chapter 1 in a summary. In this book, Adam Smith only gave
four canons of taxation, which are now known as the "Original or Main Canons of Taxation". These
are as follows:
1. Canon of Equity
The principle aims at providing economic and social justice to the people. According to this
principle, every person should pay to the government depending upon his ability to pay. Rich
people should pay higher taxes to the government, because without the protection of the
government authorities (Police, Defence, etc.) they would not have earned and enjoyed their
income. Adam Smith argued that the taxes should be proportional to income, i.e., citizens
should pay taxes in proportion to the revenue which they respectively enjoy under protection
of the State.
2. Canon of Certainty
According to Adam Smith, the tax which an individual has to pay should be certain, not
arbitrary. The taxpayer should know in advance how much tax he has to pay, at what time
he has to pay the tax, and in what form the tax is to be paid to the government. In other
words, every tax should satisfy the canon of certainty. At the same time a good tax system
also ensures that the government is also certain about the amount that would be collected
by way of tax.
3. Canon of Convenience
The mode and timing of tax payment should be as far as possible, convenient to the
taxpayers. For example, land revenue is collected at time of harvest and income tax is
deducted at source. Convenient tax system encourages people to pay tax and increases tax
revenue.
4. Canon of Economy
This principle states that there should be economy in tax administration. The cost of tax
collection should be lower than the amount of tax collected. It may not serve any purpose, if
the taxes imposed are widespread but are difficult to administer. Therefore, it would make
no sense to impose certain taxes, if they are difficult to administer.

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Additional Canons of Taxation Activities and functions of the government have increased
significantly since Adam Smith's time. Governments are expected to maintain economic stability,
full employment, reduce income inequality and promote growth and development. Tax system
should be such that it meets the requirements of growing state activities. Accordingly, modern
economists gave following additional canons of taxation.
5. Canon of Productivity: It is also known as the canon of fiscal adequacy. According to this
principle, the tax system should be able to yield enough revenue for the treasury and the
government should have no need to resort to deficit financing. This is a good principle to
follow in a developing economy.
6. Canon of Elasticity: According to this canon, every tax imposed by the government should
be elastic in nature. In other words, the income from tax should be capable of increasing or
decreasing according to the country’s requirement. For example, if the government needs
more income at a time of crisis, the tax should be capable of yielding more income through
increase in its rate.
7. Canon of Flexibility: It should be easily possible for the authorities to revise the tax
structure both with respect to its coverage and rates, to suit the changing requirements of
the economy. With changing time and conditions, the tax system needs to be changed
without much difficulty. The tax system must be flexible and not rigid.
8. Canon of Simplicity: The tax system should not be complicated. That makes it difficult to
understand and administer and results in problems of interpretation and disputes. In
Pakistan, efforts of the government in recent years have been to make the system simple.
9. Canon of Diversity: This principle states that the government should collect taxes from
different sources rather than concentrating on a single source of tax. It is not advisable for
the government to depend upon a single source of tax, it may result in inequity for a certain
section of the society and uncertainty for the government to raise funds. If the tax revenue
comes from diversified sources, then any reduction in tax revenue from one source for any
reason is bound to be small.

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3 ETHICS FOR TAX ADMINISTRATORS

Section overview

 Powers of tax administrators

 Pillars of tax administration
 Responsibilities of the tax implementing authorities

3.1 Powers of tax administrators

The tax administration is not responsible for tax policy and tax legislation but deals with current tax
system. Federal Board of Revenue is empowered under the law to monitor, assess, levy and collect
taxes as provided in the tax statutes. There are a number of occasions whereby they possess any
of the following powers:
 Assess taxes (including best judgment);
 Collect Revenue;
 Seize Property;
 Attach bank accounts;
 Commence legal (criminal/civil) proceedings against taxpayer
Such powers may be misused and can become abusive powers as exercise of that power can
result in the following against the taxpayer:
 Loss of property and income;
 Imprisonment
So, these powers can result in the loss of some of the fundamental human rights of the taxpayer.
Ethics tend to bring these powers within the principles of goodness and morality.

Illustration:
Mr. Zahid is running a textile unit and tax amounting to Rs. 5M is assessed against him. His bank
accounts balance is Rs. 10M. However, he has to fulfil his exports orders. In case he fails to fulfil
his orders, he would lose his customers and that orders. Considering his present critical financial
position, Zahid believes that tax recovery proceedings by recovery from bank account (Attachment
of bank account) would entail an irreparable loss to his organisation. So he files a request to FBR
for allowing him to pay the tax dues in instalments.
FBR staff has the power to allow him relief or recover this tax directly from his bank account. Justice
and equity demands that his request should be entertained so that his continuation and prosperity
of business would eventually result in payment of better taxes in future whereas recovery of tax
could jeopardise his business operations.

Illustration:
Income Tax Ordinance, sales tax law, Federal excise law empower tax authorities to select cases
for audit. This power can be misused by selecting some cases while leaving many unaudited. Thus,
despite the fact that law provides unfettered powers, these should be exercised on some ethical
and rational basis.

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3.2 Pillars of tax administration

In order to safeguard the interest of taxpayers and avoid abuse of powers by the tax administration,
following four pillars of Tax administration are defined:
1) Fairness
Strive to be impartial, fair, neutral and consistent in administering the law without regard to
race, social or economic circumstances.
2) Transparency
All Proceedings must be transparent and must be seen as transparent.
3) Equity
Best tax administration is not that which collects most revenue. Rather it depends on how
this revenue generation is actually accomplished. Whether all stakeholders are taxed fairly
or tax is collected from the poor/salaried class after failing to collect taxes from
entrepreneurs/businesses. Thus, equity demands that tax administrators should not achieve
their objectives in an irrational manner.
4) Accountability
There must be a strong system of accountability for wrong doers which should curb
corruption, nepotism and maladministration.
Under the four pillars, some of the ethical issues facing tax administration are:
1) Acceptance of gifts
2) Conflict of Interest
3) Selective application of the law/ or inconsistency in applying the law
4) Political influence
5) Confidentiality/secrecy
6) Discretion
7) Corruption
8) Lack of Autonomy
In order to avoid pitfalls of the abusive use of discretion, seven principles for structuring
discretion are defined which are as under:
 Open plans
 Open policy statements
 Open rules
 Open findings
 Open reasons
 Open precedents
 Fair informal procedure

3.3 Responsibilities of the tax implementing authorities

A concise code which can enlist responsibilities of Tax Administrators can be as under:
1) Obey all laws relating to taxation and grant no exemptions, credit or advantage to any
taxpayer that is not provided by the law;
2) Be dedicated to the highest ideals of honesty and integrity in all matters in order to maintain
the respect and confidence of the government and taxpayers;
3) Strive to be impartial, fair, neutral and consistent in administering the law without regard to
race, social status or economic circumstances;

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4) Provide prompt, efficient and quality service to all stakeholders in an effort to exceed their
expectations;
5) Refrain from actively participating in partisan political activities;
6) Accurately record proceedings and maintain taxpayer information in the strictest confidence
and highest level of security;
7) Refrain from soliciting gifts for actions and non-actions;
8) Make reasonable effort to collect the proper amount of tax revenue due at the lowest
possible cost to the state, and in a manner that warrants the highest degree of confidence
in our integrity, efficiency, effectiveness and fairness;
9) Respond to valid taxpayer refund claims with the same diligence as employed in collection
of taxes;
10) Educate taxpayers on their rights and responsibilities to ensure the highest possible levels
of voluntary compliance to the laws.

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4 ETHICS FOR TAX PRACTITIONERS

Section overview

 Moral and Ethical principles governing tax practitioners

4.1 Moral and Ethical principles governing tax practitioners

There are five fundamental principles of ethics for tax practitioners. These are set out below:
1 Integrity
Tax Practitioners should be straightforward and honest in all professional and business
relationships. Integrity implies not just honesty but also fair dealing and truthfulness.
2 Objectivity
Tax practitioners should not allow bias, conflicts of interest or undue influence of others to
override their professional or business judgments.
3 Professional competence and due care
Tax Practitioners have a duty to maintain their professional knowledge and skill at such a
level that a client or employer receives competent service, based on current developments
in practice, legislation and techniques. Tax practitioners should act diligently and in
accordance with applicable technical and professional standards.
4 Confidentiality
Tax Practitioners should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose such information to third
parties without authority or unless there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business relationships
should not be used for the personal advantage of tax practitioners or third parties.
5 Professional behaviour
Tax practitioners should comply with relevant laws and regulations and should avoid any
action which discredits the profession.
They should behave with courtesy and consideration towards all with whom they come into
contact in their professional capacity.

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5 ETHICS FOR TAXPAYERS

Section overview

 Morality behind tax compliance

 Ethics and morality for tax payers regarding taxation compliance
 Tax avoidance and evasion

5.1 Morality behind tax compliance

There are three approaches to ethics for tax compliance which are as under:
1. Utilitarianism, which tells us to aim for the greatest total happiness across the population. In
the economic sphere, we can interpret ‘happiness’ as the satisfaction of our desires; and so
utilitarianism as aiming for maximum satisfaction of desires.
2. Deontology, which bases ethics on the idea of duty.
3. Virtue ethics, which focus on the virtues we should have, and on what constitutes a virtuous
life. A broad conception of the virtues must be used here, encompassing not only virtues such
as honesty, but also virtues such as using one’s talents and leading a fulfilled life.

5.2 Ethics and morality for tax payers regarding taxation compliance
 For Taxpayers following utilitarian approach, the most important economic goals are to
ensure that goods and services are available to allow everyone to have a decent life, and to
ensure that these resources are distributed widely enough for all or most people to enjoy
them. Motivating citizens to pay taxes even at the highest rate. Moreover, their compliance
level would also be better as there is dire need for availability of resources for the vast
majority of masses and the country.
 Taxpayers preferring the deontologist ethical approach lay down absolute duties. Such duty
includes respect for other people’s property rights. This could be interpreted to mean that
there should be no tax at all, because tax is the forcible transfer of property from taxpayers.
On the other hand, the duty to respect property rights could be used to argue that any social
resources one uses should be paid for, even if one did not ask for those resources to be
provided. Thus in order not to be a thief, anyone who uses a public hospital, or even a public
road, should make sure that he or she pays tax to cover their use. So this approach
envisages that taxes are paid as a matter of obligation by the taxpayer for use of public
facilities.
 Virtue ethics can be a bit more helpful on the question of the fairness of taxation. One should
use one’s talents to the full. Financial incentives can encourage people to use their talents,
but very high taxation dampens those incentives by reducing take-home pay. Another virtue
is charity, either in the form of cash or time. The more take-home cash people have, the
more likely it is that they would be able to afford charitable donations; and also find time from
paid employment to perform charity work or other forms of civic service, as school trustees
or Mutawali of Masjid for example. A third virtue is independence. It is good to earn what
one needs rather than to depend on subsidies from others. Lower rates of taxation make
independence more easily achievable.
 Tax can be used for all sorts of purposes, and it is often clear what ethicists of any particular
kind would say about these purposes. We can start with the provision of law and order and
the more extensive public services such as healthcare and education.
 Utilitarians will approve of taxation for these purposes because they allow more goods and
services to be produced, and they also allow more non-materialistic desires to be satisfied.
Virtue ethicists will approve because these services enhance people’s opportunities to use
their talents and to lead prosperous lives.

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 When we turn to aid the poor, utilitarians would be prone to approve because it means
increased transfer of resources from the rich to the poor rendering them in a happier position.
Virtue ethicists will approve because with redistribution the poor can be helped to flourish
and develop virtues, and because looking after the less fortunate is itself a virtue (although
voluntary charity may be a greater virtue than forced payment). Deontologists can recognize
a duty to care for the poor.
 Taxation addressing the needs of all these ethical thoughts can attract better compliance.
Morality for citizens to pay taxes is justified as the State is responsible for providing a proper
infrastructure for a decent life. The State is also obliged to provide endow with a level playing
field to all the concerned so that talent on merit can be best explored and utilized. It therefore
becomes necessary that taxes be paid to the State in return for basic needs benefits peace
& prosperity, infrastructural development and economic growth etc.

5.3 Tax avoidance and evasion

In recent years, tax avoidance has been the subject of considerable public concern. It is compliance
with the law, though aggressive or abusive avoidance, as opposed to simple tax planning, will seek
to comply with the letter of the law, but to subvert its purpose.
Tax evasion occurs when someone acts against the law.
 Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage,
to attempt to reduce the amount of tax that is payable by means that are within the law whilst
making a full disclosure of the material information to the tax authorities. Examples of tax
avoidance involve using tax deductions, changing one's business structure through
incorporation or establishing an offshore company in a tax haven.
 By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other
entities to evade the payment of taxes by illegal means. Tax evasion usually entails
taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax
authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting
(such as under declaring income, profits or gains; or overstating deductions.
Difference between ‘Tax Avoidance’ & ‘Tax Evasion’

TAX AVOIDANCE TAX EVASION

Where the payment of tax is avoided though

Where the payment of tax is avoided through
by complying with the provisions of law but
illegal means or fraud.
defeating the intension of the law.

Tax Avoidance is undertaken by taking Tax evasion is undertaken by employing unfair

advantage of loop holes in the law means & practices

Tax Avoidance is done through not malafied Tax Evasion is an unlawful way of paying lower
intention but complying the provision of law. taxes and defaulter may be punished.

Tax Avoidance looks like a tax planning and Tax evasion is blatant fraud and is done after
is done before the tax liability arises. the tax liability has arisen.

Example of tax avoidance is making use of Falsifying income tax return

donating to approved charity recognized by
the FBR, to claim a tax credit in future when
computing the tax liability.

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Illustration:

Tax Law Objective

Mr.A earned Turnover of Rs. 10 M. However, he kept it as cash in Tax evasion , Criminal Act,
his bank locker and hid it from tax authorities. He paid all he cannot buy any asset or
related expenses from this cash. settle liabilities unless he
declares this income and
also pays tax due on it
Mr. B earned income of Rs, 10 M. However, he declared only so This too is tax evasion, a
much of income which is verifiable from the banks i.e. 6M, understatement is also an
remaining amount he has hidden in a separate bank account offence
Mr. C earned Rs. 10 M. However, he recorded 7M expenses Tax avoidance, which is
employing legal tactics to reduce his net income and offering the legally permissible.
remaining income of Rs. 3 Million for Taxes.

The Impact of Tax Avoidance on Aggregate Welfare: A Utilitarian View

Utilitarianism is a moral philosophy that emphasizes the greatest overall happiness and well-
being. According to utilitarian principles, actions are considered morally right if they result in the
greatest amount of happiness or pleasure for the greatest number of people, and morally wrong if
they produce the opposite
A utilitarian, focused on overall well-being, might not worry much about tax avoidance. This is
because avoiding tax doesn't destroy wealth; it just keeps it in the private sector instead of moving
it to the government. However, a key concern for utilitarians would be the unfair distribution of tax
burdens. When the rich avoid taxes using smart lawyers, the tax burden shifts to people with lower
incomes who can't afford such lawyers. This shift decreases the happiness of those with modest
incomes more than it increases the happiness of the wealthier people who avoid taxes.
Examples 1:
A wealthy business owner hires a tax lawyer to find legal ways to reduce their tax bill. As a result,
they pay significantly less tax.
This means that lower-income individuals, who can't afford such legal services, end up bearing a
larger share of the tax burden.
Example 2:
A high-income individual transfers their money to an offshore account to avoid paying taxes in their
home country.
Consequently, the government collects less revenue from wealthy individuals, leading to higher
taxes or reduced services for ordinary citizens.
A virtue ethicist would perhaps dislike tax avoidance. It is, after all, hardly virtuous to exploit rules
knowing that one is exploiting them in unintended ways to redistribute the disadvantage away from
oneself. A deontologist would not positively favour tax avoidance, but might not condemn it either.
Deontologists can easily argue for a duty to obey the law: yet obeying the law is something the tax
planner takes care to do, in his own peculiar way.

Virtue Ethicist's View:

A wealthy individual uses complex financial strategies to pay less tax. A virtue ethicist would
disapprove because this behavior isn't morally right and harms others by shifting the tax burden
onto them.
Deontologist's View:
A business owner finds legal loopholes to minimize their tax bill. A deontologist might not condemn
this behavior since it follows the law, even if the intention is to avoid paying taxes.

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6 CODE OF ETHICS FOR CHARTERED ACCOUNTANTS AS APPLICABLE TO TAX

SERVICES
Section overview

 Tax services
 Tax return preparation
 Tax calculations for the purpose of preparing accounting entries

The "Code of Ethics for Chartered Accountants (Revised 2019)" is based on the Handbook of the
International Code of Ethics for Professional Accountants, 2018 Edition of the International Ethics
Standards Board for Accountants, published by the International Federation of Accountants (IFAC) in
July 2018 and is used with permission of IFAC.

6.2 Tax Services

Providing tax services to an audit client might create a self-review or advocacy threat. This includes
requirements that prohibit firms and network firms from providing certain tax services to audit
clients in some circumstances because the threats created cannot be addressed by applying
safeguards.
Factors that are relevant in evaluating the level of threats created by providing any tax service to
an audit client include:
 The particular characteristics of the engagement.
 The level of tax expertise of the client’s employees.
 The system by which the tax authorities assess and administer the tax in question and the
role of the firm or network firm in that process.
 The complexity of the relevant tax regime and the degree of judgment necessary in
applying it.

6.2 Tax return preparation

Providing tax return preparation services does not usually create a threat. Tax return preparation
services involve:
 Assisting clients with their tax reporting obligations by drafting and compiling information,
including the amount of tax due (usually on standardized forms) required to be submitted to
the applicable tax authorities.
 Advising on the tax return treatment of past transactions and responding on behalf of the
audit client to the tax authorities’ requests for additional information and analysis (for
example, providing explanations of and technical support for the approach being taken).
Tax return preparation services are usually based on historical information and principally involve
analysis and presentation of such historical information under existing tax law, including
precedents and established practice. Further, the tax returns are subject to whatever review or
approval process the tax authority considers appropriate

6.2 Tax calculations for the purpose of preparing accounting entries

All Audit Clients
Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the
purpose of preparing accounting entries that will be subsequently audited by the firm creates a
self-review threat.
In addition to the factors in paragraph 6.1 above, a factor that is relevant in evaluating the level of
the threat created when preparing such calculations for an audit client is whether the calculation
might have a material effect on the financial statements on which the firm will express an opinion.

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Audit Clients that are Not Public Interest Entities

Examples of actions that might be safeguards to address such a self-review threat when the
audit client is not a public interest entity include:
 Using professionals who are not audit team members to perform the service.
 Having an appropriate reviewer who was not involved in providing the service review the
audit work or service performed.
Audit Clients that are Public Interest Entities
A firm or a network firm shall not prepare tax calculations of current and deferred tax liabilities (or
assets) for an audit client that is a public interest entity for the purpose of preparing accounting
entries that are material to the financial statements on which the firm will express an opinion.
The examples of actions that might be safeguards in (to all audit clients) to address self-review
threats are also applicable when preparing tax calculations of current and deferred tax liabilities (or
assets) to an audit client that is a public interest entity that are immaterial to the financial statements
on which the firm will express an opinion.

Example:
A Pakistani audit firm is faced with the following situations:
Situation 1
ABC limited an audit client has requested your firm to prepare current and deferred tax working for
the purpose of preparing accounting entries that will be reviewed by your firm at the time of Audit.
ABC Ltd is not a public interest entity.
Situation 2
ABC limited an audit client has requested your firm to prepare current and deferred tax working for
the purpose of preparing accounting entries that will be reviewed by your firm at the time of Audit.
ABC Ltd is public interest entity.
Required:
With reference to the ICAP Code of Ethics, what are the threats presented by the events described
above. Also comment upon the safeguards to be taken to reduce the said threat (if any)

Answer
Situation 1
Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the
purpose of preparing accounting entries that will be subsequently audited by the firm creates a self-
review threat. The significance of the threat will depend on:
 The complexity of the relevant tax law and regulation and the degree of judgment necessary in
applying them;
 The level of tax expertise of the client's personnel; and
 The materiality of the amounts to the financial statements.
Safeguards
Safeguards shall be applied, when necessary, to eliminate the threat or reduce it to an acceptable
level. Examples of such safeguards include:
 Using professionals who are not members of the audit team to perform the service;
 If the service is performed by a member of the audit team, using a partner or senior staff
member with appropriate expertise who is not a member of the audit team to review the tax
calculations; or
 Obtaining advice on the service from an external tax professional.

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Situation 2
Except in emergency situations, in the case of an audit client that is a public interest entity, a firm
shall not prepare tax calculations of current and deferred tax liabilities (or assets) for the purpose
of preparing accounting entries that are material to the financial statements on which the firm will
express an opinion.
The preparation of calculations of current and deferred tax liabilities (or assets) for an audit client
for the purpose of the preparation of accounting entries, which would otherwise not be permitted
under this section, may be provided to audit clients in emergency or other unusual situations when
it is impractical for the audit client to make other arrangements. This may be the case when:
 only the firm has the resources and necessary knowledge of the client's business to assist the
client in the timely preparation of its calculations of current and deferred tax liabilities (or
assets), and
 a restriction on the firm's ability to provide the services would result in significant difficulties
for the client (for example, as might result from a failure to meet regulatory reporting
requirements).
Safeguards
 Those who provide the services are not members of the audit team;
 The services are provided for only a short period of time and are not expected to recur; and
 The situation is discussed with those charged with governance.

Example:
Bilal Azhar, ACA is Manager Taxation at a large tax consultancy firm and reports to Bader Ali, FCA
who is one of the partners of the firm.
Bilal Azhar is presently engaged in the preparation of the income tax return of Digital Systems
Limited (DSL), an IT company. During the review of the tax workings, he discovers that DSL has
charged certain expenses against which no supporting documents are available. He brings this
matter to the attention of Bader Ali who has responded him that since this is not an audit
engagement, it is not our responsibility to highlight such matters.
Required:
Briefly discuss how Bader Ali may be in breach of the fundamental principles of ICAP’s Code of
Ethics. Also, state the potential threats that Bilal Azhar may face in the above circumstances and
how he should respond.

Answer
In the given situation, Bader may be in breach of the following fundamental principles of Code of
Ethics for Chartered Accountants:
Professional behaviour
This principle imposes an obligation on all chartered accountants to comply with relevant laws and
regulations and avoid any action that discredits the profession. Bader has breached the
fundamental principle of professional behavior as his proposed suggestion in respect of ignoring
the appropriate adjustments to the income tax return would affect the good reputation of the
profession.
Integrity
The principle of integrity imposes an obligation on all chartered accountants to be straightforward
and honest in all professional and business relationships. Bader has breached the fundamental
principle of integrity as he has knowingly ignored the required adjustments to be made in the
income tax return which may render it materially false.

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Potential threats:
Bilal may face intimidation threat from Bader as refusal to obey instruction may risk his job.
Safeguards
Identified threats are significant as Bilal is being instructed from the highest level of management.
In order to reduce the threat to an acceptable level, one or more of the following safeguards should
be applied:
 Discuss the matter with Bader and persuade him to follow code of ethics/contact the tax client
to make necessary adjustments.
 Consider informing appropriate authorities like a senior partner in the firm.
 Refuse to implement the given proposals.
 Seek legal advice.
 In case threat could not be reduced consider resigning from the job.

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CHAPTER
Scope of sales tax law and rules for
registration and deregistration
From ICAP Book

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1 INTRODUCTION
Section overview

 Preamble
 Extent and applicability of Sales Tax Act, 1990
 Taxes under sales tax law

1.1 Preamble
The preamble of Sales Tax Act, 1990 states that it is an act to consolidate and amend the law
relating to the levy of a tax on the sale, importation, exportation, production, manufacture or
consumption of goods.
The aforesaid preamble clarifies that the sales tax is not only leviable on the sale of goods but is
also on import, export, production, manufacture and consumption of goods. Before we study these
terminologies in the ensuing paragraphs, we would like to describe the jurisdiction and extent of
applicability of Sales Tax Act, 1990.

1.2 Extent and applicability of Sales Tax Act, 1990

Section 1 states that the Sales Tax Act,1990 extends to the whole of Pakistan. The territories of
Pakistan as per Article 1(2) of the Constitution comprise the following:
1) the Provinces of Balochistan, Khyber Pakhtunkhwa, Punjab and Sindh;
2) the Islamabad Capital territory hereinafter referred to as the Federal Capital; and
3) such States and territories as are or may be included in Pakistan, whether by accession or
otherwise.
Keeping in view the aforesaid discussion, it means that the Sales Tax Act, 1990 is applicable to
the whole of Pakistan. Now we discuss the tax covered under the sales tax law:

1.3 Taxes under sales tax law

Definition
“sales tax” [2(29A)] means—
 the tax, additional tax, or default surcharge levied under this Act;
 a fine, penalty or fee imposed or charged under this Act; and
 any other sum payable under the provisions of this Act or the rules made thereunder.

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2 BASIC CONCEPTS AND DEFINITIONS

Section overview

 Taxable supplies
 Supply
 Taxable goods
 Exempt supplies
 Zero rated supplies
 Supplies without payment of sales tax
 Importer, Manufacturer, Wholesaler, Distributor and Retailer
 Registered person
 Taxable activity
 Value of supply
 Time of supply
 Other definitions/concepts

2.1 Taxable supplies

Definition: Taxable Supply [Section 2(41)]
"Taxable supply" means a supply of taxable goods made by an importer; manufacturer, wholesaler
(including dealer), distributor or retailer other than a supply of goods which is exempt under section
13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4.

It is imperative to ascertain the answer of the following questions which would eventually clarify
whether any transaction is taxable supply or not:
i. Whether the transaction constitutes a “supply”?
ii. Whether the supply relates to any “taxable goods”?
iii. Whether these taxable goods are supplied by importer; manufacturer, wholesaler (including
dealer), distributor or retailer?
iv. Which goods are exempted from levy of tax?
v. What are “zero rated supplies”?
vi. What are “supplies without payment of sales tax”?

2.2 Supply
Definition The term supply is defined in section 2(33) of the Act in the following way:
Supply means “A sale or other transfer of the right to dispose of goods as owner, including such
sale or transfer under a hire purchase agreement and also includes”
(i) putting to private, business or non-business use of goods produced or manufactured in the
course of taxable activity for purposes other than those of making a taxable supply;
(ii) auction or disposal of goods to satisfy a debt owed by a person;
(iii) possession of taxable goods held immediately before a person ceases to be a registered
person;
(iv) in case of manufacture of goods belonging to another person, the transfer or delivery of such
goods to the owner or to a person nominated by him;
Provided that the Board with approval of the Federal Minister Incharge, may by notification in the
official Gazette, specify such other transactions which shall or shall not constitute supply.

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2.3 Taxable goods

Definitions:
The definition of term “taxable goods” as given in section 2(39) of the Sales Tax Act, 1990 is as
under:
 "Taxable goods" means all goods other than those which have been exempted under section
13;
The term “goods” is elaborated in section 2(12) of the Act in the following way:
 "Goods" include every kind of movable property other than actionable claims, money, stocks,
shares and securities;

It is important to place on record that under section 8(6) of the Act, the Board with approval of the
Federal Minister In-charge is empowered to prohibit registered persons from supplying taxable
goods to specified un-registered persons.

2.4 Exempt supplies

Definition
"Exempt supply" means a supply which is exempt from tax under section 13. [Section 2(11) of the
Sales Tax Act, 1990)

Section 13 stipulates that following goods are exempt from levy of sales tax:
 Supply or import of goods listed in sixth schedule
 Goods specified by Federal Government through its SROs to the extents and from the date
specified therein
The sixth schedule includes a list of items on which no sales tax is levied.

2.5 Zero rated supplies

Definition
The term “Zero rated supplies” is elaborated in section 2(48) of the Act in the following manner:
"Zero-rated supply" means a taxable supply which is charged to tax at the rate of zero per cent
under section 4.

Section 4 of the Act elucidates following items which are chargeable to tax at the rate of zero per
cent:
a. Goods exported, or the goods specified in the Fifth Schedule;
b. Supply of stores and provisions for consumption aboard a conveyance proceeding to a
destination outside Pakistan as specified in section 24 of the Customs Act, 1969;
c. such other goods, as the Federal Government may specify by notification in the official
Gazette, whenever circumstances exist to take immediate action for the purposes of national
security, natural disaster, national food security in emergency situations and implementation
of bilateral and multilateral agreements:
Provided that nothing in this section shall apply in respect of a supply of goods which –
(i) are exported, but have been or are intended to be re-imported into Pakistan; or
(ii) have been entered for export under Section 131 of the Customs Act, 1969, but are
not exported; or
(iii) have been exported to a country specified by the Federal Government, by Notification
in the official Gazette
Provided further that the Federal Government may by a notification in the official Gazette,
restrict the amount of credit for input tax actually paid and claimed by a person making a
zero-rated supply of goods otherwise chargeable to sales tax.

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2.6 Supplies without payment of sales tax

Under section 60 of the Act, the Federal Government is empowered to prescribe any specified
taxable goods which can be imported without payment of whole or part of sales tax.

2.7 Importer, manufacturer, wholesaler, distributor and retailer

Goods supplied by an importer; manufacturer, wholesaler (including dealer), distributor or retailer
are taxable goods. Therefore, the goods supplied by persons other than by these are not taxable
goods e.g. supplies by an agriculturist or a bank. These persons are defined in the law in the
following manner:

Definitions
Importer [Section 2(13)]
Importer is any person who imports any goods into Pakistan
Manufacturer or producer [Section 2(17)]
Manufacturer means a person who engages, whether exclusively or not, in the production or
manufacture of goods whether or not the raw material of which the goods are produced or
manufactured are owned by him; and shall include:
(i) a person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages,
repackages or prepares goods by any other manner;
(ii) an assignee or trustee in bankruptcy, liquidator, executor, or curator or any manufacturer or
producer and any person who disposes of his assets in any fiduciary capacity; and
(iii) any person, firm or company which owns, holds, claims or uses any patent, proprietary or other
right to goods being manufactured, whether in his or its name, or on his or its behalf, as the
case may be, whether or not such person, firm or company sells, distributes, consigns or
otherwise disposes of the goods.
Provided that for the purpose of refund under this Act, only such person shall be treated as
manufacturer-cum-exporter who owns or has his own manufacturing facility to manufacture or
produce the goods exported or to be exported;

The bare reading of the definition clarify that manufacturing services provided by a person on behalf
of a principal are covered within the definition of manufacturing. For example, dyeing services, toll
manufacturing, knitting services etc. Moreover, any person who either produces goods himself or
out-sources such manufacture is also treated as a manufacturer.

Definition:
"Manufacture" or "produce" [Section 2(16)] includes:
(i) Any process in which an article singly or in combination with other articles, materials,
components, is either converted into another distinct article or product or is so changed,
transformed or reshaped that it becomes capable of being put to use differently or distinctly
and includes any process incidental or ancillary to the completion of a manufactured product;
(ii) Process of printing, publishing, lithography and engraving; and
(iii) Process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking
or preparation of goods in any other manner.

Definition: Retailer [Section 2(28)]

Means a person supplying goods to general public for the purpose of consumption.
Provided that any person, who combines the business of import and retail or manufacture or
production with retail, shall notify and advertise wholesale prices and retail prices separately, and
declare the address of retail outlets.

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Definition: Retail Price [Section 2(27)]

With reference to the Third Schedule, means the price fixed by the manufacturer or the importer,
in case of imported goods, inclusive of all duties, charges and taxes (other than sales tax) at which
any particular brand or variety of any article should be sold to the general body of consumers or, if
more than one such price is so fixed for the same brand or variety, the highest of such price;
Provided that the board may through a general order specify zones or areas for the purpose of
determination of highest retail price for any brand or variety of goods.

Definition: Distributors [Section 2(7)]

A person appointed by a manufacturer, importer or any other person for a specified area to
purchase goods from him for further supply and includes a person who in addition to being a
distributor is also engaged in supply of goods as a wholesaler or a retailer.

Definition: Wholesaler [Section 2(47)]

Includes a dealer and means any person who carries on, whether regularly or otherwise, the
business of buying and selling goods by wholesale or of supplying or distributing goods, directly or
indirectly, by wholesale for cash or deferred payment or for commission or other valuable
consideration or stores such goods belonging to others as an agent for the purpose of sale; and
includes a person who deducts income tax at source under the Income Tax Ordinance, 2001.

2.8 Registered person

Any importer, distributor, exporter, manufacturer or wholesaler is not liable to sales tax until and
unless he is a registered person. The term “Registered person” is reproduced hereunder as defined
in section 2(25) of the Act:

Definition: Registered Person

Means a person who is registered or is liable to be registered under this Act
Provided that a person liable to be registered but not registered under this act shall not be entitled
to any benefit available to a registered person under any of the provisions of this act or the rules
made thereunder.

It is evident that a person liable to be registered is covered within the definition of registered person.
Hence, a person not registered but liable to be registered can equally be held liable to pay sales
tax on the goods supplied during the period that he remained un-registered. However, such person
is not entitled to get the benefit of input tax credit or other benefit available to a registered person
as the same are not claimed by way of filing tax returns.

Definition:
Person [Section 2(21)]
Means,
 individual;
 a company or association of persons incorporated, formed, organized or established in
Pakistan or elsewhere;
 the Federal Government;
 a Provincial Government;
 a local authority in Pakistan; or
 a foreign government, a political subdivision of a foreign government, or public international
organization

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2.9 Taxable activity

Definition: Taxable Activity [Section 2(35)]

Means any economic activity carried on by a person whether or not for profit, and includes—
a. an activity carried on in the form of a business, trade or manufacture;
b. an activity that involves the supply of goods, the rendering or providing of services, or both to
another person;
c. a one-off adventure or concern in the nature of a trade; and
d. anything done or undertaken during the commencement or termination of the economic
activity,
but does not include—
a. the activities of an employee providing services in that capacity to an employer;
b. an activity carried on by an individual as a private recreational pursuit or hobby; and
c. an activity carried on by a person other than an individual which, if carried on by an individual,
would fall within sub-clause (b).

2.10 Value of supply

Definition: Value of Supply [Section 2(46)]
(i) In respect of a taxable supply, the consideration in money including all Federal and Provincial
duties and taxes, if any, which the supplier receives from the recipient for that supply but
excluding the amount of tax:
Provided that:
(a) In case the consideration for a supply is in kind or is partly in kind and partly in money,
the value of the supply shall mean the open market price of the supply excluding the
amount of tax;
(b) In case the supplier and recipient are associated persons and the supply is made for no
consideration or for a consideration which is lower than the open market price, the value
of supply shall mean the open market price of the supply excluding the amount of tax;
and
(c) In case a taxable supply is made to a consumer from general public on installment basis
on a price inclusive of mark up or surcharge rendering it higher than open market price,
the value of supply shall mean the open market price of the supply excluding the
amount of tax.
(ii) In case of trade discounts, the discounted price excluding the amount of tax provided the tax
invoice shows the discounted price and the related tax and the discount allowed is in
conformity with the normal business practices;
(iii) In case where for any special nature of transaction it is difficult to ascertain the value of a
supply, the open market price;
(iv) In case of imported goods, the value determined under the Customs Act, including the
amount of customs-duties and federal excise duty levied hereon;
(v) In case where there is sufficient reason to believe that the value of a supply has not been
correctly declared in the invoice, the value determined by the Valuation Committee
comprising representatives of trade and the Inland Revenue constituted by the
Commissioner; and
(vi) In case the goods other than taxable goods are supplied to a registered person for processing,
the value of supply of such processed goods shall mean the price excluding the amount of
sales tax which such goods will fetch on sale in the market;

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(vii) In case of a taxable supply, with reference to retail tax, the price of taxable goods excluding
the amount of retail tax, which a supplier will charge at the time of making taxable supply by
him, or such other price as the Board may, by a notification in the official Gazette, specify.
(viii) In case of supply of electricity by an independent power producer or WAPDA, the amount
received on account of energy purchase price only; and the amount received on account of
capacity purchase price, energy purchase price premium, excess bonus, supplemental
charges etc. shall not be included in the value of supply;
(ix) In case of supply of electric power and gas by a distribution company, the total amount billed
including price of electricity and natural gas, as the case may be, charges, rents,
commissions and all duties and taxes local, provincial and federal but excluding the amount
of late payment surcharge and the amount of sales tax; and
Note: It is clarified that value of supply does not include the amount of subsidy provided by
federal government or provincial government to the electricity consumers and has never
been chargeable to tax under the Act.
(x) in case of registered person who is engaged in purchasing used vehicles from general public
on which sales tax had already been paid at the time of import or manufacturing, and which
are, later on, sold in the open market after making certain value addition, value of supply will
be the difference between sale and purchase price of the said vehicle on the basis of the
valuation method prescribed by the Board.
Provided that, where the Board deems it necessary it may, by notification in the official Gazette, fix
the value of any imported goods including those as specified in the Third Schedule or taxable
supplies or class of supplies and for that purpose fix different values for different classes or
description of same type of imported goods or supplies.
Provided further that where the value at which import or supply is made is higher than the value
fixed by the Board, the value of goods shall, unless otherwise directed by the Board, be the value at
which the import or supply is made.

The aforesaid definition used two further terms i.e. associated person and open market price.
These two terms are defined in the Act in the following manner:
Associates or associated persons [Section 2(3)] means, –
Associates" or "associated persons" shall have the same meaning as defined in Section 85 of the
Income Tax Ordinance, 2001. According to Section 85 of the Income Tax Ordinance, 2001, these
terms are defined as:
(i) Two persons are associate where the relationship between the two is such that one may
reasonably be expected to act in accordance with the intentions of the other, or both persons
may reasonably be expected to act in accordance with the intentions of a third person;
(ii) one person sufficiently influences, either alone or together with an associate, the other
person.
Note: Two persons shall be treated as sufficiently influencing each other, where one or both
persons are economically and financially dependent on each other and, decisions are made in
accordance with the directions, instructions or wishes of each other for common economic goal
(i) one person enters into a transaction, directly or indirectly, with the other who is a resident of
jurisdiction with zero taxation regime.
(ii) Two persons shall not be associates solely by reason of the fact that one person is an
employee of the other or both persons are employees of a third person;
(iii) Without limiting the generality of the above provisions the following shall be treated as
associates, namely: –
(a) an individual and a relative of the individual;
(b) members of an association of persons;
(c) a member of an association of persons and the association, where the member, either
alone or together with an associate or associates under another application of this
section, controls fifty per cent or more of the rights to income or capital of the
association;

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(d) trust and any person who benefits or may benefit under the trust;
(e) a shareholder in a company and the company, where the shareholder, either alone or
together with an associate or associates under another application of this section,
controls either directly or through one or more interposed persons–

 Fifty per cent or more of the voting power in the company;

 Fifty per cent or more of the rights to dividends; or
 Fifty per cent or more of the rights to capital; and
(f) two companies, where a person, either alone or together with an associate or
associates under another application of this section, controls either directly or through
one or more interposed persons –
 Fifty per cent or more of the voting power in both companies;
 Fifty per cent or more of the rights to dividends in both companies; or
 Fifty per cent or more of the rights to capital in both companies.
(i) Two persons shall not be associates under sub-clause (a) or (b) of paragraph (iii) above,
where the Commissioner is satisfied that neither person may reasonably be expected to act
in accordance with the intentions of the other.
(ii) In this clause, “relative” in relation to an individual, means:
(a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the
individual, or of a spouse of the individual; or
(b) A spouse of the individual or of any person specified in sub-clause (a).

Definition: Open Market Price [Section 2(19)]

Means the consideration in money which that supply or a similar supply would generally fetch in an
open market;

The term similar supply is elaborated in the following way:

Definition: Similar Supply [Section 2(31)]

In relation to the open market price of goods, means any other supply of goods which closely or
substantially resembles the characteristics, quantity, components and materials of the
aforementioned goods;

Exercise
(a) Waqar Ltd. has supplied 2000 tons of steel to Shoaib Limited. The market price of the supply
is Rs. 2.8 million exclusive of sales tax. Owing to financial difficulties, Shoaib Limited has
requested to settle the price by transferring a portion of building having a market value of
Rs. 2.5 million and to pay Rs. 75,000 in final settlement along with the applicable sales tax by
way of a cheque drawn in favour of Waqar Ltd.
(b) Atif’s son started his business in July 2024. In order to assist him, Atif supplied him the goods
at a discounted price of Rs. 2,500,000. The discount rate allowed was 18% against the normal
business practice of allowing a discount at 8%. What would be the correct value of supply on
which Atif would be chargeable to sales tax.
(c) Usama has supplied 200 kg of material, falling under the Third schedule to Munawar Limited
at wholesale price of Rs. 500 per kg. The retail price of the material is Rs. 900 per Kg.
Required:
Determine the value of supply on which sales tax would be levied under the provisions of the Sales
Tax Act, 1990.

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Answer
(a) Supply partly in kind
In case the consideration for a supply is in kind or is partly in kind and partly in money, the value
of supply shall mean the open market price of the supply excluding the amount of tax. Therefore,
value of supply shall be Rs. 2,800,000 and not the consideration received. i.e. Rs. 2,575,000.
However, if the sales tax invoice reflects trade discount of Rs. 225,000 and discount allowed is
in conformity with the normal business practices, then the value of taxable supply will be taken
at Rs. 2,575,000.
(b) Discounted price
The transaction is with an associate and not at arm’s length. In the case of trade discounts, sales
tax is levied on the discounted price excluding the amount of tax, provided that the sales tax
invoice shows the discounted price and related tax. Further, the discount allowed should be in
conformity with normal business practice.
In this case, the discounted price for charging sales tax will be computed by allowing a discount
at 8% instead of 18% as below:
Rs.
Price at 18% discount 2,500,000
Price at 8% discount 2,804,878
(2,500,000/0·82 x 0·92)
(c) Retail price
On Third Schedule items, sales tax is charged on the retail price of goods excluding the amount
of retail tax. Therefore, sales tax would be charged @ 18% on Rs. 180,000 (200kgs x Rs.
900/kg).

2.11 Time of supply

Definition: Time of Supply [Section 2(44)]

in relation to,
(a) a supply of goods, other than under hire purchase agreement, means the time at which the
goods are delivered or made available to the recipient of the supply or the time when any
payment is received by the supplier in respect of that supply, whichever is earlier.
(b) a supply of goods under a hire purchase agreement, means the time at which the agreement
is entered into; and
(c) services, means the time at which the services are rendered or provided;
Provided in respect of clause (a), (b) or (c) above where any part payment is received for a supply in
a tax period
(a) it shall be accounted for in the return for that tax period; and
(b) In respect of exempt supply, it shall be accounted for in the return for the tax period during
which the exemption is withdrawn from such supply.

2.12 Other definitions/concepts

Definition: Cottage industry [Section 2(5AB)]

cottage industry” means a manufacturing concern, which fulfils each of following conditions,
namely:-
(a) does not have an industrial gas or electricity connection;
(b) is located in a residential area;

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(c) does not have a total labour force of more than ten workers; and
(d) annual turnover from all supplies does not exceed eight million rupees;
Treatment of supplies by cottage industry
Local supplies of goods made by a cottage industry are exempt from sales tax. [Sr. No. 3 of Table 2
of the Sixth Schedule to the Sales Tax Act, 1990]

Definition: Due Date [Section 2(9)]

In relation to the furnishing of a return means the 15thday of the month following the end of the tax
period, or such other date as the Board may, by notification in the official Gazette, specify and
different dates may be specified for furnishing of different parts or annexures of the return.

Definition: Provincial Sales Tax [Section 2(22A)]

Means tax levied under the provincial laws or laws relating to Islamabad Capital Territory, declared
by the Federal Government through notification in the official Gazette to be provincial sales tax for
the purpose of input tax.

Definition: Tax Period [Section 2(43)]

Means a period of one month or such other period as the Board with the approval of the Federal
Minister in-chagre may, by notification in the official Gazette, specify.

Definition: e-intermediary [Section 2(9A)]

Means a person appointed as e-intermediary under section 52A for filing of electronic returns and
such other documents as may be prescribed by the Board from time to time, on behalf of a person
registered under section 14.

Definition: Company [Section 2(5AA)]

Means
(a) a company as defined in the Companies Ordinance, 1984;
(b) a body corporate formed by or under any law in force in Pakistan;
(c) a modaraba;
(d) a body incorporated by or under the law of a country outside Pakistan relating to
incorporation of companies;
(e) a trust, a co-operative society or a finance society or any other society established or
constituted by or under any law for the time being in force; or
(f) a foreign association, whether incorporated or not, which the Board has, by general or special
order, declared to be a company for the purposes of the Income Tax Ordinance 2001

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3 SCOPE OF TAX
Section overview

 Normal rate of sales tax

 Tax on taxable supplies specified in third schedule [Sec 3(2)(a)]
 Special rates of tax [Sect 3(2)(b)]
 Extra tax [Sec 3(5)]
 Capacity tax [Sec 3(1B)]
 Tax on retailers [Sec 3(9)]
 Special powers to the Federal Government

3.1 Normal rate of sales tax

 Sales tax @ 18% is charged, levied and paid on the value of:
(i) taxable supplies made by a registered person in the course or furtherance of any
taxable activity carried on by him; and
(ii) goods imported into Pakistan irrespective of their final destinations in territories of
Pakistan.
 Where the taxable supplies are made to a person who has not obtained registration number
or he is not an active taxpayer, there shall be charged, levied and paid a further tax at the
rate of 4% of the value in addition to the normal rate of 18%.
 However Federal Government may, by notification in the official Gazette specify the taxable
supplies in respect of which the further tax shall not be charged, levied and paid.
 SRO 648(1)/2013 dated 9th July, 2013 provides following list of persons on which this further
tax @ 4% is not charged, levied or paid on the taxable supplies of:
(i) Electricity energy supplied to domestic and agricultural consumers.
(ii) Natural gas supplied to domestic consumers and CNG stations.
(iii) Motor oil, diesel oil, jet fuel, kerosene oil and fuel oil.
(iv) Goods sold by the retailers to end customers.
(v) Supply of goods directly to end customers including food, beverages, fertilizers and
vehicles.
(vi) Items listed in Third Schedule to the Sales Tax Act, 1990.
(vii) Second hand worn clothing and other worn articles falling under PCT heading
6309.0000.
(viii) Supplies by steel-melters, re-rollers and ship breakers
(ix) Supplies covered under the Fifth Schedule to the Sales Tax Act, 1990.
(x) Supplies made to Government, semi-government and statutory regulatory bodies.
(xi) Supply of white crystalline sugar (PCT heading 1701.9910 and 1701.9920).
(xii) Supply of foam or spring mattresses and other foam products for household use
(xiii) Supplies by steel sector and edible oil sector.

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3.2 Tax on taxable supplies specified in third schedule [Sec 3(2)(a)]

 Taxable supplies and import of goods specified in the Third Schedule shall be charged to
tax at the rate of eighteen per cent of the retail price or in case such supplies or imports are
also specified in the Eighth Schedule, at the rates specified therein.
 The manufacturer or the importer shall legibly, prominently and indelibly print or emboss
retail price along with the amount of sales tax on the packet, container, package, cover or
label etc.
 Board, may exclude from or include into said schedule any taxable supply by notification in
the official Gazette.
 Goods specified in the third schedule are:
S.N Description S.N Description
1. Fruit Juices and Vegetable Juices 11. Toilet Soap
2. Detergents 12. Shampoo
3. Toothpaste 13. Milky Drinks
4. Shaving Cream 14. Powder Drinks
5. Perfumery and Cosmetics 15. Toilet paper & tissue paper
6. Ice Cream 16. Spices sold in retail packing bearing
brand names and trademarks.
7. Tea 17. Cement sold in retail packing
8. Aerated Waters or Beverages 18. Shoe polish and shoe cream
9. Syrups and Squashes 19. Mineral / Bottled water
10. Cigarettes 20. Other household and specified items

 Federal Government may, subject to such conditions and restrictions as it may impose, by
notification in the official Gazette, declare that the tax on goods specified in the Third
Schedule shall be collected and paid at such higher rate or rates on the retail price thereof,
as may be specified in the said notification.
 As per SRO 297(I)/2023 dated 08 March 2023 Federal Government has directed to charge
sales tax @ 25% on import and subsequent supply of following third schedule goods:

S.N Imported goods/Articles

1. Aerated water or beverages
2. Cigarettes, Cigars and e-cigarettes
3. Cosmetic and shaving items
4. Tissue papers
5. Household articles including crockery, kitchenware and tableware

6. Home appliances in CBU

7. Ice cream
8. Fruit and vegetable juices
9. Mattress and sleeping bags
10. Shampoos

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3.3 Special rates of tax [Sect 3(2)(b)]

The Federal Government is empowered to prescribe any higher or lower rate of tax in respect of
any class of taxable goods. Vide SRO 297(I)/2023 dated 08 March 2023 Federal Government has
directed to charge sales tax @ 25% on import and subsequent supply of following goods:
S.N Imported goods/Articles
1. Confectionery
2. Vehicles in CBU Condition
3. Sanitary and bathroom wares
4. Carpets (excluding those from Afghanistan)
5. Chandeliers and lighting devices or equipment
6. Chocolates
7. Corn flakes and other ready to use cereals
8. Decorations or ornamental articles
9. Dog and cat food only
10. Doors and window frames
11. Fish
12. Footwear
13. Fruits and dry fruits (excluding those imported through land route or barter mechanism
14. Furniture
15. Jams, jellies and preserved fruits
16. Leather jackers and apparels
17. Fresh, chilled, frozen, preserved or processed meat
18. Musical instruments
19. Pasta
20. Arms and ammunition excluding defence stores
21. Sunglasses
22. Tomato ketchup and sauces
23. Travelling bags and suitcases
24. A ship designed or adapted for use of recreation or pleasure or private use
25. An aircraft designed or adapted for use for recreation or pleasure or private use
26. Articles of jewellery
27. Wristwatches

Moreover, sales tax @ 25% will be charged on supply of following locally manufactured goods:

S.N Supply of locally manufactured goods

1. Locally manufactured or assembled vehicles having engine capacity of 1400cc and
above
2. Locally manufactured or assembled vehicles if invoice value (excluding sales tax)
exceeds Rs. 4 million
3. Locally manufactured or assembled double cabin (4x4) pick up vehicles

Note: Enhanced rates of SRO 297 dated 8.3.2023 shall not be applicable on goods specified in
8th Schedule.

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3.4 Extra tax [Sec 3(5)]

The Federal Government is empowered to levy and collect tax at such extra rate or amount not
exceeding 18% in addition to the amount of sales tax or retail tax, levied under Sales Tax Act,
1990. This tax shall be levied on the value of such goods or class of goods, on such persons or
class of persons, in such mode, manner and at time and subject to such conditions and limitations
as may be prescribed.
3.5 Capacity tax [Sec 3(1B)]
On the goods specified in the Tenth Schedule, in lieu of levying and collecting tax on taxable
supplies, the tax shall be levied and collected, in the mode and manner specified therein on-:
a. production capacity of plants, machinery, undertaking, establishments or installations
producing or manufacturing such goods; or
b. fixed basis, as it may deem fit, from any person who is in a position to collect such tax due
to the nature of the business.
3.6 Tax on retailers [Sec 3(9)]
 Tier-I category retailers shall pay tax in normal manner at standard rate of 18%.
 Tax shall be charged from retailers other than those falling in Tier-1, through their monthly
electricity bills in the following manner:
(i) Sales tax @ 5% where the monthly bill amount does not exceed Rs 20,000.
(ii) Sales tax @ 7.5% where the monthly bill amount exceeds Rs 20,000.
The electricity supplier shall deposit the amount so collected directly without adjusting
against his input tax.
The above tax on other than tier-I retailers is other than normal tax of 18%, further tax of 4%
and extra tax.
3.7 Tax on steel products/ship plates [Sec 3(9AA)]
In respect of goods, specified in the Thirteenth Schedule, the minimum production for a month shall
be determined on the basis of a single or more inputs as consumed in the production process as
per criterion specified in the Thirteenth Schedule and if minimum production so determined
exceeds the actual supplies for the month, such minimum production shall be treated as quantity
supplied during the month and the liability to pay tax shall be discharged accordingly.
3.8 Tax on supply to CNG stations
 In case of supply of natural gas to CNG stations, the Gas Transmission and Distribution
Company shall charge sales tax from the CNG stations at the rate of 18% on the value of
supply to the CNG consumers.
 Value for the purpose of levy of sales tax shall include price of natural gas, charges, rents,
commissions and all local, provincial and Federal duties and taxes but excluding the amount
of sales tax
3.9 Special Powers to the Federal Government [Sec 3(6)]
The Federal Government or the Board is authorised to levy, in lieu of Sales Tax, by notification in
the Official Gazette such amount of tax as it may deem fit on any supplies or class of supplies or
any goods or class of goods. They are also authorized to specify the mode, manner or time of
payment of such tax.

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4 LIABILITY TO PAY SALES TAX

Section overview

 Liability to pay tax [Sect 3(3)]

 Collection of excess sales tax [Sec 3B]
 Joint and several liability of registered persons in supply chain where tax unpaid (Sec 8A)

4.1 Liability to pay tax [Sect 3(3)]

 The liability to pay the tax shall be:
(i) In the case of supply of goods in Pakistan, of the person making the supply, and
(ii) In the case of goods imported into Pakistan, of the person importing the goods.
 The Board with the approval of the Federal Minister in-chagre may specify the goods in
respect of which the liability to pay tax shall be of the person receiving the supply.

4.2 Collection of excess sales tax [Sec 3B]

 Any person who has collected or collects any tax or charge, whether under misapprehension
of any provision of this Act or otherwise, which was not payable as tax or charge or which is
in excess of the tax or charge actually payable and the incidence of which has been passed
on to the consumer, shall pay the amount of tax or charge so collected to the Federal
Government.
 Any amount payable to the Federal Government shall be deemed to be an arrear of tax or
charge payable under this Act and shall be recoverable accordingly and no claim for refund
in respect of such amount shall be admissible.
 The burden of proof that the incidence of tax or charge has been or has not been passed to
the consumer shall be on the person collecting the tax or charge.

Exercise
Hassan (Pvt.) Ltd. under misapprehension collected additional sales tax of Rs. 100,000 from one
of its customers. 65% of the goods on which additional sales tax was collected are still lying with
the customer as unsold stock.

Answer
In the above scenario, since 65% of the stock, on which excess tax of (100,000 x 65%) Rs. 65,000
was collected, is still unsold, Hassan Ltd should return this amount to its customer. However the
balance amount of Rs. 35,000, the incidence of which has been passed on to the consumers should
be deposited with the Federal Government.

4.3 Joint and several liability of registered persons in supply chain where tax unpaid
(Sec 8A)
 Where a registered person receiving a taxable supply from another registered person is in
the knowledge or has reasonable grounds to suspect that some or all of the tax payable in
respect of that supply or any previous or subsequent supply of the goods supplied would go
unpaid of which burden to prove shall be on the department, such person as well as the
person making the taxable supply shall be jointly and severally liable for payment of such
unpaid amount of tax.
 Provided that the Board may by notification in the official gazette, exempt any transaction or
transactions from the provisions of this section.

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5 ZERO RATING AND EXEMPTION

Section overview

 Goods charged to tax @ 0%

 Exception to the above rule
 Relevant extracts from the Fifth schedule is given hereunder
 Goods exempt from sales tax [Sec 13]

5.1 Goods charged to tax @ 0%

 Value of following goods shall be charged to tax at the rate of zero percent:
(i) goods exported, or the goods specified in the Fifth Schedule;
(ii) supply of stores and provisions for consumption aboard a conveyance proceeding to
a destination outside Pakistan as specified in the Customs Act, 1969; and
(iii) such other goods, as the Federal Government may specify by notification in the official
Gazette, whenever circumstances exist to take immediate action for the purposes of
national security, natural disaster, national food security in emergency situations and
implementation of bilateral and multilateral agreements

5.2 Exception to the above rule

 Provision relating to zero rating shall not apply in respect of a supply of goods which:
(i) are exported, but have been or are intended to be re-imported into Pakistan; or
(ii) have been entered for export under the Customs Act, 1969, but are not exported; or
(iii) have been exported to a country specified by the Federal Government, by Notification
in the official Gazette.
 Federal Government may, by a notification in the Official Gazette, restrict the amount of
credit for input tax actually paid and claimed by a person making a zero-rated supply of
goods otherwise chargeable to sales tax.

5.3 Relevant extracts from the Fifth Schedule is given hereunder

Sr. # Description

1 Supplies of raw materials, components and goods for further manufacture of goods in the
Export Processing Zone.

2 Supply to diplomats, diplomatic missions, privileged persons and organizations

3 Supplies made to exporters under the Duty and Tax Remission Rules, 2001

4 Supplies of raw materials, components and goods for further manufacture of goods in the
Gwadar Free Zone and export thereof

5.4 Goods exempt from sales tax [Sec 13]

 Supply of goods or import of goods specified in the Sixth Schedule shall, subject to such
conditions as may be specified by the Federal Government, be exempt from tax under Sales
Tax Act. The provisions of section 13 shall apply notwithstanding anything contained in
section 3.

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 the Federal Government may, whenever circumstances exist to take immediate action for
the purposes of national security, natural disaster, national food security in emergency
situations and implementation of bilateral and multilateral agreements, by notification in the
official Gazette, exempt any supplies made or imports, of any goods or class of goods from
the whole or any part of the tax chargeable under this Act, subject to the conditions and
limitations specified therein;”;Exemption from tax chargeable under above second
paragraph above may be allowed from any previous date specified in the notification issued
or order made.
 The Board shall place before the National Assembly all exemptions related notifications
issued during the financial year.
 Any notification issued above, if not earlier recommended stand rescinded on the expiry of
financial year in which it has issued.

Exercise:
Distinguish the concept of zero rating with exempt supply as laid down in the Sales Tax Act 1990.

Distinction
Zero Rated Supply Exempt Supply
points
Definition under (48) “Zero rated supply means a (11) “Exempt Supply means a supply
section 2 taxable supply which is charged to which is exempt from tax under section
tax at the rate of zero per cent 13”
under section 4”
Products Goods exported, notified by FBR or Goods listed in Sixth Schedule are
covered listed in the Fifth Schedule are exempt supplies. Moreover, Federal
charged to sales tax at the rate of Government and FBR may specify any
zero per cent. goods exempt from levy of tax.
Invoicing Invoice shall be raised for the No sales tax invoice shall be raised.
Requirements goods supplied but sales tax shall
be charged at the rate of zero per
cent
Registration A person engaged in zero rated A person engaged exclusively in the
supplies has to be registered with exempt supplies is not liable to be
the Sales tax department. registered under the sales tax Act.
Input tax credit Input Tax paid related to zero rated Input Tax paid related to Exempt
supplies is refundable. supplies is inadmissible, therefore,
neither adjustable nor refundable.

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6 REGISTRATION
Section overview

 Registration and person required to be registered [Sec 14]

 Registration application (Rule 5)
 Temporary registration (Rule 5A)
 Option to file application with Commissioner Inland Revenue (Rule 9)
 Compulsory registration (Rule 6)
 Change in the particulars of registration (Rule 7)
 Transfer of registration (Rule 8)
 Cancellation of multiple registrations (Rule 10)

6.1 Registration and person required to be registered [Sec 14]

 Every person engaged in making taxable supplies in Pakistan, including zero-rated supplies,
in the course or furtherance of any taxable activity carried on by him, falling in any of the
following categories, if not already registered, is required to be registered under this Act,
namely:-
a) a manufacturer who is not running a cottage industry;
b) a retailer who is liable to pay sales tax excluding such retailer required to pay sales
tax through his electricity bill;
c) an importer;
d) an exporter who intends to obtain sales tax refund against his zero-rated supplies;
e) a wholesaler, dealer or distributor; and
f) a person who is required, under any other Federal law or Provincial law, to be
registered for the purpose of any duty or tax collected or paid as if it were a levy of
sales tax to be collected under the Act;
 Persons not engaged in making of taxable supplies in Pakistan, if required to be registered
for making imports or exports, or under any provisions of the Act, or any other Federal law,
may apply for registration.
 The registration shall be regulated in such manner as the Board may, by notification in the
official Gazette, prescribe.

Exercise
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, briefly explain whether
the persons under each of the following situations are required to be registered with Inland Revenue
Department. Also compute the amount of sales tax, if any, payable by or refundable to such
persons. The rate of sales tax is 18%.
(i) A manufacturer whose annual turnover during the last twelve months ended 31 March 2025 is
Rs. 14,500,000 and the amount of his annual utility bills for the same period is Rs. 800,000.
(ii) A distributor whose annual turnover during the last twelve months is Rs. 3,000,000.
(iii) An importer whose annual turnover is Rs. 12,000,000.

(iv) A commercial exporter who intends to claim a refund of Rs. 200,000.

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Answer
Requirement of registration:
(i) Manufactures other than those classified as cottage industry are required to be registered
under the Sales Tax Rules 2006. Cottage industries are those that will fulfil the conditions
specified in section 2(5AB) of the STA, 1990.
Therefore, in this case since the manufacturer is a not cottage industry, it is required to be
registered and pay any sales tax and compute its sales tax liability on monthly basis.
(ii) Since a distributor is required to be registered with Inland Revenue Department irrespective of
his turnover, therefore, in this case the distributor would register with the Inland Revenue
Department and pay sales tax of Rs. 540,000 on his turnover of Rs. 3,000,000.
(iii) Since an importer is required to be registered with Inland Revenue Department irrespective of
his turnover, therefore, in this case the importer would be required to register himself with the
Inland Revenue Department.
Sales tax at import stage would be paid on the basis of import value.
(iv) A commercial exporter is not required to be registered with Inland Revenue Department.
However, an exporter who intends to obtain sales tax refund against his zero-rated supplies
must get registration before making an application for such refund. Therefore, in this case since
the exporter intends to claim a refund of Rs. 200,000 he must get himself registered with Inland
Revenue Department.

6.2 Registration application, Electronic filing of return (Rule 5,18)

Every person who intends to get itself registered is required to file an application for registration.
The Sales Tax Rules prescribes the mechanism for filing of this application in the following manner:
 A person required to be registered, before making any taxable supplies, apply on the
computerized system through owner, authorized member or partner or authorized director,
as the case may be, in the Form STR-1. Such application shall specify the Regional Tax
Office (RTO) in whose jurisdiction the registration is sought, as per criteria given below:
(a) in case of listed or unlisted public limited company, the place where the registered
office is located;
(b) in case of other companies—
(i) if the company is primarily engaged in manufacture or processing, the place
where the factory is situated; and
(ii) if the company is primarily engaged in business other than manufacture or
processing the place where main business activities are actually carried on;
(c) in case of a person not incorporated, the jurisdiction where the business is actually
carried on; and
(d) in case of a person not incorporated, having a single manufacturing unit and whose
business premises and manufacturing unit are located in different areas, the
jurisdiction where the manufacturing unit is located
 The jurisdiction of Large Taxpayers Units shall remain as specified by the Board. Further,
the Board may transfer the registration of any registered person to a jurisdiction where the
place of business or registered office or manufacturing unit is located.
 The applicant having NTN or income tax registration shall, using his login credentials, upload
following information and documents:
(a) bank account certificate issued by the bank in the name of the business;
(b) registration or consumer number with the gas and electricity supplier;
(c) particulars of all branches in case of multiple branches at various locations;
(d) GPS tagged photographs of the business premises; and

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(e) in case of manufacturer, also the GPS tagged photographs of machinery and
industrial electricity or gas meter installed.
(f) in the case of an individual, association of persons and a company having only one
shareholder or member, other than manufacturer, a balance sheet indicating the
amount of business capital with corresponding assets in the bank, amounts
attributable to partners with percentage.
Provided that where an individual, an association of persons and a company having only
one shareholder or member, other than manufacturer, already registered, do not fulfil the
requirement, the electronic filing of return shall only be allowed with prior authorization of the
Commissioner through IRIS.
 Rule 5(4) previously required biometric verification only for new registrations. A proviso is
now inserted through which every individual, partner of an association of persons and
director of single member company are required to visit e-Sahulat Centre of NADRA during
the month of July every year for biometric re-verification. In case of failure of biometric re-
verification, the electronic filing of return shall only be made with prior approval of the
Commissioner through IRIS.
 An individual, association of persons and a company having only one shareholder or
member, will be required authorization from Commissioner through IRIS for filing of Sales
Tax Return in case such registered person wants to declare it sales which is five times more
than the sum of capital and liabilities declared in the balance sheet. This authorization is not
required for persons registered as manufacturer.
6.3 Temporary registration (Rule 5A)
 Where a person files application for sales tax registration as a manufacturer without having
installed machinery, for the purpose of import of machinery to be installed by him, temporary
registration as manufacturer shall be allowed to him for a period of sixty days subject to
furnishing of the complete list of machinery to be imported along with Bill of Lading (BL) or
Goods Declaration (GDs).
 The temporary registration shall be issued by the computerized system within seventy-two
hours of filing of the complete application.
 After receiving temporary registration, the person shall be allowed to import plant, machinery
and raw materials, etc. as a manufacturer, subject to submission to the customs authorities
of a post-dated cheque equal to the difference in duties and taxes to be availed as a
manufacturer.
 In case the requirements prescribed in clause (h) of sub-rule (1A) and sub-rule (1B) of rule
5 are not fulfilled within sixty days of issuance of the temporary registration, such temporary
registration shall be disabled and the post-dated cheques submitted shall be encashed.
 A person holding temporary registration shall file monthly return in the form STR-7, but shall
not issue a sales tax invoice and if such invoice is issued, no input tax credit shall be
admissible against such invoice.
 No sales tax refund shall be paid to the person during the period of temporary registration
and the amount of input tax may be carried forward to his returns for subsequent tax periods.
6.4 Option to file application with Commissioner Inland Revenue (Rule 9)
A person who is unable to file application for registration or change in particulars of registration
directly in computerized system may submit the prescribed application and required documents to
the concerned Commissioner Inland Revenue at RTO, which shall ensure entry of the application
and documents in computerized system within three days.

6.5 Compulsory registration (Rule 6)

Rule 6 of the sales tax rules states that:
 if a person, who is required to be registered under the Act, does not apply for registration
and the CIR or any other officer, as may be authorized by the Board, after such inquiry as
deemed appropriate, is satisfied that such person is required to be registered, he shall issue
notice to such person in the Form set out in Form STR-6.

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 In case the CIR receives a written reply from the said person within the time specified in the
above notice, contesting his liability to be registered, the CIR shall grant such person
opportunity of personal hearing, if so desired by the person, and shall thereafter pass an
order whether or not such person is liable to be registered compulsorily. Copy of the said
order shall invariably be provided to that person. Where the CIR passes the order for
compulsory registration, he shall cause the said person to be registered through
computerized system.
 Where the person to whom a notice as given above, does not respond within the time
specified in the notice, the CIR shall cause to compulsorily register the said person through
computerized system under intimation to the said person through courier service.
 A person registered compulsorily as above is required to comply with all the provisions of
the Act and rules made there under from the date of compulsory registration, and in case of
failure to do so, the CIR having jurisdiction may issue notice U/S 25 of the Act for production
of records or documents and appearance in person to assess the amount of sales tax
payable U/S 11 of the Act, and take any other action as required under the law against such
person:
Provided that if it is subsequently established that a person was not liable to be registered
but was wrongly registered under this rule due to inadvertence, error or misconstruction, the
CIR shall cause to cancel his registration through the computerized system. In case of such
cancellation of registration, such person shall not be liable to pay any tax, default surcharge
or penalty under the Act or rules made there under, subject to the conditions, limitations and
restrictions prescribed U/S 3B of the Act.
6.6 Change in the particulars of registration (Rule 7)
 In case there is a change in the name, address or other particulars as stated in the
registration certificate, the registered person shall notify the change in the Form STR-l to the
computerized system, within fourteen (14) days of such change.
 The change of business category as 'manufacturer' shall be allowed subject to fulfilment of
all applicable requirements as specified in rule 5.
 In case of approval of the change applied for, a revised registration certificate shall be issued
through computerized system, which shall be effective from the date the person applied for
the change.
 The CIR may, based on available information or particulars and after making such inquiry
as he may deem necessary and after providing reasonable opportunity of being heard to a
person, by an order in writing, make modifications in registration of the person.
6.7 Transfer of registration (Rule 8)
 The Board may, in accordance with rule 5 or otherwise, by an order, transfer the registration
of a registered person from the jurisdiction of one LTU or RTO to another.
 On transfer of registration,--
(a) all the records and responsibilities relating to such registered person shall be
transferred to the LTU or RTO, in whose jurisdiction the registration has been so
transferred;
(b) notwithstanding the actions already taken, being taken or otherwise pending
immediately before the transfer in respect of such registered person under any of the
provisions of the Act or the rules made there under in the LTU or RTO from where his
registration has been transferred, the LTU or RTO, in whose jurisdiction the
registration is so transferred shall exercise the jurisdiction over such person in the
manner as if it always had such jurisdiction.
 In case of transfer of registration as above, the Board shall issue intimation letter to the
registered person along with copy to concerned LTU or RTO.
 In case a registered person intends to shift his business activity from the jurisdiction of one
LTU or RTO to another, or he has any other valid reason for such transfer, he shall apply to
the Board for transfer of his registration along with Form STR-I. The Board shall follow the
procedure as provided above.

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6.8 Cancellation of multiple registrations (Rule 10)

 In case a person holds multiple sales tax registrations, he shall retain only one registration
and surrender all other registrations under intimation to concerned CIR at RTO.
Provided that the Board may, subject to such conditions as it may deem appropriate, allow
or allocate a person separate registration for manufacturing units located in different LTU or
RTO.
 The tax liabilities against the registration cancelled as above shall be transferred against the
registration retained and in case of such registrations being in different LTU or RTO, the CIR
having jurisdiction over cancelled registrations shall ensure that tax arrears‘ files are
transferred to the LTU or RTO, having jurisdiction over the registration so retained.

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7 DE-REGISTRATION
Section overview

 De-registration (Sec 21)

 Procedure of de-registration (Rule 11)
 Suspension of registration [Rule 12(a)]
 Blacklisting [Rule 12(b)]
 Discontinuance of gas and electricity connections (Sec 14AB)

7.1 De-registration (Sec 21)

 The Board or any Officer, authorised in this behalf, may deregister a registered person or
such class of registered persons as are not required to be registered under the Sales Tax
Act. The deregistration shall be made in accordance with the rules framed by Board.
In addition to aforesaid provision of the Sales Tax Act, 1990, following Rule 11 of Sales tax rules,
2006 are also prescribed in connection with de registration:
 A registered person may be liable for deregistration due to any of the following reasons:
(i) He ceases to carry on his business;
(ii) His supplies have become exempt from tax;
(iii) He transfers or sells his business;
(iv) Merger with another person; or
(v) Failure to file tax return for six consecutive months.

7.2 Procedure of de-registration (Rule 11)

 Every registered person who ceases to carry on his business or whose supplies become
exempt from tax, or who ceases to remain registered shall apply to the Commissioner Inland
Revenue having jurisdiction for cancellation of his registration in Form STR-3, and the
Commissioner, on such application or on its own initiative, may issue order of deregistration
or cancellation of the registration of such person from such date as may be specified, but
not later than ninety days from the date of such application or the date all the dues
outstanding against such person are deposited by him, whichever is later and such person
shall cause to be deregistered through computerized system accordingly. The
Commissioner, upon completion of any audit proceedings or inquiry which may have been
initiated consequent upon the application of the registered person for de-registration, shall
complete the proceedings or inquiry within ninety days from the date of application and direct
the applicant to discharge any outstanding liability which may have been raised therein by
filing a final return under section 28:
Provided that the person applying for de-registration shall not be de-registered unless he
provides record for the purpose of audit or inquiry.
 If a registered person fails to file tax return for six consecutive months, the Commissioner,
without prejudice to any action that may be taken under any other provision of the Act, after
issuing a notice in writing and after giving an opportunity of being heard to such person, shall
issue order of de-registration of such person and the computerized system shall be caused
to de-register the person accordingly. The obligations and liabilities of the person whose
registration is cancelled under sub-rule (1) relating to the period when he conducted
business as a registered person shall not be affected by the fact that his registration has
been cancelled or that he has ceased to be a registered person.

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7.3 Suspension of registration [Rule 12(a)]

 Where the Commissioner or Board has reasons to believe that the registered person is to
be suspended or blacklisted, in order to ensure that the LTUs and RTOs follow a uniform
policy for suspension and blacklisting of sales tax registered persons under section 21(2) of
the Act and for subsequent proceedings in such cases, the following procedure shall be
followed, namely:-
(a) Suspension
(i) Where a Commissioner, having jurisdiction, is satisfied that a registered person
has issued fake invoices, evaded tax or committed tax fraud, registration of
such person may be suspended by the Commissioner through the system,
without prior notice, pending further inquiry. The basis for such satisfaction may
inter alia include the following, namely:–
(A) non-availability of the registered person at the given address;
(B) refusal to allow access to business premises or refusal to furnish records
to an authorized Inland Revenue Officer;
(C) abnormal tax profile, such as taking excessive input tax adjustments,
continuous carry-forwards, or sudden increase in turnover;
(D) making substantial purchases from or making supplies to other
blacklisted or suspended person;
(E) non-filing of sales tax returns;
(F) on recommendation of a commissioner of any other jurisdiction;
(G) any other reason to be specified by the Commissioner;
(ii) the suspension of registration shall take place through a written order of the
Commissioner concerned, giving reasons for suspension. This order shall be
endorsed to the registered person concerned, all other LTUs/RTOs, the FBR‘s
computer system, the STARR computer system and the Customs Wing
computer system for information and necessary action as per law; 43
Substituted for the words ―the procedure as prescribed by the Board shall be
followed‖ by Notification No. SRO. 494(I)/2015, dated 30th June, 2015. Sales
Tax Rules, 2006
(iii) a registered person who does not file sales tax return for six consecutive
months shall be caused to be suspended through the system without any
notice;
(iv) in cases, where the buyers and suppliers of any such person, whose
registration is being suspended, belongs to another LTU/ RTO, and these
buyers / suppliers are also required to be suspended, the Commissioner shall
intimate the Chief Commissioner of the concerned LTU/RTO in whose
jurisdiction such buyers/suppliers fall, in writing explaining the complete facts
of the case and the reasons on the basis of which these buyers/suppliers are
to be suspended, to initiate proceedings for suspension/blacklisting of the
buyers/suppliers;
(v) no input tax adjustment/refund shall be admissible to the registered person
during the currency of suspension. Similarly, no input tax adjustment/refund
shall be allowed to any other registered persons on the strength of invoices
issued by such suspended person (whether issued prior to or after such
suspension), during the currency of suspension;
(vi) the Commissioner shall, within seven days of issuance of order of suspension,
issue a show cause notice (through registered post or courier service) to the
registered person to afford an opportunity of hearing with fifteen days of the
issuance of such notice clearly indicating that he will be blacklisted, in case–
(a) there is no response to the notice;
(b) he has not provided the required record;

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(c) he has not allowed access to his business record or premises; and
(d) any other reason specified by the Commissioner;
(vii) in case show cause notice is not issued within seven days of the order of
suspension, the order of suspension shall become void ab-initio;
(viii) in case of non-availability of the suspended person at the given address, the
notice may be affixed on the main notice Board of the LTU/RTO;
(ix) on receipt of the reply to the notice and after giving an opportunity of hearing
to the registered person, if the Commissioner is satisfied, he may order for
revoking of suspension of the registered person;

7.4 Blacklisting [Rule 12(b)]

 in case, after giving an opportunity of hearing, the offence is confirmed, the Commissioner
shall issue an appealable self-speaking order for blacklisting of the registered person, and
shall proceed to take legal and penal action under the relevant provisions of the Act;
 the order of blacklisting shall contain the reasons for blacklisting, the time period for which
any refund or input tax claimed by such person or by any other registered person on the
strength of invoices issued by him from the date of his registration shall be inadmissible, any
recovery to be paid or penalties to be imposed;
 the order of blacklisting shall be issued within ninety days of the issuance of the notice of
hearing. In case, the order of blacklisting is not issued within this time period the suspension
of registered person shall become void ab-initio;
 copies of the order shall be endorsed to the registered person concerned, all other
LTUs/RTOs, the FBR/PRAL computer system, the STARR computer system and the
Customs Wing computer system. Each LTU/RTO shall circulate all such lists to their refund
sections, audit sections and other concerned staff to ensure that the order is implemented
in letter and spirit by all concerned;
 all LTUs / RTOs shall further circulate the copies of the order along with a computer system-
generated list of invoices issued by the blacklisted persons as referred to in the preceding
clause, to all officers of Inland Revenue having jurisdiction over the registered persons who
have claimed credit of input tax or refund on the strength of the invoices issued by the said
blacklisted persons; and
 the officer of Inland Revenue receiving the aforesaid list under clause (v) shall issue show-
cause notice under section 11 and sub-section (3) of section 21 of the Act to a registered
person for rejecting the input tax or refund claimed against the invoices so circulated and
further proceed to decide the matter as per law through a self-speaking appealable order
and after affording a reasonable opportunity of being heard to such person, in the manner
as provided in the said sub-section (3).].

7.5 Discontinuance of gas and electricity connections [Sec 14(AB)]

 FBR is empowered to discontinue the supply of gas and electricity to the following persons
while notifying the gas and distribution companies:

Persons Reasons
Any person including Tier-1 retailer Fails to register for sales tax purpose
Registered tier 1 retailers Not integrated with FBR System

 FBR shall restore their connections subsequent upon registration/integration.

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CHAPTER
Determination of sales tax
liability
From ICAP Book

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1 DETERMINATION OF TAX LIABILITY

Section overview

 Determination of tax liability [Sec 7]

 Change in the rate of tax [Sec 5]
 Time and manner of payment [Sec 6]

1.1 Determination of tax liability [Sec 7]

 The liability of a registered person in respect of taxable supplies made by him during the tax
period shall be the difference between:
(i) Output tax due from him in respect of taxable supplies made during a tax period; and
(ii) Input tax paid or payable during the said tax period for the purpose of taxable supplies
made or to be made by him excluding the amount of further tax.
 Where a registered person did not deduct input tax within the relevant period, he may claim
such tax in the return for any of the six succeeding tax periods.
 Credit for input tax paid on purchases which are not paid for as per the provisions of section
73, shall not be allowed.
 Deduction of input tax from the output tax payable by a registered person shall be allowed
if:
(i) In case of a claim for input tax in respect of a taxable supply made, he holds a tax
invoice in his name and bearing his registration number in respect of such supply for
which a return is furnished or in case of supply of electricity or gas, a bill bearing his
registration number and the address where the connection is installed;
(ii) In case of goods imported into Pakistan, he holds bill of entry or goods declaration in
his name and showing his sales tax registration number, duly cleared by the customs
under section 79, section 81 or section 104 of the Customs Act, 1969; and
(iii) In case of goods purchased in auction, he holds a treasury challan bearing his name
and his registration number showing payment of Sales Tax.
 The sales tax liability of a registered person is determined by the following equation:
Particulars Rs.
Output sales tax on supplies +/ – effect of debit/credit notes xxx
Admissible input sales tax on purchases or utilities (xxx)
Balance sales tax payable/carried forwarded/ (refundable) xxx / (xxx)
Certain transactions and input tax related thereto that are inadmissible (Sec 73)
1) Any payment exceeding 50,000 (excluding utilities) to single supplier in a tax period must be
made using the banking channel.
2) Payment must be made from business bank account of buyer to business bank account of the
supplier. Bank account of both buyer and supplier should be declared to the Board at the time
of registration/through change of particulars subsequently.
3) Payment must be made within 180 days of issuance of tax invoice in case of credit
transactions. (the Board may extend time through condonation u/s 74)
Adjustments made by a registered person in respect of amounts payable and receivable to
and from the same party shall be treated as payments satisfying the provisions of this section
subject to the conditions that sales tax has been charged and paid by both parties, wherever
applicable and the registered person has sought prior approval of the Commissioner before
making such adjustments.

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If any of the above conditions are not fulfilled, then:

(a) Buyer will not be entitled to claim input tax/refund/zero rating.
(b) Supplier will not be entitled to claim input tax/refund/zero rating/ if amount not received in bank
account.
Note 1: Input tax should be reversed in the month after lapse of 180 days.
Note 2: Sec 73 not applicable on registered person supplying goods to unregistered person.
However, supplier should deposit cash in his business bank account to claim input tax
Restriction on input on supplies to unregistered persons (Sec 73(4), Sec 23, Sec 8)
1) A register person shall make all taxable supplies to a person who has obtained sales tax
registration number. However, supplies upto:
 Rs. 10 million per person per month
 Rs.100 million per person in a financial year
Can be made to unregistered persons.
2) In case of non-compliance the supplier shall not be entitled to claim input tax attributable to
such excess supplies to unregistered persons.
3) Further FBR has clarified vide STGO 01 of 2020 dated 16.01.2020 that above provisions shall
not apply to supplies made to:
 Federal/provincial/local Government departments, authorities, etc. not engaged in
making of taxable supplies’
 Foreign Missions, diplomats and privileged persons.
 Registered persons engaged in manufacturing and supply of fertilizer upon submission of
required documents.
 All other persons not engaged in supply of taxable goods.
4) Similarly as per section 23 read with section 8, any tax invoice issued shall bear the CNIC/NTN
number in case supplies are made by manufacturer or importer to unregistered distributor. In
case of non-compliance input tax attributable to supplies made to unregistered distributor on
pro-rata basis is disallowed. Similarly, expense will be disallowed proportionate to total
turnover in income tax.

1.2 Change in the rate of tax [Sec 5]

 If there is a change in the rate, tax shall be applicable as under:-
(i) A taxable supply made by a registered person shall be charged to tax at such rate
which is in force at the time of making supply;
(ii) Imported goods shall be charged to tax at such rate as is in force:
(a) in case the goods are entered for home consumption, on the date on which a
goods declaration is presented under section 79 of the Customs Act, 1969; and
(b) in case the goods are cleared from warehouse, on the date on which a goods
declaration for clearance of such goods is presented under section 104 of the
Customs Act, 1969.
 Where goods declaration is presented in advance of the arrival of the conveyance by which
the goods are imported, the tax shall be charged at the rate as is in force on the date on
which the manifest of the conveyance is delivered.
If the tax is not paid within seven days of the presenting of the goods declaration under section
104 of the Customs Act, the tax shall be charged at the rate as is in force on the date on which
tax is actually paid.

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Exercise
Rate of sales tax has increased from 17% to 18% effective from 23 May 2025. The accountant of
the company is unsure about the manner in which sales tax return for the month of May 2025 would
need to be furnished.

Answer
If there is a change in the rate of tax during a tax period, a separate return in respect of each portion
of the tax period has to be furnished showing the application of the different rates of tax.
Therefore, company will furnish two returns:
 a return for the period from 1 May 2025 to 23 May 2025 with 17% rate; and
 a separate return for the period from 23 May 2025 to 31 May 2025 with 18% rate
Alternatively only one sales tax return may filed if the single return will provide facility to incorporate
both the sales tax rates as stated above.

1.3 Time and manner of payment [Sec 6]

Time of payment
 Time for payment of tax on goods imported
Tax in respect of goods imported into Pakistan shall be charged and paid in the same
manner and at the same time as if it were a duty of customs payable under the Customs
Act, 1969.
 Time for payment of tax on taxable supplies
Tax in respect of taxable supplies made during a tax period shall be paid by the date as
prescribed in this respect by the registered person at the time of filing the return in respect
of that period.
Mode of payment
 The tax due on goods imported or taxable supplies shall be paid in any of the following
manners:
(i) Tax on goods imported shall be paid in the manner as if it were a duty of customs
payable under the Custom Act, 1969;
(ii) The tax due on taxable supplies shall be paid by any of the following modes, namely:
(a) through deposit in a bank designated by the Board; and
(b) through such other mode and manner as may be specified by the Board.
 The Federal Government may, subject to such conditions, limitations and restrictions as it
may impose, by notification in the official Gazette, allow payment of sales tax on installments
basis by Federal or Provincial Governments or any public sector organization on import or
supply of goods or class of goods. Moreover, such payment may be allowed from any
previous date.

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2 OUTPUT TAX
Section overview

 Output tax
 Adjustment of debit and credit notes

2.1 Output tax

Output tax is defined in section 2(20) in the following manner:
Definition
In relation to a registered person, means-
(i) tax levied under this Act on a supply of goods, made by the person;
(ii) tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the
manufacture or production of the goods, or the rendering or providing of the services, by the
person;
(iii) provincial sales tax levied on services rendered or provided by the person;
(iv) sales tax levied on the services rendered or provided by the person under Islamabad
Capital Territory (Tax on Services) Ordinance, 2001 (XLII of 2001);]

2.2 Adjustment of debit and credit notes

Section 9 of the Act read with section 7 permits the adjustment of the debit/credit notes against
output tax. These notes can be issued where a registered person has issued a tax invoice in
respect of a supply made by him, however, due to the following circumstances, the said invoice
may desire amendments:
 Cancellation of supply;
 Return of goods;
 A change in the nature of supply;
 Change in the value of the supply;
 Some such event the amount shown in the tax invoice; or
 Return needs to be modified.

2.2.1 Applicability (Rule 19)

The above adjustment can only be made where a registered person has issued a tax
invoice in respect of a supply made by him and as a result of the issuance of debit / credit
note; the amount shown in the tax invoice or the return needs to be modified.

2.2.2 Cancellation or return of supply (Rule 20)

 In case a registered person has made a supply, and such supply or part thereof is
cancelled or returned, the buyer or the recipient shall issue a debit note (in
duplicate) in respect of such supply or part thereof, indicating the quantity being
returned or the supply of which has been cancelled, its value determined on the
basis of the value of supply as shown in the tax invoice issued by the supplier and
the amount of related sales tax paid thereon, as well as the following, namely:-
i. name and registration number of the recipient;
ii. name and registration number of the supplier;
iii. number and date of the original sales tax invoice;
iv. the reason of issuance of the debit note; and
v. signature and seal of the authorized person issuing the note.

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 The original copy of the debit note shall be sent to the supplier and the duplicate
copy shall be retained for record.
 In the case of cancellation of supplies made to, or return of goods by, an
unregistered person, the supplier shall issue a credit note providing the same
particulars as are specified above and keep a copy for record.
 A new proviso is inserted which requires seller to obtain prior approval of the
Commissioner for preparation of credit note in case of cancellation of supplies or
return of goods by an unregistered person. Regarding the credit note for registered
person, the procedure is unchanged i.e. the buyer shall issue a Debit Note first and
seller can then claim such note as credit note.

2.2.3 Change in Value of Supply or amount of sales tax (Rule 21)

Where for any valid reason the value of supply or the amount of sales tax mentioned in
the invoice issued has increased, the supplier shall issue a debit note (in duplicate), with
the following particulars, namely:-

 name and registration number of the supplier;

 name and registration number of the recipient;
 number and date of the original sales tax invoice;
 original value and sales tax as in original invoice;
 the revised value and sales tax;
 the difference of value and sales tax adjustable;
 the reason for revision of value; and
 signature and seal of the authorized person issuing the note.
 Where, for any valid reason, the value of supply or the amount of sales tax
mentioned in the invoice issued has decreased, the supplier shall issue a credit
note (in duplicate), with the same particulars as specified above. The original copy
of the note shall be sent to the recipient and the duplicate shall be retained for
record.

2.2.4 Adjustment of input and output tax (Rule 22)

 The buyer shall not be entitled to claim input tax in respect of the supply which has
been cancelled or returned to the supplier or in respect of which the amount of tax
was reduced.
 Where the buyer has already claimed input tax credit in respect of such supplies,
he shall reduce or increase the amount of input tax by the corresponding amount
as mentioned in the Debit Note or Credit Note, as the case may be, in the return
for the period in which the respective note was issued.
 Where the supplier has already accounted for the output tax in the sales tax return
for the supplies against which Debit Note was issued subsequently, he may
increase or reduce the amount of output tax by the corresponding amount as
mentioned in the Debit Note, in the return for the period in which the respective
note was issued.
 Provided that in case of return of supplies by an unregistered person, the
adjustment as aforesaid can be made against the Credit Note issued by the
supplier.
 The adjustments as herein before noted which lead to reduction in output tax or
increase in input tax can only be made if the corresponding Debit Note or Credit
Note is issued within one hundred and eighty days of the relevant supply
 Provided that the Collector may, at the request of the supplier, in specific cases,
by giving reasons in writing, extend the period of one hundred and eighty days by
a further one hundred and eighty days.

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 Where the goods relating to a returned or cancelled supply are subsequently

supplied to the original buyer or some other person with or without carrying out any
repairs, the supplier shall charge sales tax thereon in the normal manner and
account for it in his return for the period in which these goods were supplied.

2.2.5 Destruction of goods (Rule 23)

Where any goods are returned by the buyer on the ground that the same are unfit for
consumption and are required to be destroyed by the supplier, the goods shall be
destroyed after obtaining permission from the Collector of sales tax having jurisdiction,
and under the supervision of an inland revenue officer of sales tax not below the rank of
an Assistant Collector as may be deputed by the Collector for the purpose and the input
tax credit in respect of goods so destroyed shall not be admissible.

Exercise
Following are results of Nadeem Associates for preparation of sales tax return for the month of June,
2025

Supplies 75,000,000

Purchases 55,000,000

Sales tax on utilities bills of factory 500,000

Sales returns of April 2025 6,500,000

Purchases returns of May 2025 1,200,000

Required: Compute sales tax liability of Nadeem Associates

Answer

Particulars Value of supply Sales tax

Output tax on supplies 68,500,000 (i.e. 75,000,000 - 12,330,000

6,500,000) x 18%

Less input tax 53,800,000 (55,000,000 – 1,200,000) (9,684,000)

x 18%

Less sales tax on utilities (500,000)

Net sales tax payable 2,146,000

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3 INPUT TAX
Section overview

 Definition of input tax

 Time of claim of input tax
 Input tax not admissible [Sec 8]
 Certain transactions and input tax related thereto that are inadmissible [Sec 73]
 Adjustable input tax [Sec 8B]

3.1 Definition of input tax

The peculiar meanings assigned to this widely used term are given in section 2(14) of the Act:

Definition: Input Tax [2(14)]

In relation to a registered person, means;
 tax levied under this Act on supply of goods to the person;
 tax levied under this Act on the import of goods by the person;
 in relation to goods or services acquired by the person, tax levied under the Federal Excise
Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the
goods, or the rendering or providing of the services;
 Provincial Sales Tax levied on services rendered or provided to the person excluding those
services as specified by the Board through notification in the official Gazette subject to such
conditions, restrictions and limitations as mentioned therein; and
 levied under the Sales Tax Act, 1990 as adapted in the State of Azad Jammu and Kashmir,
on the supply of goods received by the person;

3.2 Time of claim of input tax

Section 7 stipulates that a registered person shall not be entitled to deduct input tax from output
tax unless:
 in case of a claim for input tax in respect of a taxable supply made in Pakistan, he holds a
tax invoice in his name and bearing his registration number in respect of such supply for
which a return is furnished;
 in case of goods imported into Pakistan, he holds the goods declaration duly cleared by the
customs under section 79, section 81 or section 104 of the Customs Act, 1969;
 in case of goods purchased in auction, he holds a treasury challan in his name and bearing
his registration number;
 the supplier declares the supplies in his return or pays the due tax as shown in this return.
 To claim input on advance paid, buyer must have advance payment receipt which is to be
issued by seller and will be treated as equivalent to tax invoice.

3.3 Input tax not admissible [Sec 8]

 A registered person shall not be entitled to deduct input tax paid on:
(i) the goods or services which are not used or not to be used for the manufacture or
production of taxable goods or for taxable supplies made or to be made by him;
(ii) the goods on which extra amount of tax is payable under sub-section (5) of section 3;
(iii) any other goods or services which the Board with the approval of the Federal
Government may by a notification in the official Gazette specify;

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(iv) the goods or services in respect of which sales tax has not been deposited in the
Government treasury by the respective supplier;
(v) fake invoices;
(vi) purchases made by a registered person in case he fails to provide information relating
to his imports, purchases, sales etc. as required by the Board through a notification
u/s 26(5);
(vii) purchases in respect of which a discrepancy is indicated by CREST or input tax of
which is not verifiable in the supply chain;
(viii) goods and services not related to the taxable supplies made by the registered person;
(ix) goods and services acquired for personal or non-business consumption;
(x) goods used in, or permanently attached to, immoveable property, such as building
and construction materials, paints, electrical and sanitary fittings, pipes, wires and
cables, but excluding pre-fabricated buildings and such goods acquired for sale or re-
sale or for direct use in the production or manufacture of taxable goods;
(xi) vehicles falling in the First Schedule to the Customs Act, 1969, parts of such vehicles,
electrical and gas appliances, furniture furnishings, office equipment (excluding
electronic cash registers), but excluding such goods acquired for sale or re-sale;
(xii) services in respect of which input tax adjustment is barred under the respective
provincial sales tax law;
(xiii) import or purchase of agricultural machinery or equipment subject to sales tax at the
rate of 7% under Eighth Schedule to this Act; and
(xiv) from the date to be notified by the Board, such goods and services which, at the time
of filing of return by the buyer, have not been declared by the supplier in his return or
he has not paid amount of tax due as indicated in his return.
(xv) Import of scrap of compressors.
(xvi) the input goods or services attributable to supplies made by manufacturer or importer
to unregistered distributor, on pro-rata basis, for which sale invoices do not bear the
NIC number or NTN, as the case may be, of the recipient as stipulated in section 23.
 If a person deals in taxable and non-taxable supplies, he can reclaim only such portion of
input tax as is attributable to taxable supplies computed in the following manner:
Residual input tax Value of taxable supplies
credit on taxable X Residual input tax
Value of taxable + exempt supplies
supplies tax

Exercise
Omega Enterprises has submitted the following data for the month of July 2024.
Rupees
Sales to registered persons 6,000,000
Export of goods 2,500,000
Supply of Exempt goods 500,000
Gross Purchases from Registered suppliers 6,500,000
Gross Purchases from Unregistered suppliers 500,000
Purchase Return to Registered suppliers 650,000
Required:
You are required to compute the sales tax liability of Omega Enterprises for the month of July 2024.
For the sake of simplicity ignore the 90% adjustment of input tax against output tax rule as
mentioned in section 8B.

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Answer

Output tax Rs.

Sales to registered persons Rs. 6,000,000 x 18% 1,080,0000

Export of goods Rs. 2,500,000 x 0% -

Exempt supplies -

Output tax 1,080,000

Input tax (w-1) (702,000)

Balance payable 378,000

Input refundable pertaining to zero rated supplies (292,500)

Working:
W-1:
Apportionment of input tax, as per apportionment of input tax rules, 2006

Residual input (Rs.6,500,000-650,000) x 18% 1,053,000

Value of taxable supply 6,000,000 702,000 (6M/9M x 1,053,000)

Zero rated supplies 2,500,000 292,500 (2.5M/9M x 1,053,000)
Exempt supplies 500,000 58,500 (0.5M/9M x 1,053,000)

9,000,000 1,053,000

 Monthly adjustment of input tax claimed by a registered person shall be treated as

provisional adjustment and at the end of each financial year, the registered person shall
make final adjustment on the basis of taxable and exempt supplies made during the course
of that year.
 Deduction of input tax from output tax shall not be allowed to a person who is not registered
under Sale Tax Act.

3.4 Certain transactions and input tax related thereto that are inadmissible [Sec 73]
Where the sum received is partly in cash and partly in kind, then the same transaction would be
allowed subject to the conditions:
 Goods received in kind represent taxable goods
 Goods received are reflected in records.
 The balance amount even less than Rs 50,000 is received through crossed banking
instrument.
If the banking instrument is issued but the same is not encashed or deposited within 180 days then
the input tax shall not be denied. However, it must be ensured that the amount is ultimately
deposited in the seller account and the said instrument is not cancelled.

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3.5 Adjustable input tax [Sec 8B]

Section 8B of the Sales Tax Act, 1990 states that:
 A registered person shall not be allowed to adjust input tax in excess of 90% of the output
tax for that tax period.
 Restriction on the adjustment of input tax in excess of 90% of the output tax shall not apply
in case of fixed assets or capital goods. However, the Board may, by notification in the official
Gazette, exclude any person or class of persons from the purview of this para.
 A registered person may be allowed adjustment or refund of input tax not allowed as per the
above provisions subject to the following conditions
(i) In the case of registered persons, whose accounts are subject to audit under the
Companies Act, 2017, upon furnishing a statement along with annual audited
accounts, duly certified by the auditors, showing value additions less than the limit
prescribed above; or
(ii) In case of other registered persons, subject to the conditions and restrictions as may
be specified by the Board by notification in the official Gazette.
 The adjustment or refund of input tax if any, shall be made on yearly basis in the second
month following the end of the financial year of the registered person.
 The Board may, by notification in the official Gazette, prescribe any other limit of input tax
adjustment for any person or class of persons.
 Any auditor found guilty of misconduct in furnishing the certificate mentioned above shall be
referred to the Council for disciplinary action under section 20D of Chartered Accountants,
Ordinance, 1961.
 Notwithstanding anything contained in sub-sections (1), (2) and (3), input tax allowed in case
of locally manufactured electric vehicles subject to reduced rate of tax under the Eighth
Schedule shall be limited to the extent of amount of output tax and no refund or carry forward
of excess input tax shall be allowed.
 In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed during
a tax period or part thereof, the adjustable input tax for whole of that tax period shall be
reduced by 60%.

Exercise
In the light of the provisions of Sales Tax Act, 1990 explain as to the chargeability/adjustment of
sales tax in respect of each of the following independent situations
(i) Sales tax of Rs. 100,000 was paid along with the electricity bill paid in cash during February
2025. The bill pertained to the manufacture of 50% of goods exported to the UAE and 50%
of the goods which are exempt from sales tax.
(ii) Free replacement of defective parts is made in the case of taxable goods, which have been
sold under warranty. During the month of May 2025 the market value of such replacement
parts was Rs. 500,000
(iii) ABC Manufacturing Limited purchased raw material amounting to Rs. 100 million on credit.
The payment was made after 240 days of the issuance of tax invoice by way of crossed
cheque drawn on the business bank account of the supplier.
(iv) Destruction of damaged goods.
(v) Purchase of taxable goods from a person who has reputation of evading sales tax.
(vi) Payment of fuel to be used for machinery by the Director of the company using his own credit
card.

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Answer
(i) Sales tax paid on electricity bills
Sales tax paid along with an electricity bill is an admissible input tax only when the electricity
was used to produce taxable goods. Further, in the case of utility bills, payment in cash does
not disentitle a claim of input tax paid thereon. Therefore, input tax of Rs. 50,000 would be
refundable, whereas, balance sales tax of Rs. 50,000 paid in respect of exempt supplies would
not be allowed as input.
(ii) Free replacement of defective parts
The free replacement of defective parts (open market value of Rs. 500,000) during the
warranty period is considered as equivalent to the value of the original supply and not a
separate supply. Such replacement is not chargeable to tax.
(iii) Payment after 240 days
Due to the payment being made after 180 days, the input tax is no longer eligible to be
deducted from the output tax. If the input tax has already been claimed in previous months, it
will reduce the input tax of the current month due to the default in payment within the
stipulated time. Despite the payment being made through a crossed cheque drawn on the
seller's business bank account, the transaction is not admissible for the purpose of claiming
input tax as it was made after 180 days from the issuance of the tax invoice.
(iv) Destruction of damaged goods
Where any goods are returned by the buyer on the ground that the same are unfit for
consumption and are required to be destroyed by the supplier, the goods shall be destroyed
after obtaining permission from the Collector of Sales Tax having jurisdiction, and under the
supervision of an Inland Revenue Officer not below the rank of an Assistant Collector as may
be deputed by the Collector for the purpose and the input tax credit in respect of goods so
destroyed shall not be admissible.
(v) Joint and several liability of registered persons in supply chain where tax unpaid
Where a registered person receiving a taxable supply from another registered person is in the
knowledge or has reasonable grounds to suspect that some or all of the tax payable in respect
of that supply or any previous or subsequent supply of the goods supplied would go unpaid, of
which the burden to prove shall be on the department, such person as well as the person
making the taxable supply shall be jointly and severally liable for payment of such unpaid
amount of tax
(vi) Payment through credit card
Although payment made through credit card is considered as payment made through banking
channel yet the payment must be verifiable from the business bank accounts of both the buyer
and the seller. Since the director made the payment from his personal credit card, therefore,
company will not be able to obtain input tax on its payment due to non-verifiability of the said
payment from the business bank account of the company.

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4 TAX REFUNDS, ASSESSMENT AND RECOVERY

Section overview

 Refund of input Tax [Sec 10]

 Best Judgment assessment [Sec 11D]
 Assessment of tax and recovery of tax not levied or short levied or erroneously refunded. [Sec
11E]
 Failure to withhold sales tax [Sec 11F]
 Limitation of assessment [Sec 11G]
 Limitation for issuing orders in certain cases [Sec 11B]
 Recovery of short paid amounts without notice [Sec 11A]

4.1 Refund of input Tax [Sec 10]

 If the input tax paid by a registered person on taxable purchases made during a tax period
exceeds the output tax on account of zero rated local supplies or export made during that
tax period, the excess amount of input tax shall be refunded to the registered person not
later than forty-five days of filing of refund claim in such manner and subject to such
conditions as the Board may, by notification in the official Gazette specify.
 In case of excess input tax against supplies other than zero-rated or exports, such excess
input tax may be carried forward to the next tax period and shall be treated as input tax for
that period.
 The Board may, subject to such conditions and restrictions as it may impose, by notification
in the official Gazette, prescribe the procedure for refund of excess input tax against other
taxable supplies;
 The Board may, from such date and subject to such conditions and restrictions as it may
impose, by notification in the official Gazette, direct that refund of input tax against exports
shall be paid along with duty drawback at the rates notified in the said notification.
 If a registered person is liable to pay any tax, default surcharge or penalty payable under
any law administered by the Board, the refund of input tax shall be made after adjustment
of unpaid outstanding amount of tax or, default surcharge and penalty, as the case may.
 Where there is reason to believe that a person has claimed input tax credit or refund which
was not admissible to him, the proceedings against him shall be completed within 60 days.
For the purposes of enquiry or audit or investigation regarding admissibility of the refund
claim, the period of 60 days may be extended up to 120 days by an officer not below the
rank of an Additional Commissioner Inland Revenue and the Board may, for reasons to be
recorded in writing, extend the aforesaid period which shall in no case exceed (9) nine
months.

4.2 Best Judgment assessment [Sec 11D]

 If a person fails to file a sales tax return in response to a notice or does not produce
requested accounts, records after a show cause notice is issued, the CIR may make a best
judgement assessment based on available information and may also charge penalty and
default surcharge.
 However, if the person files the return within sixty days of issuance of best judgement order
and pays the amount of tax payable along with default surcharge and penalty, the notice to
show cause and the order of assessment shall abate.
 Where FBR has specified conditions for the purpose of determination of minimum tax liability
in respect of a person who is required to file return but who fails to file such return, the Officer
of Inland Revenue shall determine such liability of the registered person in accordance
thereof.

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4.3 Assessment of tax and recovery of tax not levied or short levied or erroneously
refunded. [Sec 11E)
 Where due to any reason (deliberate or otherwise) a person has
a) not paid or short paid due sales tax
b) claimed input tax/refund not admissible
c) obtained refund not due
The CIR may issue a show cause notice within 5 years of end of the financial year in which
the relevant date (15TH of following month or date of refund) falls. Further, assessment order
after show cause must be made within 120 of issuance of show cause. CIR may further
extend upto 90 days.
 Where a person whether (deliberately or otherwise) has not paid or short paid due amount
of sales tax, the tax shall be recovered as tax fraction (18/118) of value of supply.

4.5 Failure to withhold sales tax (Sec 11F)

Where any person, required to withhold sales tax, fails to withhold the tax or having withheld the
tax fails to deposit the same in the prescribed manner, the officer of Inland Revenue not below the
rank of Assistant Commissioner shall after a notice to such person to show cause pass an order
to determine and recover the amount in default and impose penalty and default surcharge under
section 33 and 34

4.6 Limitation of assessment (Sec 11G)

 The show cause notice under sections 11D to 11F shall be issued within five years, from the
end of the financial year in which the relevant date falls.
 An order under sections 11D, 11E and 11F shall be made within one hundred and twenty
days of issuance of show cause notice or within such extended period as the Commissioner
may, for reasons to be recorded, in writing specify, provided that such extended period shall
in no case exceed from ninety days
 Any period during which the proceedings are adjourned on account of a stay order or
Alternative Dispute Resolution proceedings or the time taken through adjournment by the
registered person not exceeding sixty days shall be excluded from the computation of the
said period
 For the purpose of sections 11D, 11E and 11F, the words “relevant date” means
(a) the time of payment of sales tax or charge as provided under section 6;
(b) the time of payment for goods or services on which sales tax was to be withheld under
sub-section (7) of section 3; and
(c) in a case where sales tax or charge has been erroneously refunded, the date of its
refund.

4.7 Limitation for issuing orders in certain cases (Sec 11B)

For the purposes of issuing an assessment order or any other order in consequence of or to give
effect to any order made by the Commissioner (Appeals), Appellate Tribunal, High Court, or
Supreme Court, the provisions of section 124 of the Income Tax Ordinance, 2001 shall apply
mutatis mutandis.

4.8 Recovery of short paid amounts without notice [Sec 11A]

 Where a registered person pays the amount of tax less than the tax due as indicated in his
return, the short paid amount of tax along -with default surcharge shall be recovered from
such person by stopping removal of any goods from his business premises and through
attachment of his business bank accounts. Any of these actions may be taken without giving
him a show cause notice and without prejudice to any other action prescribed under section
48 of this Act or the rules made there under.
Provided that no penalty under section 33 of this Act shall be imposed unless a show cause notice
is given to such person.
 Provisions of this section shall apply notwithstanding any of the provisions of this Act.

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 18

CHAPTER
Returns and records
From ICAP Book

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1 RETURNS
Section overview

 Returns [Sec 26 to 28]

 Return for person operating in different sectors - U/R 14(2)
 Electronic filing - U/R 18
 Extension of time for furnishing returns
 Particulars of sales tax return
 Special return [Sec 27]
 Final return [Sec 28]
 Returns deemed to have been made [Sec 29]
 Summary of returns and their filing dates

1.1 Returns [Sec 26 to 28]

 A Sales Tax return is the taxpayer’s document of declaration through which taxpayer not
only furnishes the details of transactions during a tax period but also determines his sales
tax liability.
 On the return form, the taxpayer declares, for a particular tax period, his respective input tax
and output tax for different categories of taxpayers, monthly, quarterly or annual returns may
be filed on prescribed format.
 The officer of Inland Revenue may, by notice in writing, require any person who, in his
opinion, is required to file a return under this section for a tax period or tax periods but who
has failed to do so, to furnish the return or returns within fifteen days from the date of service
of such notice or such longer or shorter period as may be specified in such notice or as the
officer of Inland Revenue may allow:
Provided that the notice under this sub-section shall only be issued within fifteen years from the
end of the financial year in which the return was to be filed, in cases of tax fraud and five years in
all other cases
Following returns may be filed under the sales tax act by the taxpayers:
 Monthly return
 Quarterly return
 Annual return
Monthly Return
 Every registered person shall furnish a true, complete and correct return in the prescribed
form upto the 15th day of month next following the end of tax period.
 The return shall be filed in the bank or any other office specified by Board.
(Read with 1.3 below)
Quarterly Return
 The Board may, by notification in the official Gazette, require any person or class of persons
to submit return on quarterly basis
 Further, the Board may, by notification in the official Gazette, require any person or class of
persons to submit such return as may be prescribed annually in addition to the monthly
return or quarterly return.
Annual return - Rule 17
A private or public limited company is required to file annual sales tax return, for a financial year
by 30th September of the following financial year.

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1.2 Return for person operating in different sectors - Rule 14(2)

In case a registered person operates in different sectors for which different dates of filing of return
have been prescribed in any rules made under the Sales Tax Act, 1990 or the Federal Excise Act,
2005, such person shall file a single return for all such sectors by the due date applicable to his
major activity in terms of sales tax or federal excise duty payable.

1.3 Electronic filing - Rule 18

 The return filed electronically on the web or any magnetic media or any other computer
readable media (as may be specified by the Board) shall also be deemed to be a valid return
filed. The Board is authorised to make rules for determining eligibility of the data of returns
filed electronically and e-intermediaries who will digitize the data of such returns and transmit
the same electronically under their digital signatures.
 Every registered person required to file return or other statement as prescribed or any
notification issued thereunder shall file such a return or, as the case may be, statement,
electronically in the manner as specified by the Board through a general order.
 A registered person filing returns electronically shall make payment of the amount of sales
tax due, if any, in any of the designated branches of the National Bank of Pakistan.
 In case where due date has been prescribed as 15th of a month, the tax due shall be
deposited by the 15th and the return shall be submitted electronically by 18th of the same
month.
 Return filed by the buyer for a tax period shall be taken as provisional return in IRIS, until
the respective seller files his return for the same tax period within up to the last day of the
month in which the due date of filing of return falls.
 If the seller fails to file his return by the last day of the month in which the due date of filing
of return falls, the invoices issued by the non-filer seller will be deleted by IRIS from the
return of buyer and sales tax liability of the buyer will be calculated without corresponding
input tax in the provisional return of the buyer. Such provisional return shall be taken as valid
by IRIS after payment of the said computed sales tax liability.
 In cases where the seller files his return accompanied with payment of sales tax by the last
day of the month in which the due date of filing of return falls, the provisional return of the
buyer shall be taken as valid by IRIS with the claim of invoices and corresponding input tax.
 a registered person can only claim the amount of sales tax withheld by a withholding agent
if he declares the corresponding sales to such withholding agent in his return. Otherwise,
the amount of sales tax withheld and reduction in output tax shall not be allowed to such
person.

1.4 Extension of time for furnishing returns

 A registered person required to furnish a return under section 26 may apply, in writing, to
the Commissioner for an extension of time to furnish the return.
 An application for extension shall be made by the due date for furnishing the return in terms
of section 2(9) for the period to which the application relates.
 Where an application has been made and the Commissioner is satisfied that the applicant
is unable to furnish the return to which the application relates by the due date because of–
(a) absence from Pakistan;
(b) sickness or other misadventure; or
(c) any other reasonable cause,
the Commissioner may, by order in writing, grant the applicant an extension of time for
furnishing the return.

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 An extension of time shall not exceed fifteen days from the due date for furnishing the return,
unless there are exceptional circumstances justifying a longer extension of time
Provided that where the Commissioner has not granted extension for furnishing the return
the Chief Commissioner may on an application made by the registered person for extension
or further extension, as the case may be, grant extension or further extension for a period
not exceeding fifteen days, unless there are exceptional circumstances justifying a longer
extension of time.
 An extension or further extension of time granted shall not, for the purpose of charge of
default surcharge under section 34, change the due date for payment of sales tax under
section.

1.5 Particulars of sales tax return

i. The return shall indicate; Sales tax registration number (STRN), name and address of the
supplier.
ii. name, address and registration, number of the recipient and NIC or NTN of the unregistered
person, as the case may be, excluding supplies made by a retailer where the transaction
value inclusive of sales tax amount does not exceed rupees one hundred thousand, if sale
is being made to an ordinary consumer
iii. Explanation—For the purpose of this clause, ordinary consumer means a person who is
buying goods for his own consumption and not for the purpose of resale or processing:
Provided that the condition of NIC or NTN shall be effective from 1st August, 2019;
iv. Date of issue of invoice;
v. description, including count, denier and construction in case of textile yarn and fabric and
quantity of goods;
vi. Tax credit carried forward from previous period.
vii. Value of supplies
viii. Output tax due on supplies as under:
a) Local taxable supplies
b) Exempted supplies
c) Zero rated supplies
ix. Value of purchases;
x. Input tax paid on purchases as under:
a) Local taxed goods
b) Imported taxed goods
c) Exempted purchases
d) Zero rated purchases
e) Other purchases
xi. Arrears payable
xii. Amount payable / refundable.
 The registered person shall deposit in the banks, the amount of sales tax indicated as “Sales
Tax Payable” in the return at the time of filing of return.
 In case no amount of sales tax is payable by the registered person, he shall file “Nil” return
without depositing any amount.

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 A registered person may file a revised return to correct any omission or wrong declaration
made in a return filed under section 26 or 27, subject to approval of the Commissioner Inland
Revenue having jurisdiction within 120 days of filing of return.
 Provided that the approval under this sub-section shall not be required if revised return is
filed within sixty days of filing of return and either the tax payable therein is more than the
amount paid or the refund claimed therein is less than the amount as claimed, under the
return sought to be revised.
 Provided further that not more than on tax invoice shall be issued for a taxable supply:
 Provided also that if it is subsequently proved that CNIC provided was by the purchaser was
not correct, liability of tax or penalty shall not arise against the seller, in case of sale made
in good faith.
If a registered person wishes to file revised return voluntarily along with deposit of the
amount of tax short paid or amount of tax evaded along with default surcharge, whenever it
comes to his notice, before receipt of notice of audit, no penalty shall be recovered from him.
However, in case the registered person wishes to deposit the amount of tax as pointed out
by the officer of Inland Revenue during the audit, or at any time before issuance of the show
cause notice, he may deposit the evaded amount of tax, default surcharge under section 34,
and twenty-five percent of the penalty payable under section 33 along with the revised return.
Further in case the registered person wishes to deposit the amount after issuance of show
cause notice, he shall deposit the evaded amount of Sales Tax, default surcharge under
section 34, and full amount of the leviable penalty under section 33 along with the revised
return and thereafter, the show cause notice, shall stand abated.
 Board may require any person or classes of persons, for any goods of such description, or
class, to furnish such summary or details or particulars relating to imports, purchases and
supplies made by them during any tax period or periods in such format as may be specified.

1.6 Special return [Sec 27]

 In addition to the return specified u/s 26, a registered person may be required to file special
return containing information relating to:
(i) Quantity of goods manufactured or produced.
(ii) Purchases made.
(iii) Goods supplied.
(iv) Payment of arrears made.
 This special return will be for such period as the Board may, by a notification in official
Gazette, specify.
 The Commissioner may also require from any person whether, he is registered or not, a
return in a prescribed form and such person shall furnish the return not later than the date
specified in this regard. This return may be demanded from any person in respect of
information relating to himself or relating to his principal if he is acting as agent.

1.7 Final return [Sec 28]

If a person applies for de-registration in terms of section 21, he shall before such de-registration,
furnish a final return to the Commissioner in the specified form, in such manner and at such time
as directed by the Commissioner.

1.8 Returns deemed to have been made [Sec 29]

A return purporting to be made on behalf of a person by his duly appointed representative shall,
for all purposes, be deemed to have been made by such person or under his authority unless
proved to the contrary.

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1.9 Summary of returns and their filing dates

Summary of returns and their filing dates is given hereunder:

Filer Nature of Return Due Date

Registered Person Monthly return 15thof next month following any tax period
(*Electronic filing – 18th of next month, where
sales tax payable with the return paid till 15th day
as specified above.)

Registered or Special return On the date specified by the commissioner in its

unregistered notice calling for such return.

Person applied for de Final return On the date specified by the commissioner
registration

Every private or Public Annual return 30thof September following the year end.
Limited Company

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2 RECORDS
Section overview

 Records [Sec 22]

 Tax invoices [Sec 23]
 Retention of record and documents for six years [Sec 24]

2.1 Records [Sec 22]

 A registered person shall maintain the following records of goods purchased locally or
imported and supplies (including zero-rated and exempt supplies)
 Records of supplies indicating

 description

 quantity

 value of goods

 name and address of the person to whom supplies were made

 the amount of the tax charged;

 Records of goods purchased showing

 description

 quantity

 value of goods

 name, address and registration number of the supplier

 the amount of the tax on purchases;

 Records of goods imported showing

 description

 quantity

 value of goods

 the amount of the tax paid on imports;

 Records of zero-rated and exempt supplies;
 Double entry sales tax accounts;
 Following further records is desired

 Tax invoices

 Credit notes, debit notes,

 Bank statements,

 Banking instruments in terms of section 73

 Inventory records,

 Utility bills,

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 Cash book

 Salary and labour bills

 Rental agreements,

 Sale-purchase agreements and

 Lease agreements;

 Record relating to gate passes, inward or outward, and transport receipts;

 Electronic version of records mentioned above

 Such other records as may be specified by the Board.

Provided that the persons paying retail tax shall keep such record as may be specified by
the Board.
 The Board may also require a registered person or class of registered persons to declare
and use only as many number of business bank accounts as may be specified by the Board
in such notification to make or receive payments on account of purchase and sale
transactions for the purpose of the Sales Tax Act, 1990 or rules made thereunder and to
make payment of due tax from such accounts only.
 The Board may specify to keep such other records for the sales tax law purposes.
 The Board may specify to use such electronic fiscal cash registers as are approved by the
Board.
 The registered person shall keep the aforesaid record at his business premises or registered
office in English or Urdu language
 The registered persons, whose accounts are subject to audit under the Companies Act,
2017, shall be required to submit a copy of the annual audited accounts, along with a
certificate by the auditors certifying the payment of due tax by the registered person.
2.2 Tax invoices [Sec 23]
 A registered person making a taxable supply shall issue a serially numbered tax invoice at
the time of supply of goods containing the following particulars in Urdu or English language,
namely:
(i) name, address and registration number of the supplier;
(ii) name, address and registration, number of the recipient and NIC or NTN of the
unregistered person, as the case may be, excluding supplies made by a retailer where
the transaction value inclusive of sales tax amount does not exceed rupees one
hundred thousand, if sale is being made to an ordinary consumer
Explanation—For the purpose of this clause, ordinary consumer means a person who is
buying goods for his own consumption and not for the purpose of resale or processing:
Provided that the condition of NIC or NTN shall be effective from 1st August, 2019
(iii) date of issue of invoice;
(iv) description including count, denier and construction in case of textile yarn and fabric
and quantity of goods;
(v) value exclusive of tax;
(vi) amount of sales tax; and
(vii) value inclusive of tax:
 No person other than a registered person or a person paying retail tax shall issue an invoice
under this section. Moreover, not more than one tax invoice shall be issued for a taxable
supply.

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 A registered person making a taxable supply shall, subject to such conditions, restrictions
and limitations as the Board may, by notification in the official Gazette, specify to issue
electronic invoices
 The sales tax registered person may also issue sales tax invoice electronically to its buyers.
The sales tax rules prescribe the procedure for issuance of sales tax invoice electronically.
 The Board may specify modified invoices for different persons along with the manner and
procedure for regulating the issuance and authentication of the invoices.
2.3 Retention of record and documents for six years [Sec 24]
A person shall retain the record and documents for a period of six years after the end of the tax
period to which such record or documents relate or till the final decision in any proceedings
including proceedings for assessment, appeal, revision, reference, petition and any proceedings
before an alternative Dispute Resolution Committee.

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3 MISCELLANEOUS
Section overview

 Audit of sales tax affairs [Sec 25]

 Drawing of samples [Sec 25A]
 Transaction between associates [Sec 25AA]

3.1 Audit of sales tax affairs [Sec 25]

 The Commissioner on the basis of reasons to be recorded in writing, may direct the officer
of Inland Revenue not below the rank of Assistant Commissioner to conduct audit of sales
tax affairs of any registered person and issue a notice to such registered person intimating
him regarding audit of sales tax affairs.
Explanation: For the removal of doubt, it is declared that the powers of the Commissioner to
direct conduct of audit and to issue a notice under this sub-section are independent of the
powers of the Board under section 72B and nothing contained in section 72B restricts the
powers of the Commissioner to direct conduct of audit and to issue notice under this sub-
section.
 The Commissioner shall communicate the reasons to the registered person whose audit is
to be conducted through the notice.
 Commissioner may not provide an opportunity of hearing before issuance of notice for audit.
 The reasons for audit selection shall be based on scrutiny of the available records including
sales tax and federal excise returns, income tax returns and withholding statements,
financial statements or third party information.
 The reasons shall not include the mere verification of input tax, output tax, refund claim and
compliance of legal provisions without identifying risk factors that require such verification.
 Subsequent to the issuance of notice, the officer of Inland Revenue, may call for any record
or documents including record maintained under this Act, the rules made thereunder or any
other law for the time being in force for conducting audit of the sales tax affairs of the person.
 Where such record or documents have been kept on electronic data, the registered person
shall allow authorize officer of Inland Revenue access to the use of machine and software
on which such data is kept and the officer of Inland Revenue may obtain duly attested hard
copies of such information or data from the registered person.
 The officer of Inland Revenue shall not call for record or documents of the registered person
after expiry of six years from the end of the financial year to which they relate.
 The officer of Inland Revenue may require the registered person to attend his office in person
or through an authorized representative. The registered person shall produce such
accounts, documents or any evidence as the officer of Inland Revenue may consider
necessary.
 The officer of Inland Revenue not below the rank of Assistant Commissioner may conduct
or cause to be conducted such enquiry and obtain such information from any third party as
he considers appropriate.
 The officer of Inland Revenue not below the rank of Assistant Commissioner shall conduct
audit of the sales tax affairs to verify the correctness or otherwise of the declared tax liability,
output tax, input tax claimed, tax paid, refund claimed, stocks consumed or available for
ascertaining compliance or otherwise with the provisions of this Act and the rules made
thereunder on the basis of the record and evidence obtained.
 The officer of Inland Revenue may conduct audit proceedings electronically through video
links, or any other facility as may be prescribed by the Board.

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 After completion of the audit, the officer of Inland Revenue may, if required pass an order
under section 11E (assessment/recovery of tax), after providing an opportunity of being
heard to the registered person.
 Where a registered person fails to produce before the officer of Inland Revenue, any
accounts, documents or records required to be maintained under this Act or the rules made
thereunder or any other relevant document electronically kept record, electronic machine or
any other evidence that may be required by the officer of Inland Revenue for the purpose of
audit. The officer of Inland Revenue may proceed to make best judgment assessment under
section 11D of this Act.
 Notwithstanding the penalties prescribed in section 33, if a registered person wishes to
deposit the amount of tax short paid or amount of tax evaded along with default surcharge
voluntarily, whenever it comes to his notice, before receipt of notice of audit, no penalty shall
be recovered from him.
 If a registered person wishes to deposit the amount of tax short paid or amount of tax evaded
along with default surcharge during the audit, or at any time before issuance of show cause
notice under section 11E, he may deposit the evaded amount of tax, default surcharge under
section 34, and twenty five percent of the penalty payable under section 33.
 If a registered person wishes to deposit the amount of tax short paid or amount of tax evaded
along with default surcharge after issuance of show cause notice under section 11E, he shall
deposit the evaded amount of tax, default surcharge under section 34, and full amount of
the penalty payable under section 33 and thereafter, the show cause notice, shall stand
abated.

3.2 Drawing of samples [Sec 25A]

 An authorized officer of Inland Revenue, if consider it necessary, may take a sample of any
goods or raw materials, for the purpose of:
(i) determining the liability to sales tax of a registered person; or
(ii) for the purpose of establishing value of goods; or
(iii) for any other reason.
 The sample drawn shall be a minimum quantity of goods or raw materials sufficient to enable
a proper examination or analysis to be made.
 At the time of taking the sample the person in possession of the goods shall be informed
and given the opportunity to sign the representative samples, so drawn, and take
corresponding sample for his own record.
 Any sample taken as above shall be taken against a proper receipt a copy each of which
shall be kept in the record by the registered person and the large Tax payers unit or Regional
Tax Officer, as the case may be.

3.3 Transaction between associates [Sec 25AA]

The Commissioner or an officer of Inland Revenue may, in respect of any transaction between
persons who are associates, determine the transfer price of taxable supplies between the persons
as is necessary to reflect the fair market value of supplies in an arm’s length transaction.
The Board may, by notification in official gazette, prescribe rules for carrying out the purpose of
above section.

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Sales Tax Notes

Important Point of Sales Tax

Sales Tax

Standard Goods Taxable Exempt Pool

Specified in 6th Schedule

No need to registered e.g. Agri. Products

Pulses, Flour

Local Supplies Export of Luxury Items

Goods 5th (imported)
 Registered 18% Schedule
 Unregistered 25%
18% + 4% (Zero Rated)

0%

Section 73:

Sec 73

Payment exceeding Payment made Payment must be made

(excluding utilities) of within 180 days from business bank
Rs. 50,000 to a Single of issuance of account of buyer to
person in a tax period invoice in case of business bank account
must be made through credit of the supplier.
Banking Channel

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Sales Tax Notes

Apportionment:

Common Input Apportionment (Residual)

Local Export Exempt

Deduct from Refundable Part Of CGS

Output Tax

Notes
 Input Tax on Machine will be apportioned separately after the application of rule 8b(1).
 Machine or any material, which is specifically used for any Supply. The Input Tax of that
machine or material will not be apportioned rather will be deducted, refundable or part of CGS
directly. e.g.
 Material or machinery used for only Local Supplies No Apportionment (Direct Subtract).
 Material or machinery used for only Export Supplies No Apportionment (Direct
Refundable).
 Material or machinery used for only Exempt Supplies No Apportionment (Part of CGS).

Discount:

Discount

Mentioned on Invoice Not Mentioned on Invoice

And according to norm
of business
Not to be Considered

To be Considered

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Sales Tax Notes
Note:
 Discount allowed/Received after the settlement of the ledger balance has no effect.

Debit and Credit Notes:

Debit / Credit Note

Issued Not Issued

Adjustment Can Be Made Adjustment can’t be Made

Notes:

 Adjustment of Debit Note and Credit Note can be made within 180 days of Date of Invoice. Extension
of 180 days more is also available.
 Sale and purchase return will only be considered if Credit/Debit note is issued.

Other Important Aspects for Numerical

 If Export sales exceed 50% of the taxable supplies than Sec 8b (1) is not applicable.

 If Purchase invoice is not claimed in relevant month, it can be claimed with in next 6 months.

 If sales Invoice is not recorded than return of the relevant month will be revised.

 Input and Output Tax of Third Schedule always computed on Retail Price.

 If Exempt Goods if exported to be considered as zero rated supplies.

 Free replacement of goods either purchase or sale cannot be considered for Input or output until
unless tax invoice related to that is issued.

 Any tax invoice issued shall bear the CNIC/NTN number in case supplies are made by manufacturer or
importer to unregistered distributor. In case of non-compliance, input tax attributable to supplies
made to unregistered distributor on pro-rata basis is disallowed.

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Sales Tax Notes
 Input tax on advance payment for purchases is considered if tax invoice is issued from the suppliers
and tax fraction is applicable.

 Output tax shall be calculated on advance payment received.

 If particulars of advance of sales tax invoice is not completed the related tax will not be allowed e.g.
Name, Sales tax Number

 Read Section 8b

Entries for understanding

On the Time of purchases
Purchases A/c Debit
Input A/c Debit
To Bank/P/a A/c Credit
Notes:
For Purchase
Debit note issued means purchase Return.
Credit note issued also means increase in purchases.

On the Time of Sale

Debtor/ Bank a/c Debit

To Sales a/c Credit
To Sales Tax p/a Credit

Notes:
For sales
Credit Note issued means sales return.
Debit notes issued also means increase in sales.

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 19

CHAPTER
ICAP Sales Tax Practice
Question Bank

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 ICAP Sales Tax Practice Question Bank

Q.1

Ans.1

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Q.2

Ans.2

469 of 545
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Q.3

Ans.3

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Q.4

Ans.4

471 of 545
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Q.5

Ans.5

472 of 545
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Q.6

Ans.6

473 of 545
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Q.7

Ans.7

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 ICAP Sales Tax Practice Question Bank

Q.8

Ans.8

476 of 545
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Q.9

Ans.9

477 of 545
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Q.10

Ans.10

478 of 545
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Q.11

Ans.11

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Q.12

Ans.12

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Q.13

Ans.13

481 of 545
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Q.14

Ans.14

482 of 545
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Q.15

Ans.15

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Q.16

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 ICAP Sales Tax Practice Question Bank
Ans.16 M/S Safi Electronics
Calculation of Sales Tax for the month of March 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 3,200,000 576,000
Sale to un-registered person 3,600,000 648,000
Supply on account of personal use of Goods 200,000 36,000
Exports 3,000,000 -
Total supplies/Output tax for the month (A) 10,000,000 1,260,000

Less: Input Tax

Actual W-1 [909,300 + 45,000= 954,300]
or 90% of Output Tax 1,134,000 (1,260,000x90%) Lower of (954,300)
Sales Tax Payable 305,700
Further tax on sales to un-registered person (3,600,000x4%) 144,000
Total Sales Tax Payable 449,700
Sales Tax Refundable (W-2) 389,700

W-1 Input Tax

Purchases from registered suppliers (4,500,000-100,000) 4,400,000 792,000
Purchases from Unregistered Person 1,200,000 -
Input tax omitted to be claimed in the relevant month of February 100,000 18,000
Imports 2,300,000 414,000
Utility Bill 75,000
Total Purchases/Input tax for the month 8,000,000 1,299,000

W-2 Apportionment Sales Input Tax

Local (3,200,000+3,600,000+200000) 7,000,000 909,300
Export 300,000 389,700
Total 7,300,000 1,299,000

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Q.17

Ans.17

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Q.18

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 ICAP Sales Tax Practice Question Bank
Mr. Kaleem
Ans.18 Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Local Sale 120,000,000 21,600,000
Exempt Sales 20,000,000 -
Exports 30,000,000 -
Total supplies/Output tax for the month (A) 170,000,000 21,600,000

Less: Input Tax

Actual (W-2) 20,330,000
or 90% of Output Tax 19,440,000 (21,600,000x90%) Lower of (19,440,000)
Sales Tax Payable 2,160,000
Sales Tax Refundable (W-2) 5,080,000
Sales Tax C/F (20,330,000 - 19,440,000) 890,000

W-1 Input Tax

Purchases from registered suppliers 160,000,000 28,800,000
Purchases from Unregistered Person 50,000,000 -
Total Purchases/Input tax for the month 210,000,000 28,800,000

W-2 Apportionment Sales Input Tax

Local 120,000,000 20,330,000
Exempt 20,000,000 3,390,000
Export 30,000,000 5,080,000
Total 170,000,000 28,800,000

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Q.19

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 ICAP Sales Tax Practice Question Bank
Ans.19 Zubair Enterprizes
Calculation of Sales Tax for the month of June 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 20,000,000 3,600,000
Sale to un-registered person 25,000,000 4,500,000
Sale of Goods to CEO 100,000 18,000
Exports 18,000,000 -
Total supplies/Output tax for the month (A) 63,100,000 8,118,000

Less: Input Tax

Actual W-1 6,406,780
or 90% of Output Tax 7,306,200 (8,118,000x90%) Lower of (6,406,780)
Sales Tax Payable 1,711,220
Further tax on sales to un-registered person (25,000,000x4%) 1,000,000
Total Sales Tax Payable 2,711,220
Sales Tax Refundable (W-2) 3,966,102

W-1 Input Tax

Purchases from registered suppliers (42,000,000/1.18) 35,593,220 6,406,780
Total Purchases/Input tax for the month 35,593,220 6,406,780

W-2 Refundable
Machine for Export only (16,000,000/118x18) 2,440,678
Machine for Export only (10,000,000/118x18) 1,525,424
Total 3,966,102

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Q.20

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 ICAP Sales Tax Practice Question Bank
Ans.20 Sunglow Pakistan Limited
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 7,375,950 1,327,671
Sale to un-registered person 8,040,150 1,447,227
Sale to registered person (accessories and lenses) 1,615,785 290,841
Sales Return (980,500) (176,490)
Total supplies/Output tax for the month (A) 16,051,385 2,889,249

Less: Input Tax (W-1)

(1,553,904)
Sales Tax Payable 1,335,345
Further tax on sales to un-registered person (8,040,150x4%) 321,606
Total Sales Tax Payable 1,656,951

W-1 Input Tax

Purchases of Components & Lenses (6987354 /1.18) 5,921,486 1,065,867
Purchases of RM & Stores [(2,125,215 - 225,215)/1.18] 1,610,170 289,831
Import PPE (2,350,000 / 1.18) 1,991,525 358,475
Purchase Return (1,050,560 / 1.18) (890,381) (160,269)
Total Purchases/Input tax for the month 8,632,800 1,553,904

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Q.21

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 ICAP Sales Tax Practice Question Bank
Ans.21 Leproc Associates
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 6,296,000 1,133,280
Sale to un-registered person 6,874,650 1,237,437
Exempt 2,364,000 -
Exports 5,790,000 -
Total supplies/Output tax for the month (A) 21,324,650 2,370,717

Less: Input Tax

Actual W-1 2,102,293
or 90% of Output Tax 2,133,645 (2,370,717 x 90%) Lower of (2,102,293)
Sales Tax Payable 268,424
Further tax on sales to un-registered person (6,874,650x4%) 274,986
Total Sales Tax Payable 543,410
Sales Tax Refundable (W-2) 163,393

W-1 Input Tax

Purchases from registered suppliers Local Supply Only (10,127,800/1.18) 8,582,881 1,544,919
Input Tax Apportioned (W-2) 371,674
Input Tax Jan 2025 185,700
Total Purchases/Input tax for the month 8,582,881 2,102,293

Input Tax to be apportioned (3,945,000 /118 x 18)= 601,799

W-2 Apportionment Sales Input Tax
Local 13,170,650 371,674
Exempt 2,364,000 66,712
Export 5,790,000 163,393
Total 21,324,650 601,779

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Q.22

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Ans.22 BARQ RO Pakistan Limited
Calculation of Sales Tax for the month of June 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale of Taxable Goods 6,535,000 1,176,300
Exports of Cables 5,790,000 -
Total supplies/Output tax for the month (A) 12,325,000 1,176,300

Less: Input Tax

Actual (W-2) 1,038,870
or 90% of Output Tax 1,058,6700 (1,176,300x90%) Lower of (1,038,870)
Sales Tax Payable 137,430
Sales Tax Refundable (W-2) 920,437

W-1 Input Tax

Purchases of RM (7,448,850/1.18) 6,312,585 1,136,265
Purchases of Machinery for new unit (5,395,500/1.18) 4,572,458 823,042
Total Purchases/Input tax for the month 10,885,043 1,959,307

W-2 Apportionment Sales RM Input Machine Input Total

Local 6,535,000 602,474 436,396 1,038,870
Export 5,790,000 533,791 386,646 920,437
Total 12,325,000 1,136,265 823,042 1,959,307

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Kamyab Engineering Limited
Ans.25 Calculation of Sales Tax for the month of Jan 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 40,000,000 7,200,000
Sale to un-registered person 24,000,000 4,320,000
Exempt 11,000,000 -
Exports 13,000,000 -
Total supplies/Output tax for the month (A) 88,000,000 11,520,000

Less: Input Tax

Actual (W-2) 9,255,273
or 90% of Output Tax 10,368,000 (11,520,000x90%) Lower of (9,255,273)
Sales Tax Payable 2,264,727
Further tax on sales to un-registered person (24,000,000x4%) 960,000
Total Sales Tax Payable 3,224,727
Sales Tax Refundable (W-3) 1,804,977

W-1 Input Tax

Purchases from registered suppliers 70,700,000 12,726,000
Purchases from Unregistered Person 15,250,000 -
Input tax P/A (180 days not lapsed) 200,000 -
Total Purchases/Input tax for the month 86,150,000 12,726,000

W-2 Apportionment Sales Input Tax

Local (40,000,000+24,000,000) 64,000,000 9,255,273
Exempt 11,000,000 1,590,750
Export 13,000,000 1,879,977
Total 88,000,000 12,726,000

W-3 Refundable
Input Tax Refundable 1,879,977
Less Penalty (50,000)
Less Additional Tax (25,000)
Total Refundable 1,804,977

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Q.26

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Ans.26 Abdul Ghaffar
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 22,000,000 3,960,000
Exempt 3,000,000 -
Exports 5,000,000 -
Total supplies/Output tax for the month (A) 30,000,000 3,960,000

Less: Input Tax

Actual W-2 [3,300,000 + 365,000= 3,665,000]
or 90% of Output Tax 3,564,000 (3,960,000x90%) Lower of (3,564,000)
Sales Tax Payable 396,000
Sales Tax Refundable (W-2) 750,000
Sales Tax C/F (3,665,000 - 3,564,000) 101,000

W-1 Input Tax

Local Purchases 8,000,000 1,440,000
Imports 17,000,000 3,060,000
Total Purchases/Input tax for the month 25,000,000 4,500,000

W-2 Apportionment Sales Input Tax

Local 22,000,000 3,300,000
Exempt 3,000,000 450,000
Export 5,000,000 750,000
Total 30,000,000 4,500,000

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Q.27

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Ans.27 Olive Limited
Calculation of Sales Tax for the month of Jan 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Local Sales 20,000,000 3,600,000
Exempt 4,000,000 -
Exports 4,000,000 -
Total supplies/Output tax for the month (A) 28,000,000 3,600,000

Less: Input Tax

Actual (W-3) 3,241,000
or 90% of Output Tax 3,240,000 (3,600,000x90%) Lower of (3,240,000)
Sales Tax Payable 360,000
Sales Tax Refundable (W-2) 540,000
Sales Tax C/F (3,241,000 - 3,240,000) 1,000

W-1 Input Tax

Local Manufactured Packing 6,000,000 1,080,000
Imports 15,000,000 2,700,000
Total Purchases/Input tax for the month 21,000,000 3,780,000

W-2 Apportionment Sales Input Tax

Local 20,000,000 2,700,000
Exempt 4,000,000 540,000
Export 4,000,000 540,000
Total 28,000,000 3,780,000

W-3 Input Tax

Input Tax Apportioned (W-2) 2,700,000
Input Tax C/F 325,000
Input Tax on Machinery (1,200,000 x 18%) 216,000
3,241,000

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Q.31

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Ans.31 Ms Zainab
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Local Sales (Product B) 1,010,000 181,800
Exempt (Product A) 5,350,000 -
Exports (Product A & B) (2,550,000 + 3,950,000) 6,500,000 -
Total supplies/Output tax for the month (A) 12,860,000 181,800

Less: Input Tax (W-2) (84,114)

Less: Input Tax C/F (262,500)
Sales Tax C/F (164,814)
Sales Tax Refundable (W-2) 541,330

W-1 Input Tax

Purchases from registered suppliers 6,000,000 1,080,000
Purchases from Unregistered Person 850,000 -
Purchase Return (150,000) (27,000)
Invoiced not Claimed 100,000 18,000
Total Purchases/Input tax for the month 6,800,000 1,071,000

W-2 Apportionment Sales Input Tax

Local 1,010,000 84,114
Exempt 5,350,000 445,556
Export 6,500,000 541,330
Total 12,860,000 1,071,000

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Q.33

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Ans.33 Maroof Engineering Limited
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 10,000,000 1,800,000
Sale to un-registered person 3,000,000 540,000
Exempt 2,000,000 -
Exports 13,000,000 -
Sale to CEO 15,000 2,700
Sales Return (500,000) (90,000)
Total supplies/Output tax for the month (A) 27,515,000 2,252,700

Less: Input Tax

Actual (W-2) 1,507,007
or 90% of Output Tax 2,026,800 (2,252,000x90%) Lower of (1,507,007)
Sales Tax Payable 745,693
Further tax on sales to un-registered person (3,000,000x4%) 120,000
Total Sales Tax Payable 865,693
Sales Tax Refundable (W-2) 1,204,161

W-1 Input Tax

Purchases from registered suppliers (15,000,000 - 1,000,000) 14,000,000 2,520,000
Purchases from Unregistered Person 8,000,000 -
Total Purchases/Input tax for the month 22,000,000 2,520,000

W-2 Apportionment Sales Input Tax Machinery Total

Local (10,0000,000 + 3,000,000 - 500,000 + 15,000) 12,515,000 1,286,470 220,538 1,507,007
Exempt 2,000,000 205,588 35,244 240,832
Export 10,000,000 1,027,942 176,219 1,204,161
Total 24,515,000 2,520,000 432,000 2,952,000

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Q.34

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Ans.34 Faiz Associates
Calculation of Sales Tax for the month of Jan 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person (3,450,000-80,000+100,000+90,000-225,000) 3,335,000 600,300
Sale to un-registered person (1,000,000+80,000) 1,080,000 194,400
Sale to PIA Flight 500,000 -
Exports 700,000 -
Sales Return (100,000) (18,000)
Total supplies/Output tax for the month (A) 5,515,000 776,700

Less: Input Tax

Actual 517,443 (W-3)
or 90% of Output Tax 699,030 (776,700x90%) Lower of (517,443)
Sales Tax Payable 259,257
Further tax on sales to un-registered person (1,080,000x4%) 43,200
Total Sales Tax Payable 302,457
Sales Tax Refundable (W-2) (30,190 + 42,267) 72,457

W-1 Input Tax

Purchases from registered suppliers (2,000,000-150,000) 1,850,000 333,000
Purchases from Unregistered Person 450,000 -
Exempt goods purchased from registered person 600,000 -
Total Purchases/Input tax for the month 2,900,000 333,000

W-2 Apportionment Sales Input Tax

Local (3,335,000+1,080,000-100,000) 4,315,000 260,543
PIA Flight 500,000 30,190
Export 700,000 42,267
Total 5,515,000 333,000

W-3 Input Tax

Input Tax Apportioned (W-2) 260,543
Add Input Tax C/F 265,000
Less Input Tax on Destroyed Goods (45,000x18%) (8,100)
Total Input Tax 517,443

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Q.35

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Ans.35 Cyma Associates
Calculation of sales Tax for the month of August 2024
Output Tax Amount Sales Tax
Local taxable supplies - to registered suppliers
(15,000,000+500,000−325,000−300,000) 14,875,000 2,677,500
Local taxable supplies - to unregistered persons 2,800,000 504,000
Local taxable supplies - according to agreement with Majeed
sons 225,000 40,500
Local taxable supplies - to government official
(325,000+125,000) 450,000 81,000
Local taxable supplies - sale of tooth brushes 400,000 72,000
Exempt supplies - no effect of free samples given 1,700,000 -
Export (zero rated) (1,500,000−500,000) 1,000,000 -
Output tax for the month 21,450,000 3,375,000
Less: Sales return (756,000) (136,080)
Total supplies/Output tax for the month 20,694,000 3,238,920

Less: Admissible input

Lower of Accumulated credit 2,806,186 (w-1) or
90% of the output 2,915,028 (3,238,920 X 90%) (2,806,186)
432,734
Less Input tax on fixed asset (w-2) (156,515)
Sales Tax payable 276,219
Further Tax Payable (2,800,000 x 4%) 112,000
Total Sales Tax Payable 388,219
Refundable sale tax on zero rated (w-2) 160,481

Input Tax (w-1)

Purchases from registered suppliers
(20,000,000−350,000−800,000-1,400,000) 17,450,000 3,141,000
Purchases from unregistered suppliers 1,800,000 -
Purchases of exempt goods from registered suppliers 400,000 -
Purchases against which cash deposited in bank account 350,000 -
Purchases against which discrepancy indicated by CREST 800,000 -
20,800,000 3,141,000

Input Tax Apportioned (W-2) 2,731,186

Add: sales tax carry forward from previous months 75,000
Accumulated credit 2,806,186

W-2
Turnover Common Input Fixed assets Total
Taxable local supplies 17,994,000 2,731,186 156,515 2,887,700
Zero-rated 1,000,000 151,783 8,698 160,481
Exempt 1,700,000 258,031 14,787 272,818
20,694,000 3,141,000 180,000 3,321,000

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Q.36

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Ans.36 Samaaj Associates
Calculation of Sales Tax for the month of Aug 2024
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 2,500,000 450,000
Sale to un-registered person 875,000 157,500
Supply to person registered as Exporter 625,000 112,500
Supply of Shampoo (135,000 x 3) 405,000 72,900
Sales Tax not charged 27,000
Advance against supply (600,000/1.18) 508,474 91,525
Total supplies/Output tax for the month (A) 4,913,474 911,425

Less: Input Tax

Actual (W-1) 468,160
or 90% of Output Tax 820,283 (911,425x90%) Lower of (468,160)
Sales Tax Payable 443,265
Further tax on sales to un-registered person (875,000x4%) 35,000
Total Sales Tax Payable 478,265

W-1 Input Tax

RM purchased 930,000 167,400
Packing material purchased 510,000 91,800
imports 472,000 84,960
Cables and wires purchased 250,000 45,000
Input tax claimed on HCl (80,000)
Input Tax disallowed due to late payment (300,000) (54,000)
Electric Kettle purchased (Tax Credit not allowed) -
Sales Tax on Utility Bills (70,000+45,000+68,000) 183,000
Input Tax C/F (20,000+10,000) 30,000
Total Purchases/Input tax for the month 1,862,000 468,160

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Q.37

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Ans.37 Mulaqat Associates
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Fuel jet to pak airways 800,000 -
Sale to registered Customer 500,000 90,000
Sale to un-registered end Consumer 175,000 31,500
Sale to cottage industry 200,000 36,000
RM to insurance company 90,000 16,200
Supply to Bali Traders 290,000 52,200
Supply on two months credit 50,000 9,000
Free sample of detergent Zeta 65,000 11,700
Debit note issued to Hali Brothers 35,000 6,300
Caramel Ice cream (4,000 x 160) 640,000 115,200
Total supplies/Output tax for the month (A) 2,845,000 368,100

Less: Input Tax

Actual (W-3) 239,506
or 90% of Output Tax 331,290 (368,100x90%) Lower of (239,506)
Sales Tax Payable 128,594
Further tax on sales to cottage industry (Not Applicable) -
Total Sales Tax Payable 128,594
Sales Tax Refundable (W-2) 44,794

W-1 Input Tax

Purchases from registered suppliers (650,000-45,000) 605,000 108,900
Furniture for use in marketing manager's office 45,000 -
Taxable goods from un-registered suppliers 150,000 -
Exempt goods from registered suppliers 100,000 -
Import of raw material 280,000 50,400
Purchase of cement [being personal in nature] [150x500] 75,000 -
Advance against purchase of packing material - Inadmissible
Total Purchases/Input tax for the month 1,255,000 159,300

W-2 Apportionment Sales Input Tax

Local (40,000,000+24,000,000) 2,045,000 114,506
Export 800,000 44,794
Total 2,845,000 159,300

W-3 Input Tax

Input Tax Apportioned 114,506
Input Tax C/F 245,000
Less Input tax on chemicals destroyed (120,000)
Input Tax for the month 239,506

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Q.39

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Q.40

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Ans.40
MH Associates
Calculation of Sales Tax for the month of Aug 2024
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person [7,850,000 + (720,000-270,000)] 8,300,000 1,494,000
Sale to un-registered person 815,000 146,700
Exempt 800,000 -
Sales Return (90,000) (16,200)
Total supplies/Output tax for the month (A) 9,825,000 1,624,500

Less: Input Tax

Actual [713,365(W-2)+255,000]= 968,365
or 90% of Output Tax 1,462,050 (1,624,500x90%) Lower of (968,365)
Sales Tax Payable 656,135
Input Tax on Machine(900,000x18%) (162,000)
Further tax on sales to un-registered person [(815,000-365,000)x4%] 18,000
Total Sales Tax Payable 512,135

W-1 Input Tax

Purchases from registered suppliers 5,400,000 972,000
Purchases exempt goods from registered Person 1,500,000 -
Purchases from Unregistered suppliers 1,100,000 -
Purchase of Rs.1,200,000 for which discrepancy indicated by CREST (1,200,000) (216,000)
Advance on paid on goods August (Rs.1,800,000 x 60%) (1,080,000) (194,400)
Electricity Bill 670,000 95,000
Input tax unclaimed in March 2024 - 120,000
Total Purchases/Input tax for the month 6,390,000 776,600

W-2 Apportionment Sales Input Tax

Local (8,300,000+815,000-90,000) 9,025,000 713,365
Exempt 800,000 63,235
Total 9,825,000 776,600

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Q.41 SHAN

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Ans.41 Mr. Taha
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to un-registered person 2,000,000 360,000
Exempt 3,800,000 -
Exports 2,500,000 -
Total supplies/Output tax for the month (A) 8,300,000 360,000

Less: Input Tax -

Sales Tax Payable 360,000
Further tax on sales to un-registered person (2,000,000x4%) 80,000
Total Sales Tax Payable 440,000
Sales Tax Refundable (W-2) 357,143

W-1 Input Tax

Purchases from Unregistered Person 3,500,000 -
Input Tax on Machine (Only for Exempt and Zero rated) 5,000,000 900,000
Total Purchases/Input tax for the month 8,500,000 900,000

W-2 Apportionment Sales Input Tax

Exempt 3,800,000 542,857
Export 2,500,000 357,143
Total 6,300,000 900,000

Mr. Shan
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 10,000,000 1,800,000
Exempt 5,500,000 -
Total supplies/Output tax for the month (A) 15,500,000 1,800,000

Less: Input Tax

Actual: 1,980,000
Or 90% of Output Tax 1,620,000 (1,800,000x90%) Lower Of
(1,620,000)
Sales Tax Payable 180,000
Input Tax on Machine (6,000,000x18%) (1,080,000)
Sales Tax C/F (900,000)
Sales Tax C/F (1,980,000-1,620,000) (360,000)
Total Sales Tax C/F (1,260,000)

W-1 Input Tax

Purchases from registered Person 11,000,000 1,980,000
Exempt goods 3,000,000 -
Total Purchases/Input tax for the month 14,000,000 1,980,000

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Q . 4 2 MEHRBAN ASSOCIATES (MA)

Mehrban Associates (MA) is registered under the Sales Tax Act, 1990. MA is engaged in the business of
manufacturing and supplying of various consumer goods. Following information is available from MA’s
records for the month of August 2024:

Rupees
Purchases
Taxable goods from registered persons 4,960,000
Taxable goods from unregistered persons 1,400,000
Exempt goods from unregistered persons 520,000
Supplies
Taxable goods to registered persons 8,650,000
Taxable goods to unregistered persons 1,560,000
Exempt goods to local unregistered persons 1,740,000
Export of taxable goods to UAE 3,200,000
Export of Purchased exempt goods to UAE 1,900,000
Additional information:
(i) Taxable goods from registered persons include:
 materials worth Rs. 296,000, which were exclusively used for manufacturing exempt
supplies.
 materials worth Rs. 675,000, which were exclusively used for manufacturing export
related goods.
 goods worth Rs. 150,000 which were purchased in cash from a supplier.
 500 kg of tea purchased at a cost of Rs. 360,000 in one kg packing, covered under Third
Schedule. Retail price of tea per kg is Rs. 900. By end of August 2024, 300 kg were
supplied to an unregistered wholesaler at a price of Rs. 790 per kg.
(ii) Taxable goods supplied to unregistered persons include goods worth Rs. 320,000 which were
sold to a distributor who did not provide his CNIC or NTN details. The raw material pertaining
to these goods was purchased from a registered supplier for Rs. 275,000 during August 2024.
(iii) Following fixed assets were purchased during the month of August 2024:
Fixed Purchase Usage
assets cost (Rs.)
Machine A 2,000,000 To ensure quality standards of packing for exports
Machine B 3,000,000 To manufacture taxable (local) as well as exempt
(local) goods
Furniture and fittings 1,000,000 To use in office premises
(iv) Electricity bill of Rs. 959,450 was paid in cash. The bill was inclusive of sales tax of Rs. 154,
250.
(v) Sales tax credit brought forward from last month amounted to Rs. 1,137,580.
(vi) Input tax of Rs. 186,000 pertaining to purchase made on 1 February 2024 was inadvertently
remain unclaimed.
All the above figures are exclusive of sales tax, except where it is specified otherwise. Sales tax is payable
at the rate of 18%.
Required

In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the amount
of sales tax payable by or refundable to MA and input tax to be carried forward, if any, for the tax period
August 2024. (Show all relevant exemptions, exclusions and disallowances)

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Ans.42
MEHRBAN ASSOCIATES (MA)
Calculation of sales Tax Payable for the month of August 2024
Output Tax Amount Rate Sales Tax
Taxable supplies to registered person
8,650,000 18% 1,557,000
Taxable goods to unregistered persons 1,560,000 18% 280,800
300 kg of tea covered under third schedule to be taxed at
5,940
retail price [300×(900‒790)] 33,000 18%
Export of taxable goods to UAE (zero rated supplies) 3,200,000 0% -
Export of purchased exempt goods to UAE 1,900,000 -
Exempt goods to local unregistered persons 1,740,000 -
Total supplies/Output tax for the month 17,083,000 1,843,740

Less: input tax (90% of output tax i.e. Rs. 1,659,366 or

input tax excluding fixed asset 1,810,847
(673,267+1,137,580) whichever is lower. (1,659,366)
Sales Tax payable 184,374
Less: Admissible sales tax on Machinery
(taxable supplies portion only) (461,589)
Sales tax to be carried forward – fixed assets (277,215)
Sales tax to be carried forward – taxable supplies due to
application of 8b(1) rule
(1,810,847-1,659,366) (151,481)
Total Sales tax to be carry forward (428,696)

Further tax payable on sale to un-registered person

(1,560,000–237,000 (300*790) x 4% 52,920

Total Sales Tax Payable 52,920

Sales tax refundable
[210,334+360,000(W-2) + (675,000 x 18%) 691,834

Workings:
Input Tax (w-1) Amount Rate Sales Tax
4,960,000
Purchase from registered person
(296,000)
Less: Materials exclusively used for exempt supplies
(675,000)
Less: Materials exclusively used for zero rated
(150,000)
Less: Goods purchased on cash
3,839,000 18% 691,020

500 kg of tea covered under Third Schedule to be taxed at 16,200

retail price [450,000(500×900)-360,000] 90,000 18%
Goods sold to unregistered who have not provided their
(49,500)
CNIC or NTN (275,000) 18%
Taxable goods from unregistered persons 1,400,000 - -
Exempt goods from unregistered persons 520,000 - -
Sales tax paid on electricity bill 959,450 - 154,250

Input tax related to purchase made in February 2024 (It

186,000
may be claimed in August return being input tax can be
claimed in six succeeding tax periods)
Total Common Input 997,970

Input Tax on Machinery (w-1.1)

Machine A (used in export of goods) 2,000,000 18% 360,000
Machine B (Local and Exempt goods) 3,000,000 18% 540,000
Furniture and fittings (inadmissible) 1,000,000 - -

W-2 Apportionment
Particulars Turnover Common Input Machinery A Machinery B
Taxable local supplies (A) 10,243,000 673,267 0 461,589
Zero rated supplies (B) 3,200,000 210,334 360,000 0
Exempt supplies (C) 1,740,000 114,369 0 78,411
Total 15,183,000 997,970 360,000 540,000
Total supplies used for common input = (17,083,000-1,900,000) = 15,183,000
Total supplies used for Machine B = 10,243,000+1,740,000 = 11,983,000
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Q.42 MEHRBAN ASSOCIATES (MA)

Mehrban Associates (MA) is registered under the Sales Tax Act, 1990. MA is engaged in the business of
manufacturing and supplying of various consumer goods. Following information is available from MA’s
records for the month of August 2024:

Rupees
Purchases
Taxable goods from registered persons 4,960,000
Taxable goods from unregistered persons 1,400,000
Exempt goods from unregistered persons 520,000
Supplies
Taxable goods to registered persons 8,650,000
Taxable goods to unregistered persons 1,560,000
Exempt goods to local unregistered persons 1,740,000
Export of taxable goods to UAE 3,200,000
Export of exempt goods to UAE 1,900,000
Additional information:
(i) Taxable goods from registered persons include:
 materials worth Rs. 296,000, which were exclusively used for manufacturing exempt
supplies.
 materials worth Rs. 675,000, which were exclusively used for manufacturing export
related goods.
 goods worth Rs. 150,000 which were purchased in cash from a supplier.
 500 kg of tea purchased at a cost of Rs. 360,000 in one kg packing, covered under Third
Schedule. Retail price of tea per kg is Rs. 900. By end of August 2024, 300 kg were
supplied to an unregistered wholesaler at a price of Rs. 790 per kg.
(ii) Taxable goods supplied to unregistered persons include goods worth Rs. 320,000 which were
sold to a distributor who did not provide his CNIC or NTN details. The raw material pertaining
to these goods was purchased from a registered supplier for Rs. 275,000 during August 2024.
(iii) Following fixed assets were purchased during the month of August 2024:
Fixed Purchase Usage
assets cost (Rs.)
Machine A 2,000,000 To ensure quality standards of packing for exports
Machine B 3,000,000 To manufacture taxable (local) as well as exempt
(local) goods
Furniture and fittings 1,000,000 To use in office premises
(iv) Electricity bill of Rs. 959,450 was paid in cash. The bill was inclusive of sales tax of Rs. 154,
250.
(v) Sales tax credit brought forward from last month amounted to Rs. 1,137,580.
(vi) Input tax of Rs. 186,000 pertaining to purchase made on 1 February 2024 was inadvertently
remain unclaimed.
All the above figures are exclusive of sales tax, except where it is specified otherwise. Sales tax is payable
at the rate of 18%.
Required

In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the amount
of sales tax payable by or refundable to MA and input tax to be carried forward, if any, for the tax period
August 2024. (Show all relevant exemptions, exclusions and disallowances)

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MEHRBAN ASSOCIATES (MA)

Calculation of sales Tax Payable for the month of August 2024
Output Tax Amount Rate Sales Tax
Taxable supplies to registered person
8,650,000 18% 1,557,000

Taxable goods to unregistered persons 1,560,000 18% 280,800

300 kg of tea covered under third schedule to be taxed at 5,940
retail price [300×(900‒790)] 33,000 18%

Export of taxable goods to UAE (zero rated supplies) 3,200,000 0% -

Export of exempt goods to UAE 1,900,000 -
Exempt goods to local unregistered persons 1,740,000 -
Total supplies/Output tax for the month 17,083,000 1,843,740
Less: input tax (90% of output tax i.e. Rs. 1,659,366 or input tax
excluding fixed asset 1,735,965 (598,385+1,137,580) whichever is
lower.
(1,659,366)
Sales Tax payable 184,374
Less: Admissible sales tax on Machinery
(461,589)
(taxable supplies portion only)
Sales tax to be carried forward – fixed assets (277,215)
Sales tax to be carried forward – taxable supplies due to
application of 8b(1) rule (1,735,965-1,659,366)

(76,599)
Total Sales tax to be carry forward (353,814)

Further tax payable on sale to un-registered person

52,920
(1,560,000–237,000 (300*790) x 4%

Total Sales Tax Payable 52,920

Sales tax refundable

779,436
[297,936+360,000(W-2) + (675,000 x 18%)

Workings:
Input Tax (w-1) Amount Rate Sales Tax
Purchase from registered person 4,960,000
Less: Materials exclusively used for exempt supplies Less: Materials (296,000)
exclusively used for zero rated (675,000)
Less: Goods purchased on cash (150,000)
3,839,000 18% 691,020
500 kg of tea covered under Third Schedule to be taxed at retail price
[450,000(500×900)-360,000] 16,200
90,000 18%
Goods sold to unregistered who have not provided their (49,500)
(275,000) 18%
CNIC or NTN
Taxable goods from unregistered persons 1,400,000 - -
Exempt goods from unregistered persons 520,000 - -
Sales tax paid on electricity bill 959,450 - 154,250
Input tax related to purchase made in February 2024 (It may be claimed
in August return being input tax can be claimed in six succeeding tax
186,000
periods)

Total Common Input 997,970

Input Tax on Machinery (w-1.1)

Machine A (used in export of goods) 2,000,000 18% 360,000
Machine B (Local and Exempt goods) 3,000,000 18% 540,000
Furniture and fittings (inadmissible) 1,000,000 - -

W-2 Apportionment
Particulars Turnover Common Input Machinery A Machinery B
Taxable local supplies (A) 10,243,000 598,385 0 461,589
Zero rated supplies (B) 5,100,000 297,936 360,000 0
Exempt supplies (C) 1,740,000 101,649 0 78,411
Total 17,083,000 997,970 360,000 540,000
Total supplies used for Machine B = 10,243,000+1,740,000 = 11,983,000

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Kazmi Trader's
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person (200,000,000 x 90%) 180,000,000 32,400,000
Exports 98,000,000 -
Total supplies/Output tax for the month (A) 278,000,000 32,400,000

Less: Input Tax

Actual (W-2) 30,716,547
or 90% of Output Tax 29,160,000 (32,400,000x90%) Lower of (29,160,000)
Sales Tax Payable 3,240,000
Input Tax on Machine (W-2) (9,789,928)
Sales Tax C/F (6,549,928)
Sales Tax C/F (30,716,547-29,160,000) (1,556,547)
Total Sales Tax C/F (8,106,475)
Sales tax Refundable (W-2)(16,723,453+5,330,072) 22,053,525

W-1 Input Tax

Purchases from registered suppliers (320,000,000 x 80%) 256,000,000 46,080,000
Purchases from Unregistered Person 32,000,000 -
Exempt good from unregistered persons 56,000,000 -
Electrical and sanitary fitting 17,000,000
Electricity bills - 1,360,000
Total Purchases/Input tax for the month 361,000,000 47,440,000

Input tax on machinery (84,000,000x18%)=15,120,000

W-2 Apportionment Sales Input Tax Machine
Local (200,000,000-20,000,000) 180,000,000 30,716,547 9,789,928
Export 98,000,000 16,723,453 5,330,072
Total 278,000,000 47,440,000 15,120,000

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Zahid Enterprizes
Calculation of Sales Tax for the month of June 2024
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person (180,000,000-50,000,000) 130,000,000 23,400,000
Sale to un-registered person (44,000,000x80%) 35,200,000 6,336,000
Sale to Export Processing Zone 50,000,000 -
Sale to End Consumer (44,000,000x20%) 8,800,000 1,584,000
Garments 4,000,000 720,000
Sale Return (180 days lapsed) (7,000,000) -
Total supplies/Output tax for the month (A) 221,000,000 32,040,000

Less: Input Tax

Actual (W-2) 20,516,842
or 90% of Output Tax 28,836,000 (32,040,000x90%) Lower of (20,516,842)
Sales Tax Payable 11,523,158
Less Input Tax on Plant and Machinery (2,810,526)
Further tax on sales to un-registered person (35,200,000x4%) 1,408,000
Total Sales Tax Payable 10,120,632
Sales Tax Refundable (W-2)(5,763,158+789,474+1,040,000) 7,592,632

W-1 Input Tax

Purchases from registered suppliers 140,000,000 25,200,000
Purchases - invoice dated 21 December 2024 10,000,000 1,800,000
Gas bill paid in cash 2,000,000 360,000
Electricity bill of rented premises showing particulars of landlord - -
Purchase Return (180 days not lapsed) (6,000,000) (1,080,000)
April Invoice payment in June 70,000,000 -
Advance paid to supplier 12,000,000 -
Total Purchases/Input tax for the month 152,000,000 26,280,000
Services to Export Processing Zone @13% 8,000,000 1,040,000
Input Tax on Plant and Machinery 20,000,000 3,600,000

W-2 Apportionment Sales Input Tax Plant and Machinery

Local (130,000,000+44,000,000+4000000) 178,000,000 20,516,842 2,810,526
Export 50,000,000 5,763,158 789,474
Total 228,000,000 26,280,000 3,600,000

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Confidence Engineering
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)

Sale to registered person (220,000,000-2,000,000-32,000,000-5,000,000-4,000,000) 177,000,000 31,860,000

Supplies under Warranty 5,000,000 -
Goods withdrawn by users for personal use 4,000,000 720,000
Sales to pray traders 32,000,000 5,760,000
Raw material to factory manager 2,000,000 -
Local taxable supplies - to unregistered persons(4000000 16,000,000) 24,000,000 4,320,000
Sales to cottage industry 16,000,000 2,880,000
Invoice dated 15 July 2024 (The relevant month return should be revised) 8,000,000 -
Sales return (lapse of 180 days) 19,000,000 -
Total supplies/Output tax for the month (A) 287,000,000 45,540,000

Less: Input Tax

Actual (W-1) 78,516,000
or 90% of Output Tax 40,986,000 (45,540,000x90%) Lower of (40,986,000)
Sales Tax Payable 4,554,000
Further tax on sales to un-registered person (24,000,000x4%) 960,000
Total Sales Tax Payable 5,514,000
Sales Tax C/F (78,516,000 – 40,986,000) 37,530,000

W-1 Input Tax

Purchases from registered suppliers 332,000,000 59,760,000
Purchases from Cottage industry 14,000,000 -
Purchases from unregistered suppliers (60000000-14000000) 46,000,000 -
Electricity bill 1,200,000 216,000
Cables and wires 6,000,000 1,080,000
Less: Raw material destroyed due to fire (25,000,000) (4,500,000)
Less: Purchase return (26,000,000) (4,680,000)
Less: Raw material given to factory manager (2,000,000) (360,000)
Total Purchases/Input tax for the month 346,200,000 51,516,000
Input Tax C/F 27,000,000

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Zeenat Enterprizes
Calculation of Sales Tax for the month of Aug 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Cosmetics products 25,000,000 4,500,000
Sales to registered person (30,000,000-23,000,000) 7,000,000 1,260,000
Sales to unregistered Tier 1 retailer 8,000,000 1,440,000
Exports 12,000,000 -
Perfume for marketing staff 1,000,000 180,000
Sales return - -
Total supplies/Output tax for the month (A) 53,000,000 7,380,000

Less: Input Tax

Actual (W-2) 4,776,113
or 90% of Output Tax 6,642,000 (7,380,000x90%) Lower of (4,776,113)
Sales Tax Payable 2,603,887
Less Input Tax on Machine (W-2) (2,088,679)
Further tax on sales to un-registered person -
Total Sales Tax Payable 515,208
Sales Tax Refundable (W-2)(1,397,887+611,321) 2,009,208

W-1 Input Tax

Raw material from associated company (9,200,000+1,200,000) 10,400,000 1,872,000
Glass bottles 4,000,000 720,000
Glass bottles – free of cost (4,000,000x20%) 800,000 144,000
Pigments in retail packaging 7,900,000 1,422,000
Remaining purchases (44,000,000-35,700,000) 8,300,000 1,494,000
Purchases from unregistered persons 9,000,000 -
Purchase dated 10 February 2025 2,900,000 522,000
Purchase Return - -
Total Purchases/Input tax for the month 43,300,000 6,174,000

Input Tax on Machine (15,000,000x18%)=2,700,000

W-2 Apportionment Sales Input Tax Machine
Local (25,000,000+1,000,000+7,000,000+8,000,000) 41,000,000 4,776,113 2,088,679
Export 12,000,000 1,397,887 611,321
Total 53,000,000 6,174,000 2,700,000

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Registered Person A
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 8,000,000 1,440,000
Sale to un-registered person 5,000,000 900,000
Total supplies/Output tax for the month (A) 13,000,000 2,340,000

Less: Input Tax

Actual (W-1) 4,980,000
or 90% of Output Tax 2,106,000 (2,340,000x90%) (2,106,000)
Sales Tax Payable 234,000
Less Input Tax on Machine (4,000,000x18%) (720,000)
Further tax on sales to un-registered person -
Sales Tax C/F (486,000)
Total Sales Tax C/F [486,000+(4,980,000-2,106,000)] 3,360,000

W-1 Input Tax

Purchases from registered Person (10,000,000+1,000,000) 11,000,000 1,980,000
Exempt Supplies 2,000,000 -
Input Tax C/F - 3,000,000
Total Purchases/Input tax for the month 13,000,000 4,980,000

Registered Person B
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 28,000,000 5,040,000
Sale to un-registered person 10,000,000 1,800,000
Exempt 9,000,000 -
Total supplies/Output tax for the month (A) 47,000,000 6,840,000

Less: Input Tax

Actual: [3,085,277(W-2)+2,000,000]=5,085,277
Or 90% of Output Tax 6,156,000 (6,840,000x90%) Lower Of
(5,085,277)
Sales Tax Payable 1,754,723
Further Tax [(10,000,000x90%)x4%] 360,000
Total Sales Tax Payable 2,114,723

W-1 Input Tax

Purchases from registered Person[20,000,000-
4,000,000(20,000,000x20%)+5,200,000(4,000,000x130%)] 21,200,000 3,816,000
Zero rated supplies from unregistered person 3,000,000 -
Total Purchases/Input tax for the month 24,200,000 3,816,000

W-2 Apportionment Sales Input Tax

Local (28,000,000+10,000,000) 38,000,000 3,085,277
Exempt 9,000,000 730,723
47,000,000 3,816,000

Registered Person C
Calculation of Sales Tax for the month of Feb 2025
Output Tax Amount (Rs.) Sales Tax (Rs.)
Sale to registered person 42,000,000 7,560,000
Export 7,000,000 -
Exempt 15,000,000 -
Total supplies/Output tax for the month (A) 64,000,000 7,560,000

Less: Input Tax on Machine (W-2) (1,851,429)

Sales Tax Payable 5,708,571
Sales Tax Refundable 308,571

W-1 Input Tax

Purchases from Un-registered Person 6,000,000 -
Machine 12,000,000 2,160,000

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Total Purchases/Input tax for the month 18,000,000 2,160,000

W-2 Apportionment Sales Input Tax

Local 42,000,000 1,851,429
Export 7,000,000 308,571
49,000,000 2,160,000

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Q.49

Ans.49

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Ans.50

Q.51

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