advanced taxation (cfap5) by fawad hassan [lecture3]

Income from SalaryEmployee Employment Employer

Means any individual engaged in employment Means any person who engages and remunerates an employeeIncludes:i. Directorship or any other office involved in management of company ORii. a position entitling the holder to a fixed or ascertainable remuneration ORiii. holding or acting in any public office

3 Important Questions:1. Geographical Source of Income2. Basis of Taxation3. Residential Status recently changed

Heads of Income

61

Deciding a Salary case

Income from Salary1. Geographical Source of Income [S-101(1), (11) & (16)]

Heads of Income

Employment ExercisedIn Pakistan Outside Pakistan

Payment of Salary made In Pakistan PSI FSIOutside Pakistan PSI FSI

By or on behalf of FG/PG/LG in PakistanPSI wherever employment is exercised

Salary

62

Pension/AnnuityResident

FSIPSIPENRBorn by

Paid by

Income from Salary2. Basis of Taxation

Heads of Income Salary

63

Cash BasisAccrual

[S-110]Salary received in current tax year in respect of services rendered in previous Tax Year is taxable on accrual basis.Conditions:(i) Salary is received from a private company(ii) Commissioner of Income Tax is satisfied that the payment of salary was deferred[S-12(7)]Arrears of salary received in tax year caused higher taxation, then tax payer by notice in writing to commissioner tax salary on accrual basis

All Other Cases

Amount OR Perquisite treated as received [S-12(5)]:as and when it is paid or provided;By(i) Employer(ii) Associate of employer(iii) Any 3rd party under agreement with employer or its associateBy(i) Past employer(ii) Perspective employerTo(i) Employee(ii) Associate of employee(iii) Any 3rd party under agreement with employee or its associate

Receipt of Income [S-69]:Amount/benefit/perquisite treated as received when:(i) Actually received(ii) Applied on behalf/instruction of person OR under any law(iii) Made available to person

Income from Salary3. Residential Status Recently Changed

Heads of Income Salary

64

Non ResidentResident

Geographical Source of IncomePSI FSI

Residential StatusFSI of Resident

Foreign Source Salary of Resident [S-102]:Exempt if;- Foreign tax on salary is paid by individual OR- withheld by employer and paid to revenue authority of foreign country

Citizen of Pakistan leaves Pakistan [S-51(2)]:If a citizen of Pakistan leaves Pakistan in a Tax Year and remains abroad during that tax yearthen Salary earned outside Pakistan shall be exempt

Returning Expatriate [S-51(1)]:If resident in a Tax Year but was Non-Resident in preceding 4 Tax YearsThen all foreign source income will be exempt in tax year in which tax payer becomes resident and the following tax year

Short term Resident [S-50]:FSI will be exemptConditions:(i) Resident solely by reason of employment(ii) Present in Pakistan for 3 years or lessExceptions:(i) Income from business established in Pakistan(ii) Foreign Source Income brought into or received in Pakistan

Income from SalaryHeads of Income Salary

65

Deciding a Salary case:1. Salary Definition2. Deductions3. Perquisites/Facilities/Benefits4. Exemptions


66

Salary [S-12(2)] Means: any amount received by employee from employment whether capital or revenue natureIncludes: Perquisites [Section-13]

means- items provided by employer in kindOR

- cash reimbursed for expenses other than office purposeincludes

- Services of house keeper, driver, gardener, domestic assistant- Utilities- Any obligation of employee to employer, waived off by employer-Any obligation of employee to another person paid by employer- FMV of property transferred to employee reduced by any payment made by employee

Allowances- Cost of Living Allowance- Subsistance Allowance- Rent- Utilities- Education- Entertainment- Travel Allowance; except for official tours

-Pay-Wages-Other remuneration-Leave pay-Overtime-Bonus-Commission-Fee-Gratuity-Work condition Supplements

Expenditureincurred by employee but paid by employer, other than official purposes

Others- Pension, Annuity

- Leave encashment -Vehicle wholly or partly for private use-Accommodation-Medical Facility- Interest free loan

- Medical Allowance - Profits in lieu of salary- Employee Share Scheme


67

Leave Encashment [2nd Schedule, Part-I, Clause-19]:

Encashment ofLeave Preparatory to RetirementOf

(i) Government Employee(ii) Member of Armed Forces

Exempt from Tax

Definition


68

Valuation of Conveyance [Rule-5]:

Taxable

Vehicle leased by employerVehicle owned by employer

Official Use onlyOfficial & Personal use

Personal Use onlyUsage

Not Taxable5% of FMV at commencement of lease5% of cost of vehicle10% of FMV at commencement of lease10% of cost of vehicle

Definition


69

Valuation of Accommodation [Rule-4]:

Amount that would have been paid if accommodation was not provided 45% of MTS/Basic Salary

Higher

TaxableTaxable Accommodation provided in mufasal areas shall be taxable at 30% of MTS/Basic Salary

Definition


70

Medical Allowance [2nd Sched, P-I, Clause 139]:

BothMedical Facility/Reimbursement

Not in accordance with terms of employment

In accordance with terms of employment

Medical Allowance

Medical Allowance >>>>exempt upto 10% of Basic SalaryMedical Facility>>>>>>totally taxableTaxable

Medical Allowance >>>>Totally TaxableMedical Facility>>>>>>totally exempt if following conditions are met(i) Provide NTN of medical practitioner(ii) Attestation of expense by employer

Totally exempt if following conditions are met:(i) Provide NTN of medical practitioner(ii) Attestation of expense by employer

Exempt upto 10% of Basic Salary

Definition


71

Interest Free Loan [S-13(7) (8) & (14)]: Loan from employer

@benchmark rate or more

Markup charged?

Markup @ benchmark rateIncluded in Taxable Income

Markup @ benchmark rate– Markup charged by employerIncluded in Taxable Income

Nothing Taxable

NoYes

Yes

Above is not applicable on loan upto Rs 500,000/-ORWhere such benefit is extended by the employer due to waiver of interest by such employee on his accounts maintained with the employer.

NoX(X)X

If loan is utilized by employee to acquire any assetThen employee shall be treated as having been paid markup @ benchmark rate or actual markup paid, which ever is higher.

Definition


72

Profits in lieu of salary [S-12(2)(e)]

(i) Payment of Employer's Contribution from provident fund(ii) Amount on termination of employment, whether voluntary basis or under an agreement(iii) Compensation for redundancy or loss of employment (e.g., Golden Hand Shake)(iv) Consideration for employee's agreement to :• enter into employment agreement• accept changes to conditions of employment• a restrictive covenant to any past, present or future employment

Includes:

[S-12(6)]Tax payer has option to get it taxed @ last 3 years average rate of tax

Last 3 year’s taxable incomeLast 3 year’s tax liability=Average rate of tax

Definition


73

Employee Share Scheme [S-14] Option/Right Acquired

Shares disposed off

Shares acquired without any restriction on transferOR restriction removed afterwards

Shares acquired with restriction on transfer

Exercised Option/Right & Shares received Taxable under salaryConsideration- Cost PaidOption/Right Disposed Off

Nothing TaxableX(X)X

FMV- Consideration paid to acquire shares X(X)X Taxable under salary

Taxable under Capital Gains

Disposal value- Consideration paid to acquire option & share- Amount previously included in Taxable incomeX(X)(X)X

Nothing Taxable

Definition


74

Deductions:Section 12(4):No deduction shall be allowed for any expense incurred by employee in deriving salary income.


75

Perquisites/Facilities/Benefits:1. Pension2. Commutation of Pension3. Gratuity & Commutation of Pension4. Provident Fund5. Tax on Salary Born by Employer6. Services provided by employer to employee7. Utilities8. Obligation of employee waived by employer9. Obligation of employee to 3rd party, paid by employer10. Property or service provided to employee11. Any other perquisite12. Self Hiring of Property13. Superannuation Fund14. Benevolent Fund


76

Perquisites/Facilities/Benefits:1. Pension [2nd Sched, Pt-I, Cl (8)&(9)]

Member of Armed ForceEmployee of FG/PG Totally Exempt

Others

Age>60 Totally ExemptWorks for

same employer or its associate

Taxable

More than 1 pension

Totally Exempt

Higher amount is exemptYes

No

YesNo

YesNo

Perks


77

Perquisites/Facilities/Benefits:2. Commutation of Pension [2nd Sched, Pt-I, Cl (12)]

Received from GovernmentORReceived from Scheme approved by FBR Totally Exempt

Perks


78

Perquisites/Facilities/Benefits:3. Gratuity and Commutation of Pension [2nd Sched, Pt-I, Cl (13)]

Rs 75,000/-OR50% of amount(Which ever is less is exempt)Exempt upto Rs 300,000/-Totally Exempt

Un-approved GratuityORUn-approved CommutationGratuity & Commutation Scheme Approved by FBR

Government EmployeeORApproved Gratuity Fund by CIT under 6th Schedule

Exemption not available to following:(i) Payment not received in Pakistan(ii) Payment received by Director of Company who is not employee of company(iii) Payment received by Non Resident(iv) Gratuity received by employee who has already received gratuity from same or another employer

Perks


79

Perquisites/Facilities/Benefits:4. Provident Fund [2nd Sched, Pt-I, Cl (23)] & [6th Sched, Pt-I, Cl (3), (4) & (5)]

Already taxed in salary, therefore no treatmentEmployee ContributionGovt. PF

Already taxed in salary, therefore no treatmentAlready taxed in salary, therefore no treatmentUn-recognized PFRecognized PF

ExemptEmployer Contribution No treatment when contribution is madeRs 150,000OR10% of (Basic Salary + Dearness Allowance)(Lesser is exempt)

ExemptReturns credited during yearReturn @ 16%OR1/3rd of (Basic Salary + Dearness Allowance)(Higher is exempt)

ExemptAccumulated Balance Paid

No treatment when returns are credited

Exempt Only employee’s contribution is exemptAll other sums are taxableNote: Dearness Allowance is a type of Cost of Living Allowance

Perks


80

Perquisites/Facilities/Benefits:5. Tax on Salary Born by Employer [S-12(3)]

Amount of salary income shall be grossed up by amount of tax payable by employer.Q. Mr. A has received taxable salary and allowances amounting to Rs 1,810,000 during tax year 2017. You are required to calculate his taxable income and tax payable under each of following situations:(i) 100% tax is to be borne by employer(ii) 40% of tax is to be borne by employer and balance to be borne by Mr. A(iii) Rs 50,000 is to be borne by employer and balance to be borne by Mr. A(iv) Mr. A shall pay only Rs 50,000 as tax and balance tax to be borne by employer

Perks


81

Perquisites/Facilities/Benefits:6. Services provided by employer to employee [S-13(5)]

House keeperGardnerDriverOther domestic assistantLess: payment by employee to employer for these services

Salary paid to them by employer X(X)X Taxable

Perks


82

Perquisites/Facilities/Benefits:7. Utilities [S-13(6)]

ElectricityGasWaterTelephoneLess: payment by employee to employer for these utilities

Fair Market Value of utilities X(X)X Taxable

Perks


83

Perquisites/Facilities/Benefits:8. Obligation of employee waived by employer [S-13(9)]

Waived Amount Taxable

9. Obligation of employee payable to 3rd party paid by employer [S-13(10)]Paid Amount Taxable

10. Property or service provided to employee [S-13(11)]

Less: payment by employee to employerFair Market Value X

(X)X Taxable

Perks


84

Perquisites/Facilities/Benefits:11. Any other perquisite [S-13(13)]

Less: payment by employee to employer for perquisiteFair MV of perquisite X

(X)X Taxable

Perks


85

Perquisites/Facilities/Benefits:12. Self Hiring of Property [S-15(5)]

"Income from Salary" shall include value of accommodation in accordance with Rule-4

"Income from Property" shall include rent income in accordance with Section-15(4)&(5)

Perks


86

Perquisites/Facilities/Benefits:13. Superannuation Fund approved by Commissioner in accordance with Part-II of 6th Schedule [Cl-4-6] & 2nd Sched, P-I, Cl-25 :

Employer’s Contribution

During life time other than above

In lieu of annuityOn deathPayment out of fund:

Taxable

ExemptInterest Credited

Perks


87

Perquisites/Facilities/Benefits:14. Benevolent Fund [2nd Sched, P-I, Cl-24]

Any payment in accordance with"Central Employee Benevolent Fund & Group Insurance Act 1969" Exempt

Perks


88

Exemptions:1. Foreign Government Officials2. Diplomatic & United Nations Exemptions3. International Agreements4. Perquisites without Marginal Cost to Employer5. Special Allowance6. Workers’ Participation Fund7. Salary income of seafarer8. Allowances to persons working outside Pakistan9. Full Time teacher/researcher


89

Exemptions:1. Foreign Government Officials [S-43]

Salary of foreign government employee shall be exempt from tax if:(i) employee is citizen of foreign country and not citizen of Pakistan(ii) services performed are similar to those performed by employees of Federal Government in foreign countries(iii) foreign government grants similar exemption to employees of the Federal Government performing similar services in such foreign country


90

Exemptions:2. Diplomatic & United Nations Exemptions [S-42]

Following shall be exempt from tax:(i) Individuals entitled to privileges under the Diplomatic and Consular Privileges Act, 1972(ii) Individuals entitled to privileges under the United Nations (Privileges and Immunities) Act, 1948(iii) Pension received by citizen of Pakistan due to former employment in the United Nations or its specialized agencies, if the person’s salary from such employment was exempt under this Ordinance


91

Exemptions:3. Exemption under International Agreements [S-44]

If Pakistan is not permitted to tax an income under TAX TREATY, it will be exempt from tax

Salary received under an AID AGREEMENT is exempt from tax subject to following conditions:(i) Salary received by individual, who is not citizen of Pakistan(ii) Exemption will be to the extent provided in AID AGREEMENT(iii) AID AGREEMENT is between FG≈Fr.G FG ≈PIO(iv) Individual is not resident OR Is resident solely for performance of service under AID AGREEMENT(v) In case AID AGREEMENT is with Foreign Govt. then individual should be citizen of that country(vi) Salary is paid out of funds released to Pakistan under AID AGREEMENT

Any income under a bilateral or multilateral technical assistanceAGREEMENT is exempt from tax subject to following conditions::(i) Income is received by person, who is not citizen of Pakistan(ii) Person is engaged as a contractor, consultant, or expert on a project in Pakistan(iii) Exemption will be to the extent provided in AGREEMENT(iv) AGREEMENT is between FG≈Fr.G FG ≈PIO(v) Project is financed out of funds released in accordance with AGREEMENT(vi) Person is not resident OR Is resident solely for performance of service under AGREEMENT(vii) Income is paid out of funds under AGREEMENT


92

Exemptions:4. Perquisites without Marginal Cost to Employer [2nd Sched, P-I, Cl-53A]

Hospital/ClinicEducational InstitutionHotel/RestaurantAny other notified by FBRFree/subsidized Medical TreatmentFree/subsidized educationFree/subsidized food during duty hours

Totally Exempt


93

Exemptions:5. Special Allowance [2nd Sched, P-I, Cl-39]

Any allowance, other than Conveyance and Entertainment Allowance, specially granted to meet expenses wholly and necessarily incurred in performance of office duties Exempt


94

Exemptions:6. Workers’ Participation Fund [2nd Sched, P-I, Cl-26]

Amount received as worker, out of Workers' Participation Fund Exempt


95

Exemptions:7. Salary Income of Seafarer [2nd Sched, P-I, Cl-4]

Salary income shall be exempt ifPakistani seafarer is on

Pakistan flag vesselfor183 days or more on vesselForeign vessel

No limit of number of daysFollowing conditions required for exemption:(i) Income remitted to Pakistan(ii) through normal banking channel(iii) within 2 months of relevant tax year


96

Exemptions:8. Allowance to person working outside Pakistan [2nd Sched, P-I, Cl-5]

Allowance from Govt of Pakistanto a citizen of Pakistanfor rendering services outside Pakistan Exempt


97

Exemptions:9. Full Time teacher/researcher [2nd Sched, P-III, Cl-1(2)]

Tax payable in salary shall be reduced by 40% if following conditions are fulfilled:(i) The individual is Full time teacher/researcher(ii) in non-profit education/research institution, duly recognized bya. Higher Education Commission (HEC)b. Board of Educationc. University recognized by HEC(iii) including in any Government training/research institute

Income from PropertyOwner/Landlord PropertyLand/Building Tenant

Rent means:Amount received/receivableBy owner of land/buildingAs consideration to use/occupy OR right to use/occupy the land/buildingRent includes:Forfeited deposit on contract for sale of land/building [S-15(1)&(2)]

2 Important Questions:1. Geographical Source of Income2. Basis of Taxation

Heads of Income

98

Deciding a Property Income case

Accrual Basis

Income from Property1. Geographical Source of Income [S-101(9) & (10)]

Heads of Income Property

99

Immovable Propertysituated in Pakistan Right to explore natural resourcesin PakistanRental Income shall be Pakistan Source Income

Gain on disposal of above property or right shall also be Pakistan Source Income

Income from PropertyDeciding Income from Property Case:


100

Individual CompanyTax shall be imposed on these persons on Gross Rent Income @ 1st Sched, P-I, Div-VIA

Except following:(i) Individual/AOP(ii) having no taxable income under any other head &(iii) Taxable Property Income is upto Rs 200,000/- [S-15(6) & (7)]

Income from Property derived by Company shall be taxable under"Normal Tax Regime”Rental income shall be reduced by allowable expenses, detailed in Section-15A, and remaining amount shall by included in taxable income under Normal Tax Regime

AOP

Rent



101

Rent

i. 1/10th of advance will be treated as Rent in• TY of receipt &• 9 subsequent TYs

ii. Nothing will be included in taxable income, in the tax year in which such advance is refundediii. If tenancy is terminated before 10 years and previous advance is returned and new advance is received then:

1/10th of advance will be treated as Rent in• TY of receipt &• 9 subsequent Tys

NON-ADJUSTABLE Advance (Building)[S-16]automatically included in taxable income because of accrual basis of taxation

Advance ADJUSTABLEagainst RentTaxable on accrual basis

Rent

Amount of new advance- Amount charged to tax earlierX

X(X)



102

Rent [S-15], [S-39] & [S-66]Important !!(i) Rent received/receivable OR Fair Market Rent, which ever is higher, is taxable [S-15(4)](ii) Above is not applicable if Fair Market Rent has already been included in salary income due to self hiring of property [S-15(5)](iii) Following amounts shall be included in taxable income under the heads of income mentioned thereagainst;

• Ground Rent• Rental income from sub-lease of land or building• Rental income from lease of building, together with Plant & Machinery• Amount of amenities, utilities, other services connected with renting• Amount received as consideration for vacating possession of building

(iv) When a property is owned by two or more persons &their share is definite and ascertainablethenPersons shall not be treated as AOPShare of each person's income from property shall be taxed separately

Income from Other sources[S-39(1)(d)][S-39(1)(e)][S-39(1)(f)] & [S-15(3)][S-39(1)(fa)] & [S-15(3A)][S-39(1)(k)]



103

Allowable Deductions [S-15A]i. Building Repair Allowanceii. Insurance Premiumiii. Rates, tax, charge, cess not being Income Taxiv. Ground Rentv. Markup on loan to acquire, construct, renovate, extend, reconstruct propertyvi. HBFC Loan / Scheduled Bank Loan on scheme based on sharing rent

(share in rent+share in appreciation in value)vii. Markup on mortgages/charges

1/5th of rent chargeable to taxPaid/PayablePaid/PayablePaid/PayablePaid/Payable

Paid/PayablePaid/Payable



104

Allowable Deductions [S-15A]viii. Expenses wholly & exclusively for deriving rent including administrative and collection charges

ix. Legal Chargesx. Irrecoverable Rent

xi. Inadmissible deductions [S-21]

• Paid/Payable• maximum upto 6% of rent chargeable to tax• must be paid within 3 subsequent tax years• otherwise will be included in taxable income in 4th subsequent tax year• if unpaid amount which is included in taxable income, as above, is subsequently paid, then it will be allowed as deduction in tax year in which it is paidPaid/Payable (to defend title of property or defend any suit connected with property in a court)Conditions:i. Tenancy was bonafideii. defaulting tenant has vacated property OR steps have been taken to compel tenant to vacate propertyiii. defaulting tenant is not occupying any other property of same personiv. person has taken all legal steps for recovery OR reasonable grounds exist that legal proceedings will be uselessv. rent was previously included in taxable income and tax was duly paid(if irrecoverable rent is subsequently recovered, then it will be included in taxable income in tax year of recovery)will be studied in "Income from Business"

advanced taxation (cfap5) by fawad hassan [lecture3]

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