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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005. Philosophy of Taxation and Core Concept By Shahid Jamal. INCOME-COMMENTS. Inclusive Definition which in addition to generally accepted meaning, includes certain items that have specifically been declared to be income.

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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

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  1. WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi29 – 30 August,2005

  2. Philosophy of Taxation and Core Concept By Shahid Jamal

  3. INCOME-COMMENTS • Inclusive Definition which in addition to generally accepted meaning, includes certain items that have specifically been declared to be income. • Amounts subject to collection as well as deduction under relevant sections included. • Finance Act 2003 deleted the word ‘Domestic’ & Finance Act 2005 included the sections 150, 152(1), 156, 156A, 233, 233A in the scope of Definition Clause

  4. INCOME-DEFINITION 2(29) • “Income includes any amount chargeable to tax under this Ordinance, any amount subject to, Collection or Deduction of tax u/s 148,150,152(1), 153, 154, 156, 156A, 233, 233A, 234(5), any amount treated as income under any provisions of the ordinance and any loss of income but doesn’t include, in case of a shareholder of a company, the amount representing the face value of any bonus share or the amount of any bonus declared, issued or paid by the company to shareholders with a view to increasing the paid up share capital

  5. INCOME-CONCEPT • Regular and Definite Source: • Periodical monetary return coming in with some sort of regularity or expected regularity from certain source. • PIDC vs Federation[1992] 49 TAX 76 • Raghuvanshi Mills Ltd vs CIT 1952 22 ITR 484 SC • Different Forms of Income: • May be received in cash or kind- If in kind, its valuation is to be made according to Presribed Rules/Market Value.

  6. INCOME-CONCEPT • Deemed Income: • Deemed incomes under the statute are at par with real income. • Ellahi Cotton Mills vs Federation 1997 SCC 1097 • Receipt vs Accrual: • Income arises either on receipt basis or on accrual basis. It may accrue to person without its actual recept • Illegal Income: • The Income Tax Law doesn’t make distinction between Legal and Illegal Income- Both Taxable • Minister of Finance Vs Smith [1927] AC 193 (PC)

  7. INCOME-CONCEPT • Disputed Title: • I.Tax assessment can’t be held up or postponed merely b/c of dispute over the title of Income. The beneficiary of income will be charged to tax • Franklin vs IRC 15 TC 464 • Temporary & Permanent Income: • There is no distinction b/w Permanent & Temporary Income, even Temporary income is taxable. • Lump sum receipt: • Whether received in lump sum or in installments, is liable to tax- eg. Arrears of bonus/ salary is taxable

  8. INCOME-CONCEPT • Personal Gifts: • Gifts of personal nature e.g birthday gifts, marriage gifts is not income. • Franklin vs IRC 15 TC 464 • Relief or Reimbursement of expenses: • Mere relief or reimbursement of expenses is not treated as income eg. Reimbursement of actual travelling expenses to an employee is not an income. • Income should be real & not fictional: • A person can not make a profit of trading with himself Income doesn’t arise from transaction b/w Head office and branch - ITO Mardan vs Sanaullah [1971] 35 Tax 1 SC

  9. CHARGEABILITY OF TAX Sec. 4 • Not different from Section 9 of Repealed Ordinance- Characteristics are: • Charge is subject to other provisions of Ord. • Tax is payable for each Tax Year on the Taxable Income of the person as per rates given • From the resulting amount of tax, tax credits will be allowed. • Subsection 6 has been inserted to authorize deduction at source or collection and payment in advance under the provisions of ordinance.

  10. CHARGEABILITY OF TAX Sec. 4 • Charge of Income Tax Super Tax & Surcharge • Section 9 & 10 have been amended to clarify that whenever, by virtue of any amendment in 1st Schedule, the rates are altered, for the purpose of future assessments, the rates existing to the prior alteration shall continue to apply in case of remaining assessment years (8/1991 dt 30.06.91) • Jurisdiction over Territorial Waters: • In the sea, the territory of Pakistan would include the seabed and subsoil of the ‘continental shelf’ adjoining the land territory- activities like fishing & exploitation of natural sources are taxable.

  11. TAXABLE &TOTAL INCOME [SECTION 9 & 10] • Total Income means a sum total of a person’s income under each of the heads of income. The concept is at par with section 2(44) in R.O • Total Income= Gross receipts-allowable deductions • Taxable Income is that portion which is chargeable to tax after all deductible allowances have been taken into account. This is net income on which rate of tax is applicable for a particular tax year. • In R.O, there was no concept of Taxable Income and Total Income was chargeable to tax.

  12. HEADS OF INCOME [SECTION 11] • This section classifies income from various sources into the heads like Salary, Income from Property, Income from Business, Capital Gains and Income from other Sources. • The only departure from R.O is deletion of head “Interest on Securities”. This will now be taxed as Income from Business or Income from Other sources as the case may be.[ If a person derives interest from securities held as stocks in trade- Income will be chargeable to tax under head “ income from business”

  13. PERSON [Sec. 2(42) r/w Sec.80] • The definition includes: • an individual [ for natural persons] • a company or AOP incorporated, formed organized or established in Pakistan or elsewhere; and • The Federal Government or Foreign Government or Public International Organization • The A.O.P includes: • Hindu undivided family[Persons lineally descended] • An Artificial Juridical Person[Devta,Devi, Mazar,Socity] • Any body of persons formed under foreign law • The Company includes: • Company, Body Corporate, Trust, Foreign association, Provincial Government or Local Authority

  14. PERSON [COMPARISAN] • The definition has exhaustively enumerated the types of persons whereas, in R.O the definition was inclusive one which envisaged,any other meaning which could possibly be assigned to the word ‘person’ thus plugging the legal lacuna. • The Artificial Juridical person has been mentioned as offshoot of A.O.P. Whereas, in R.O, anyone not falling in the category of individual, firm, an AOP, a company or a local authority fell in the ambit of term “A.J.P”

  15. PERSON [CONCEPT] • Definition of person includes a dead man as alive for certain purposes and a human being as a dead as in the case of bankruptcy or insolvency • Begum Nusrat Bhutto vs ITO [1980] 42 TAX 59 H.C Lhr • AOP is separate & indep. entity for income which was taxed in the hands of members • ITO vs Narayanganj Company [1971] 23 TAX 223 S.C Pak • “Body of individuals” doesn’t include a provincial government or any other governmental department • [2004 PTD (Trib.) 1517= (2004) 89 TAX 89 Trib.

  16. Resident Individual [Sec.82] • Is present in Pak for period or periods aggregating to 182 days in tax year will be resident individual • The Section 2(40) of R.O described the concept of resident person in totality. The definition in new ordinance is exactly the same with the only exception that an employee or an official of the Federal Government or a Provincial Government posted abroad in the tax year has been included. • Clause (b) has been omitted by Finance Act, 2003, thus restricting the definition of resident only w.r.t stay in Pakistan during the relevant tax year.

  17. Resident Company [Sec.83] • (a)Is incorporated or formed under any law in force in Pakistan (b) the control and Management of the affairs is situated wholly in Pakistan ( c ) is a Provincial Govt or Local authority in Pakistan • All the Pakistani incorporated bodies are ‘resident’ where there control and Management lies. For other corporate bodies, the criterion is that to qualify as resident “their control and management should be wholly in Pakistan at any time in the relevant tax year. • The words “almost wholly” have been omitted through F.A 2003 to avoid ambiguity.

  18. Geographical Source of Income [Sec.101] • The section determines the geographical source of various incomes similar to few provisions of Section 12 of Repealed Ordinance (RO). • Receipt vs Accrual • In some cases, income is to be declared to Pakistan Source irrespective of its actual accrual or receipt in Pakistan. Ramkola Sugar Mills Ltd vs CIT [1960] 2 TAX (Supp-4) • Receiving salaries from state exchequer is taxable no matter where paid. 71 TAX 45 H.C Quetta • The section doesn’t contain the word ‘deemed to accrue or arise in Pakistan’ as the case in R.O

  19. TAX YEAR [Sec.74 vs Sec.2 (26), R.O] • Three types of Tax year have been mentioned. • Normal Tax year, also called financial year starting from 1st July ending on 30th June. • Special Tax year which may be allowed by CIT to taxpayer if he applies in writing. • Transitional Tax year which is a period falling b/w the change from Special to Normal Tax year & v/v. • The CIT can allow the shift from Special to Normal Tax year subject to some conditions and his decision is subject matter of appeal. The CBR is now empowered to grant permission for Special Tax year to certain class through Notification in gazette.

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