University of Central Punjab

Taxation Management
(By: Muhammad Hussain, FCMA, MS (Fin)

University of Central Punjab

1- Khaban-e-Jinnah, Jouhar Town, Lahore
1|Page
 University of Central Punjab

Course Synopsis:

This course comprises of theoretical and numerical concepts of Tax Laws prevailing in Pakistan.
In this course you will learn the heads of income, statutory definitions, exemptions, tax return
and sales tax. This course will help you in understanding the tax laws and will enable you to
understand the practical implications of tax laws. It will serve as a tool in developing the basic
understanding of theoretical knowledge. This course develops vivid perception and interpretation
skills regarding tax structure and tax laws in Pakistan. The students will be able to make
effective taxation management strategies.

Course Learning Outcomes

At the end of the course, you should be able to:

 Understand the basic principles of Tax Laws

 Understand the application of Tax Laws
 Prepare the income tax return
 Make effective use of tax credits and exemptions
 Basic features and application of Sales Tax in Pakistan

2|Page
 University of Central Punjab

Background/ History of Tax Laws in Pakistan

Income Tax Act of 1860: The British Empire introduced first formal Income Tax Act after war
on independence of 1857. It was repealed in 1865.

The Income Tax Act 1886: Important landmark in the taxation history for a long period of time. The
great improvements in the legislation were also made. A proper definition of agricultural income for the
first time, completely exempted. This Act was imposed on traders by some of the provinces. Income Tax
Act, 1886, itself continued up to 1918 and during its life of 32 years, only one major amendment was
made in it in the year 1903. The 1918 Act with some amendments was further amended in Super Tax Act
of 1920

Income Tax Act of 1922: The Income Tax Act and the Super Tax Act were consolidated in the Income
Tax of 1922. After Independence on 14 August 947, the Pakistan Government adopted the Income Tax
Act, 1922 as its Income Tax Law till 30, June 1979. The provisions of the Act were extended to the whole
of Pakistan except the special areas.

Income Tax Ordinance, 1979: The government introduced a new Income Tax Law namely “Income
Tax Ordinance, 1979. The ordinance replaced the Income Tax Act 1922 and was enforced in Pakistan
from 1st July, 1979.

Income Tax Ordinance, 2001: After 22 years government of Pakistan introduces a new income tax law
namely “The Income Tax Ordinance 2001”. To updates the tax laws and brings our law in accordance
with international standards, this ordinance was promulgated on 13th September, 2001, which became
effective from 1st July, 2002.

Income Tax Rules 2002: These were promulgated by CBR on 1st July 2002 in exercise of
powers granted under section 237 of the Ordinance. Rules are integral part of the main enactment
/ Law. I.T Ordinance 1979 stands repealed vide section 238 of the Ordinance. The Ordinance
over rules all other laws for the time being in force (Sec 3).

3|Page
 University of Central Punjab

TYPES OF TAXES

Different types of taxes are explained below:

Direct taxes:
Direct taxes are the taxes where incidence of taxation is on the person on whom levied. For
example
Income tax:
Direct Taxes primarily comprise of Income Tax. For the purpose of the charge of tax and
the computation of total income, all income is classified under the following five heads:-
1. Salary
2. Income from Property
3. Income from Business
4. Capital Gains
5. Income from other sources
Capital Value Tax:
Capital Value Tax on transfer of immovable Property, transfer of rights etc

Indirect Taxes:
Indirect taxes are the taxes where incidence of tax can be shifted by the person on whom levied
to other persons. For example:-
Sales Tax:
Sales Tax is levied @17% on all goods imported into Pakistan and supplies made
in Pakistan by a registered person.
Federal Excise Duty:
Federal Excise Duties are levied on a limited number of goods produced or manufactured
and services provided or rendered in Pakistan. All exports are liable to Zero % Federal
Excise Duty.
Custom Duty:
Goods imported and exported from Pakistan are liable to rates of customs duties as
prescribed in Pakistan Customs Tariff.

4|Page
 Taxation system of Pakistan

Taxation system of Pakistan

A country works like a home, members of the house contribute and head of the home administer the
management of the house. Similarly, a government of a country needs revenue in the form of taxes from
the people to manage the country matters. Government normally required that, after the end of a certain
year, a specific percentage of total income should be paid in the government treasury by the public.

WHT

Computation
Appeal
of Taxable
Procedures
Income

Computation
Assessment
of tax liability
procedures
& tax payable

Filing of
income tax
return

Income Tax Cycle – Steps

1. RECORDING OF BUSINESS TRANSACTIONS

2. PREPRATION OF FINANCIAL STATEMENT (INCOME STATEMENT)
3. COMPUTATION OF TAXABLE INCOME / TAX LIABILITY
4. FILING OF RETURN (COMMUNICATION WITH TAX DEPARTMENT)
5. ASSESSMENT
6. APPEALS (AGAINST THE ASSESSMENT)
7. RECOVERY/COLLECTION PROCEDURE

CONCEPT OF WITHHOLDING TAX – WHT (ADVANCE TAX)

It was observed that it was difficult for the people to pay heavy amount of taxes at the end of a period, so that the
concept of advance tax was introduced in the shape of withholding tax. “Withholding tax is Income
tax withheld from taxpayer and paid directly to the government i.e. Federal Board of Revenue (FBR)
through National Bank of Pakistan by a withholding agent”.

TYPES OF WHT
Withholding tax has two forms

i. DEDUCTION OF TAX
ii. COLLECTION OF TAX
DEDUCTION OF TAX
Deduction of tax is a form of advance tax where tax is deducted by the withholding agent at the time of making
payment.

5|Page
 Taxation system of Pakistan

Example: when salary is paid to employee by the employer, tax is deducted. Gross salary is Rs.100/- and tax
deducted Rs.10/-. Rs.90 will be given to the employee and Rs. 10/- will be treated as deduction of tax. Employer is
withholding agent in this case.

Example: Mr. Rasheed has won a prize bond of Rs.10,000/-. He went to State Bank of Pakistan for encashment. SBP
deducted tax Rs.1,500/- (15% x 10,000) while making payment to him. This is deduction of tax and SBP is
withholding agent.

COLLECTION OF TAX
Collection of tax is a form of advance tax where tax is collected by the withholding agent while incurring some
expenditure.

Example: Mr. Bill gate has received telephone bill from PTCL Rs.2,200/-. The detail of the bill is Rs.2,000/- PTCL
charges and Rs.200/- is tax. Mr. Bill gate paid Rs.2,200/-, tax collected by PTCL being withholding agent, is
Rs.200/-. This is not final tax liability rather advance tax collected.

Example: similarly, tax paid along with cell phone, (pre-paid and post-paid), gas bills and electricity bills are some
examples collection of taxes.

COMPUTATION OF TAXABLE INCOME

At the end of a certain year, taxable income of a person is computed by applying the provisions of income tax laws.
Total income = Taxable Income + Exempt Income. In Pakistan, all income are not taxable, rather government has
exempted some income, like agricultural income.

COMPUTATION OF TAX LIABILITY

Taxable liability is computed by multiplying tax rates with taxable income
Tax Liability = Taxable Income x Tax Rates

Example: Mr. Basheer earned Rs.1,000/- from his business and Rs.500/- from growing of rice. His total income is
Rs.1,500/- and Taxable income is Rs.1,000/-. Assume 10% tax rate is applicable on his taxable income. His tax
liability will be Rs. 100/- (1,000 x 10%).

COMPUTATION OF TAX PAYABLE OR REFUNDABLE

From the tax liability advance tax (WHT) is deducted to arrive at the tax payable or refundable. Tax will be payable,
if tax liability is higher than the advance tax and tax will be refundable if advance tax is higher than tax liability.

Example: Mr. Basheer earned Rs.1,000/- from his business and Rs.500/- from growing of rice. His total income is
Rs.1,500/- and Taxable income is Rs.1,000/-. Assume 10% tax rate is applicable on his taxable income. His tax
liability will be Rs. 100/- (1,000 x 10%). Tax collected on electricity bill was Rs.40/-. His tax payable will be Rs.60/-
(100 tax liability – 40 WHT).

Example: Mr. Basheer earned Rs.1,000/- from his business and Rs.500/- from growing of rice. His total income is
Rs.1,500/- and Taxable income is Rs.1,000/-. Assume 10% tax rate is applicable on his taxable income. His tax
liability will be Rs. 100/- (1,000 x 10%). Tax collected on electricity bill was Rs.120/-. His tax refundable will be
Rs.20/- (100 tax liability – 120 WHT).

FILING OF RETURN (COMMUNICATION WITH TAX DEPARTMENT)

“Filing” means submission and “Return” is the prescribed form by the tax department on which a person provides
the detail of his income and tax. This return is divided into three parts.
 Profile

6|Page
 Taxation system of Pakistan

 Computation of Total and Taxable Income

 Computation of Tax Liability, Tax Payable or Refundable

ASSESSMENT
When the person files the return of income tax the tax department (assessing officer) evaluate that whether the
information provided by the person (assessee) is correct or not? For this they may call them for other information as
required and made certain amendments. This process of evaluation is known as assessment and an assessment order
is made. There are different types of assessment procedures are given by the Income Tax Ordinance 2001
Assesses Tax payer/who is liable to pay tax
Assessment Checking/detailed checking
Assessment officer Who will make the assessment of assesses commissioner income
tax
APPEALS (AGAINST THE ASSESSMENT)
If the person is not satisfied with the order made by the department then it has options to go against the order of the
department and may file an appeal. Following rooms are available:
 CIT (Commission of Income Tax) - Appeal
 ITAT (Income Tax Appellate Tribunal)
 Reference to High court

1- WHT With holding

Tax Payer
Agent

4- Computation of tax 5- Tax payable 2- Deposited

Liability

3- Transfer to Tax
Department

Assignment: Introduction and Functions of FBR

7|Page
 Taxation system of Pakistan

S167 - Indemnity S 168- Credit for tax collected or deducted

1- is eligible for tax credit 2- Tax deducted 3-
Tax credit by a company which a member of
S 158- Time of deduction of tax
an AOP. 4- Refund of tax
S 166- Priority of tax collected or deducted
(Bankruptcy or liquidation of WHA)
Payment - Tax (U/S 149 to 156 etc.)

Goods and Services supplied

Buyer Supplier
Buyer (Withholding Agent) S 164 - WHT Certificate Supplier

S-161 (Failure to WH tax) S-162 Recovery of tax (by CIR) if tax is

S-160 (Deposit of Tax)

NOT with held

S-169 Tax collected or

deducted as a final tax
1-WHT shall be final 2-
Expenses are not allowed 3-
No heads of income 4- No tax
reductions are allowed 5-
Excess tax collected shall be
CIR refundable 6- If tax is not WH,
Banks that can be recovered u/s
162 7- Return is not required
to be filed.

8|Page
 Taxation system of Pakistan

Composition of Income Tax Laws

Income Tax Ordinance,

2001 Income Tax Rules
2002

Ordinance
Schedules

1- Chapters
2- Divisions 1- 1st Schedule (Tax Rates)
3- Sections 2- 2nd Schedule (Exemptions)
4- Sub- sections 3- 3rd Schedule (Depreciation &
5- Clauses Amortization)

Income Tax Ordinance

Income tax ordinance is divided into “Ordinance” in the form of sections and “Schedules”
Income Tax Ordinance
Income tax ordinance included provisions of the law means
 Definitions
 What is meant by person?
 How to compute income; and
 How to compute tax on income etc.

Income Tax Schedules

Income tax schedule is a part of income tax ordinance and different issues are discussed. There
are seven schedules
1- Income tax Rates
2- Exemptions and tax concessions
3- Depreciation and Amortization
4- Tax Rules for Insurance Business
5- Tax Rules for Exploration and Production of Petroleum
6- Rules for Recognized Provident Fund.
7- Rules for Banking Companies

Income Tax Rules

Income tax Rules normally explains the income tax ordinance, like ITO says that if an Individual stay in
Pakistan for 183 days or more in a tax year, he will be a resident person. So, the way to compute 183 days
(or 120 days) is given in the Rules rather than in the ordinance. Similarly, computation of perquisites and
benefits is also given in the Rules.

9|Page
 Tax Rates

Tax Rates Tax year – 2020

(Part-I of First Schedule)

Category 1 (for individual non-salaried case i.e. where taxable salary is nil or up to 25% of
taxable income and for AOP)

TAXABLE INCOME RATE OF TAX

1. Up to Rs.400,000 0%
2. Rs.400,001 – Rs.600,000 5% of amount exceeding Rs.400,000
3. Rs.600,001 – Rs.1,200,000 Rs.10,000 + 10% of amount exceeding Rs.600,000
4. Rs.1,200,001 – Rs.2,400,000 Rs.70,000 + 15% of the amount exceeding Rs.1,200,000
5. Rs.2,400,001 – Rs.3,000,000 Rs.250,000 + 20% of the amount exceeding Rs.2,400,000
6. Rs.3,000,001 – Rs.4,000,000 Rs.370,000 + 25% of the amount exceeding Rs.3,000,000
7. Rs.4,000,001 – Rs.6,000,000 Rs.620,000 + 30% of the amount exceeding Rs.4,000,000
8. Over Rs.6,000,000 Rs.1,220,000 + 35% of the amount exceeding
Rs.6,000,000

Category 2 (for individual salaried case i.e. where taxable salary exceeds 75% of taxable
income)

TAXABLE INCOME RATE OF TAX

1. Up to Rs.600,000 0%
2. Rs.600,001 – Rs.1,200,000 5% of the amount exceeding Rs.600,000
3. Rs.1,200,001 – Rs.1,800,000 Rs.30,000 + 10% of the amount exceeding Rs.1,200,000
4. Rs.1,800,001 – Rs.2,500,000 Rs.90,000 + 15% of the amount exceeding Rs.1,800,000
5. Rs.2,500,001 – Rs.3,500,000 Rs.195,000 + 17.5% of the amount exceeding Rs.2,500,000
6. Rs.3,500,001 – Rs.5,000,000 Rs.370,000 + 20% of the amount exceeding Rs.3,500,000
7. Rs.5,000,001 – Rs.8,000,000 Rs.670,000 + 22.5% of the amount exceeding Rs.5,000,000
8. Rs.8,000,001 – Rs.12,000,000 Rs.1,345,000 + 25% of the amount exceeding Rs.8,000,000
9. Rs.12,000,001 – Rs.30,000,000 Rs.2,345,000 + 27.5% of the amount exceeding
Rs.12,000,000
10. Rs.30,000,001 – Rs.50,000,000 Rs.7,295,000 + 30% of the amount exceeding Rs.30,000,000
11. Rs.50,000,001 – Rs.75,000,000 Rs.13,295,000 + 32.5% of the amount exceeding
Rs.50,000,000
12. Over Rs.75,000,000 Rs.21,420,000 + 35% of the amount exceeding
Rs.75,000,000

2. Tax rates for a company

Income Tax rate for a company is 29%. Tax rate is 23% for a small company as defined in
section 2(59A).

10 | P a g e
 Computation of Taxable Income

Person Means
a) Individual
a. Salaried
b. Non-salaried
b) AOP (association of person)
c) Company
d) Government

Tax Objective of Personal Status:

The persons are classified into different categories because different tax rates are applicable on
the income of different persons as follows:

a) Individual (Slab rates are given)

a. Salaried
b. Non-salaried
b) AOP (association of person)
c) Company

Illustration
Below is the information mentioned related to the incomes earned by different persons:

A & B Enterprises Nishat Limited

Source of Income AHMAD Bashir
(Firm) (Company)
Salary 1,500,000 1,387,500 500,000 -
Capital Gains 300,000 312,500 150,000 850,000
Business 50,000 150,000 1,200,000 1,000,000

Requirements: -
a. Determine the Personal Status?
b. Calculate Tax Payable by each person?
c. Write down the conclusion from this illustration?

11 | P a g e
 Computation of Taxable Income

INCOME
Summary of Classes of Income

Heads of income S11 — Total income means: –

(a) Salary; (S 12 -14)
(b) Income from Property; (S 15-16)
(c) Income from Business; (S 18-36)
(d) Capital Gains; and (S 37-38)
(e) Income from Other Sources. (S 39-40)

Heads of Income
Heads of Income Income Deductions Taxable
Salary Taxable No expenditure is allowed Total Income
except professional fee
Income from 1) Signing Amount  Repair  Income – Deductions (no
Property 2) Un-Adjustable amount  Collection Charges deduction is allowed to
3) Rent from immoveable  Insurance Premium an individual and AOP
property.  Local Taxes & taxed at separate
4) Forfeited deposit, against sale  Ground Rent block)
of immovable property.  Profit on Debt  Ind./AOP having
 Legal charges to defend chargeable rent more
the title of property than 4 million can opt to
 Bad debts tax income like a
company and avail
deductions (TY 2020)
Business Income 1) Non-speculative income Sections 20 to 36
Income – Deductions
2) Speculative income
Capital Gains 1) u/s 37 Cost of purchase and
2) u/s 38 disposal (separate rules or Sale price – Cost
sec. 38)
Income from Other Income which is not taxed under Cost of purchase and
Income – Deductions
Sources any above head. disposal

Construction of Tax Laws

Head of
Income Sections Tax Rates Ref. WHT Sec. WHT Rates Ref.
Income
149
(231A to 236 Y –
Salary 12,13,14 Part I, Division`-I Part I, Division-I
for business and
non-business)
15,15A, 16
Individual / AOP
Part I, Division-VIA 155 Part III, Division-V
Income from (Separate Block)
Property Individual / AOP
Part I, Division- I 155 Part III, Division-V
Normal (optional)
Company Part I, Division- II 155 Part III, Division-V
233A
37,37A, 38 Part I, Division- VII (Stock Part IV, Division-IIA
Capital Gains
Exchange)
233AA Part IV, Division-IIB

12 | P a g e
 Computation of Taxable Income

(NCCPL)
Part I, Division`-I
(Clause-1) Non-Salaried,
147-158
AOP
(231A to 236 Y –
Business 18-36 Part I, Division`-I
for business and
(Clause-2) Salaried
non-business)
Part I, Division- II
Company

Important Notes:
1- Income cannot be taxed twice
2- Expenditures/deduction cannot be claimed twice
3- Income once taxed (come under tax net as an exempt income), will become wealth or
cost of the taxpayers.
4- Capital receipts are exempt unless specifically taxed under law e.g. sale of house, sale of
jewelry etc. but sale of personal car is a capital receipts and are not taxed under the law.
5- Revenue receipts are taxable unless exempt by the law. All revenue receipts are taxable
but pension and agricultural income is exempt by law.

Class practice

Illustration-1
Mr. Hameed was doing a job in a well reputed company with a taxable salary of Rs.80,000/- per
month. Compute his tax liability

Illustration-2
Mr. Majeed was doing his business of as a retailor in his colony. During the current year his
business income was Rs.760,000/-. Compute his tax liability

Illustration-3
Mr. Hameed was doing a job in a well reputed company with a taxable salary of Rs.60,000/- per
month. Tax deducted from cell phone was Rs.500/-. Compute his tax payable or refundable?

Illustration-4
Mr. Majeed was doing his business as a retailor in his colony. During the current year his
business income was Rs.960,000/-. Tax collected with cell phone was Rs.3,000. Compute his tax
payable or refundable?

Question- 5
Mr. Hameed was doing a job in a well reputed company with a taxable salary of Rs.80,000/- per
month. After coming back from his office, he runs a retail store in his colony. During the current
year his business income was Rs.800,000/-. Tax deducted on registration of car was Rs.5,500/-
and tax collected along with cell phone was Rs.5,000/-. Compute his tax payable or refundable?

Illustration-6
Mr. Hameed was doing a job in a well reputed company with a taxable salary of Rs.80,000/- per
month. After coming back from his office, he run a retail store in his colony. During the current

13 | P a g e
 Computation of Taxable Income

year his business income was Rs.1,200,000/-. Tax deducted on registration of car was Rs.5,500/-
and tax collected along with cell phone was Rs.5,000/-. Compute his tax payable or refundable?

Question– 7 (Resident)
Mr. Hameed, a resident individual, was doing a job in a well reputed company in Pakistan with a
taxable salary of Rs.80,000/- per month. He also started a business in UK from where he earned
income from his business Rs.800,000/-. Tax deducted on registration of car was Rs.5,500/- and
tax collected along with cell phone was Rs.5,000/- in Pakistan. Compute his tax payable or
refundable?

Illustration-8 (Non-Resident)
Mr. Michael, a non-resident of Pakistan, was doing a job in a well reputed company with a
taxable salary of Rs.700,000/- per annum. He has also started a business in UK from where he
earned income from his business Rs.1,200,000/-. Tax deducted on registration of car was
Rs.15,000/- and tax collected along with cell phone was Rs.2,000/-. Compute his tax payable or
refundable?

Steps for the computation of Tax payable

1- Compute total income (Salary, Income from Property, Business, capital gains, Income
from other sources)
2- Compute taxable income (Total Income – Zakat, Donation, Profit on Debt)
3- Determine Personal Status (Salaried, Non-Salaried or AOP)
4- Compute Tax Liability [Category 1 (salaried) Category 2 Non-Salaried or AOP)].
5- Compute Tax payable [(tax liability – WHT (advance Tax)]

Further practice to compute Tax Payable

Question-1 (Mr. Aleem) Question-2 (Mr. Qadeem)

Taxable Salary per month Rs.60,000/- Taxable Salary per month Rs. 160,000
Taxable Business Income Rs. 200,000/- Taxable Business Income Rs. 200,000/-
Taxable Capital Gains Rs.50,000/- Income from other sources Rs.60,000/-
Zakat Deducted by banks Rs.5,000/- Zakat Deducted by banks Rs.5,000/-
Tax deducted on salary Rs.6,000/- Tax deducted on salary Rs.102,000/-
Tax collected on mobile Rs.1,000 Tax collected on mobile Rs.5,000

Question-3 (Mr. Raheel) Question-4 (ABC a partnership firm)

Taxable Salary –UCP per month Rs.160,000/- Taxable Business Income Rs.1,300,000/-
Taxable Business Income Rs. 200,000/- Capital gains Rs. 500,000/-
Income from other sources Rs.60,000/- Income from other sources Rs.160,000/-
Zakat deducted by banks Rs.5,000/- Tax deducted on supply Rs.58,500/-
Tax deducted on salary Rs.102,000/- Tax collected on mobile Rs.3,000
Tax collected on mobile Rs.5,000
UCP Joined as teacher in October, 2019
Question-5 (XYZ Limited Company) Question– 6 (Resident)
Taxable Business Income Rs.1,300,000/- Mr. Hameed, a resident individual, was doing a job
Capital gains Rs. 500,000/- in a well reputed company in Pakistan with a taxable
Income from other sources Rs.160,000/- salary of Rs.80,000/- per month. He also started a
Tax deducted on supply Rs.52,000/- business in UK from where he earned income from
Tax collected on mobile Rs.3,000 his business Rs.800,000/-. Tax deducted on

14 | P a g e
 Computation of Taxable Income

registration of car was Rs.5,500/- and tax collected

along with cell phone was Rs.5,000/- in Pakistan.
Tax deducted on salary Rs.18,000/-

Hint for Question -7: Non-Resident foreign source income is exempt in Pakistan.
Question-7 (Non-Resident)
Mr. Michael, a non-resident of Pakistan, was doing a job in UCP as teacher with a taxable salary
of Rs.70,000/- per month. His taxable business income from Pakistan is Rs.500,000/- and Capital
Gains Rs.100,000/-. He has also started a business in UK from where he earned income from
business Rs.1,200,000/-. Tax deducted in Pakistan on registration of car was Rs.15,000/- and tax
collected along with cell phone was Rs.2,000/-. Tax deducted by UCP (employer) Rs.12,000/-

15 | P a g e
 Salary Income

I. House Rent Allowance, Conveyance Allowance, Cash Allowance etc:

House Rent allowance, conveyance allowance and cash allowance are totally taxable
under the head “Income from salary”.
II. Medical Allowance:
Medical Allowance is exempt up to 10% of basic salary.
III. Special Allowance:
Any allowance or benefit (other than in the nature of entertainment or conveyance
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 official trip.
Example # 1 (Allowances and Benefits)
Mr. Farooq’s salary is Rs.50,000/- per month. The company has provided him other benefits as
follows:
i. House Rent Allowances Rs. 10,000 PM
ii. Conveyance Allowances Rs. 10,000 PM
iii. Medical Allowances Rs. 6,000 PM
Required: Compute his taxable income the current tax year?

Ans: Mr. Farooq

Resident: Salaried
Tax Year: 20X0
Rs.
Computation of Taxable Income:
Income from Salary:
Basic Salary (50,000x12) 600,000
House rent allowance (10,000x12) 120,000
Conveyance allowance (10,000x12) 120,000
Medical Allowance (6,000x12) 72,000
Less: Exempt up to 10% of basic salary (10%x600,000) (60,000) 12,000

Taxable Salary Income 852,000

Perquisites:

Motor Vehicle: (asset given for use)

If a conveyance is provided by an employer, its value to be included in taxable income of the
employee shall be worked out as under:
Conveyance provided Amount to be included in taxable salary
Partly for personal and partly 5% of the cost (at inception) of vehicle to the employer or 5% of
for office use FMV of vehicle at the commencement of the lease.
[Note for students: FMV at the commencement of lease does
not include finance charge and therefore finance charge included
in the lease transaction is not taxable for the employee.]
For personal use only 10% of the cost of vehicle to the employer or 10% of FMV of
vehicle at the commencement of the lease.

16 | P a g e
 Salary Income

5% or 10% of the cost of vehicle to the employer or FMV at the inception of the lease in case of lease shall
be reduced proportionately where the vehicle is provided to the employee for a part of the year.
Any deduction from the salary of employee in this respect shall also be reduced from the taxable
amount of this perquisite.
5% or 10% shall be included where a vehicle has been purchased or taken on lease by the
employer. If an employee takes a vehicle on rent-a-car basis and rent is paid by the employer then
the rentals paid by the employer are fully taxable [or 50% of the rentals may be claimed as
exempt if the vehicle is also being used for office purpose]
Summary:
Mode of Acquisition Personal Use only Personal and Office Use only
Purchased by the employer 10% x Cost Value 5% x Cost Value
Finance Leased by the employer 10% x FMV Value 5% x FMV Value
Operating Lease (Rent a car) Rent of the car ½ Rent of the car

Accommodation: (accommodation given by the company for employee’s use)

The value of accommodation provided by an employer to the employee shall be higher of:
 45% of the basic salary or of the minimum of the time scale of the basic salary; or
 Amount that would have been paid by employer had no accommodation been provided

Minimum of Time Scale: It is the amount from where the salary scale of an employee starts e.g.
(5,000-2,000-25,000) means salary will start with Rs. 5,000 with annual increment of Rs. 2,000 per
annum up to maximum of Rs. 25,000.
The basic salary taxable for first year shall be Rs.5,000 x 12 = 60,000. In the second year Rs.7,000 x
12 = 84,000 and so on.

Assets Transferred
If any property is not transferred to an employee but it is given only for the use then specific rules are
there for vehicles and accommodation.
In the case of other assets given for use only, rental value or depreciation charged by the employer is the
taxable benefit for the employee e.g. TV or refrigerator is provided by the employer only for the use of
employee.

Medical Facility:

Type Tax Treatment

Medical Facility or reimbursement of medical Exempt (Provided that National Tax Number of
expense is provided as per terms of employment the Hospital or Clinic, as the case may be, is

17 | P a g e
 Salary Income

given and the employer also certifies and attests

the medical or hospital bills)
Medical Facility or reimbursement of medical Fully Taxable
expense not as per terms of employment
Medical Allowance + Medical Allowance is fully taxable. Facility or
Facility/reimbursement of medical expense in reimbursement will be exempt.
accordance with the terms of employment
Medical Allowance + Medical Allowance is exempt up to 10% of basic salary.
Facility/reimbursement of medical expense not in Facility or reimbursement will be fully taxable.
accordance with the terms of employment

Summary:
Medical Tax Treatment
Sr. Medical Facility
Allowance Medical Allowance Facility
1 Yes - Exempt up to 10% of Basic Salary N/A
2 - Under the Contract N/A Exempt
3 - Not under the contract N/A Taxable
4 Yes Under the Contract Totally taxable Exempt
5 Yes Not Under the Contract Exempt up to 10% of Basic Salary Taxable

Note: - If an employee is working in a hospital and getting medical facility not under the contract, it is
still totally exempt as marginal cost.

Example#2. (Accommodation and HRA)

Mr. Haris is an employee of ABC Company. He has provided you with the following details for
the tax year 2019. He joined on August 1, 2018. His basic salary is Rs. 40,000/month and
education allowance and entertainment allowance of Rs.5,000/month and Rs.6,000/month
respectively. Employer has offered him two options either to take home in factory premises or
take a monthly cash allowance of Rs.20,000. Mr. Haris has opted to take home in factory
premises. He is allowed to take the electricity, telephone and water facility in home on nominal
amount of Rs.1,000 per month charged by his employer against all of these facilities. However,
he paid gas bills himself.

The actual amount of bills during the tax year 2019:

Electricity Rs.20,000
Telephone Rs. 30,000
Gas Rs.10,000
Water Rs.6,000

Required: Calculate his taxable income?

Ans: Mr. Haris

Resident: Individual
Tax Year: 20X9
Rs.
Computation of Taxable Income:
Income from Salary:

18 | P a g e
 Salary Income

Basic salary (40,000x11) 440,000

Education allowance (5,000x11) 55,000
Entertainment allowance (6,000x11) 66,000
Accommodation (higher of)
-Actual rent (20,000x11) 220,000
-or (45%x440,000) 198,000 220,000
Utility bills (20,000+30,000+6,000) 56,000
Less: Payment by employee (1,000x11) (11,000) 45,000
Taxable Salary 826,000

Example#3. (Accommodation and HRA)

Mr. Haris is an employee of ABC company. He has provided you with the following details for
the tax year 20X9. He joined on August 1, 20X8. His basic salary is Rs. 40,000/month and
education allowance and entertainment allowance of Rs.5,000/month and Rs.6,000/month
respectively. Employer has offered him two options either to take home in factory premises or
take a monthly cash allowance of Rs.20,000. Mr. Haris has opted for monthly remuneration. He
is allowed to take the electricity, telephone and water facility in home on nominal amount of
Rs.1,000 per month charged by his employer against all of these facilities. However, he paid gas
bills himself. The actual amount of bills during the tax year 20X9:

Electricity Rs.20,000
Telephone Rs. 30,000
Gas Rs.10,000
Water Rs.6,000
Required: Calculate his taxable income?

Ans: Mr. Haris

Resident: Salaried
Tax Year: 20X9
Rs.
Computation of Taxable Income:
Income from Salary:
Basic salary (40,000x11) 440,000
Education allowance (5,000x11) 55,000
Entertainment allowance (6,000x11) 66,000
House rent allowance (20,000x11) 220,000
Utility bills (20,000+30,000+6,000) 56,000
Less: Payment by employee (1000x11) (11,000) 45,000
Taxable Salary 826,000

Example#4. (Asset transferred to employees)

Ms. FH was working as a marketing Head with Consumer Products Ltd (CPL) at following
emoluments:

Basic salary Rs.100,000 per month

19 | P a g e
 Salary Income

House rent allowance Rs.40,000 per month

Utilities allowance Rs.15,000 per month

In addition to the above cash emoluments, she was provided with a Honda Civic car, exclusively
for official use. The cost of car to the Company was Rs.1,000,000. As per company’s policy, the
car was sold to Ms. FH during the year at the WDV (written down value) of Rs. 100,000 whereas
the FMV of the same at the time of sale was Rs.300,000.

Required: Compute her taxable income and tax liability for the tax year 20X9

Ans: Ms. FH
Resident: Individual
Tax Year: 20X9
Rs.
Computation of Taxable Income:
Income from Salary:
Basic salary (100,000x12) 1,200,000
House rent allowance (40,000x12) 480,000
Utilities allowance (15,000x12) 180,000
Car transfer (300,000-100,000) 200,000
Taxable Salary 2,060,000
Computation of Tax Liability:
Tax on 2,060,000
Tax on (1,800,000) 90,000
Tax on 260,000 @ 15% 39,000
Tax Liability 129,000

Income from Salary

Compute the taxable income and tax liability from the following situations:
Question.1 Question.2
Basic salary 50,000/month Basic salary Rs. 40,000 /month
Capital gain Rs.200,000 Business income Rs.500,000
Question.3 Question.4
Mr. Hamid joined XYZ Ltd. on 1st March 2020. Basic salary 70,000 per month
Basic salary Rs 75,000 per month House rent allowance 30,000 per month
Income from Property 500,000
Question.5 Question.6
Basic salary 3,600,000 Basic salary of an employee is Rs.100,000 per
Medical allowance 540,000 month. Employer has provided him a house.
House rent allowance 20,000 per month
Conveyance allowance /month RS.15,000/-
Question.7 Question. 8
Mr. A provided you the following data: Basic salary Rs.2,500,000
Basic salary 90,000 per month House rent allowance Rs.20,000 per month
House rent allowance 60,000 per month Medical allowance Rs.250,000
Car provided costing Rs.2 million for personal use

20 | P a g e
 Salary Income

Question.9
Mr. Ali is an employee of Pink Panther Ltd. (PPL). He has provided you with the following details for tax
year 2020.He joined this company on September 1st 2019. His basic salary is Rs.40,000 per month and
Medical allowance 6,000 per month. His employer has offered him two options either to take home in
factory premises or to take a monthly cash allowance of Rs.20,000. Mr Ali has opted to take house in the
factory.

Question.10
Mrs Firdous Ashiq Awan is a director of Multi Tech Ltd. The company has provided her a car as a part of
her salary package. The FMV of the car is Rs.1,200,000 at the inception of lease. Gross lease rentals
payable by the employer amount to Rs.22,000 per month for 5 years.
Compute the amount to be added in her salary income of Mrs Firdous Ashiq Awan.
A) The car has been provided for both official & personal use.
B) The car has been provided for personal use only.

Question.11
Mr. Jumma khan is a director of ABC Ltd. The company has provided him a car as a part of his salary
package. The cost of the car purchased by the company is Rs.1,000,000. Compute the amount to be added
in the salary income if the car has been provided for the personal use only.

Question.12
Mr. Jumma khan is a director of ABC Ltd. His basis salary is Rs. 200,000/month. A car was purchased
by the company at Rs.1,000,000, having book value Rs.700,000/- and Fair Market Value Rs. 900,000/-.
This car was sold to him at Rs.500,000/-

21 | P a g e
 Salary Income

Deduction of Tax from Salary

UCP Limited
Salary Sheet-Business School
For the month of March,2020
1 2 3 4 5 6 7 8 9 10 11
Basic Monthly Taxable Per Month Salary
Designation HRA CA MA Annual Tax
Name Salary Pay Amount Tax Payable
A Dean 300,000 50,000 40,000 20,000 410,000 2,300,000 165,000 13,750 396,250
B Professor 252,000 40,000 35,000 20,000 347,000 3,924,000 454,800 37,900 309,100
C Professor 240,000 35,000 30,000 20,000 325,000 3,660,000 402,000 33,500 291,500
D Administrator 184,000 25,000 25,000 15,000 249,000 2,808,000 248,900 20,742 228,258
E Security Chief 70,000 20,000 - 7,000 97,000 1,080,000 24,000 2,000 95,000
1,428,000 107,892 1,320,108

22 | P a g e
 Income from Property

a) Basis of Taxation
b) Taxable Income
a. Income
b. Expenditures
c) Exception
d) Taxation

Taxable Income
Income Tax Treatment Rupees
Signing amount Totally Taxable xxx

Un-Adjustable amount 1/10 taxable in the year of receipt and no in the xxx
year of refunded.
Rent from immovable Totally Taxable (time) xxx
property
Forfeited deposit Totally Taxable xxx
Chargeable Rent to Tax (RCT) Xxx

Less: Deductions (for companies only)

Repair to a Building 1/5th of RCT (for buildings only). Don’t xxx

consider actual expenditures
Collection Charges Lower of - 6% of RCT OR xxx
- Actual expenditures
Insurance Premium To insure the building against the risk of xxx
damage or destruction.

Local rate or taxes xxx

Ground Rent
Interest, Profit, Mortgage Against loan for property
or Share
Legal Fee For legal services acquired to defend the
person’s title to the property or any suit
connected with the property in a court.
Un-Paid Rent If Suitable steps have been taken against the
tenant.

Note:
o From the current un-adjustable amount deduct, if any amount, already taxed under
this head. In case of negative amount nothing will be added in income from
property.
o Mode of payment is irrelevant. Any benefit given by tenant to his employer is
rent.
o Expenditures are allowed on accrual basis (credit) but it must be paid within a
period of 3 years.

23 | P a g e
 Income from Property

Exceptions
Following income (connected with immoveable property) shall be taxed under other heads of
income.
Income from Other Sources
i. Rent in respect of the lease of a building together with plant and machinery
ii. Provision of amenities, utilities or other services connected with the renting
of the building
iii. Sub-letting of property.
iv. Any amount received by a person as consideration for vacating the possession of a
building or part thereof, reduced by any amount paid by the person to acquire possession
of such building or part thereof. 1/10 is taxable.

Capital Gains
v. Sale of Immovable Property

Tax Rates for Income from Property

S. # Gross amount of rent Rate of tax

1 Up to Rs.200,000 Nil
2 Rs.200,001 – Rs.600,000 5% of the gross amount exceeding Rs.200,000
3 Rs.600,001 – Rs.1,000,000 Rs.20,000 + 10% of the gross amount exceeding Rs.600,000
4 Rs.1,000,001 – Rs.2,000,000 Rs.60,000 + 15% of the gross amount exceeding Rs.1 million
5 Rs.2,000,001 – Rs.4,000,000 Rs.210,000 + 20% of the gross amount exceeding Rs.2 million
6 Rs.4,000,001 – Rs.6,000,000 Rs.610,000 + 25% of the gross amount exceeding Rs.4,000,000
7 Rs.6,000,001 – Rs.8,000,000 Rs.1,110,000 + 30% of the gross amount exceeding Rs.6,000,000
8 Exceeding Rs.8,000,000 Rs.1,710,000 + 35% of the gross amount exceeding Rs.8,000,000

Q-1:
Ms. FH was working as a marketing Head with Consumer Products Ltd (CPL) at following
emoluments:
Basic salary Rs.100,000 per month
House rent allowance Rs.40,000 per month
Utilities allowance Rs.15,000 per month
In addition to the above cash emoluments, she was provided with a Honda Civic car, exclusively
for personal use. The cost of car to the Company was Rs.1,000,000.

She has rented out his house to ABC Limited at a monthly rent of Rs.50,000 pm and receive
advance not adjustable Rs.600,000/-.
Required: Please compute tax payable.

Q-2:
Mr. Farooq’s salary is Rs.50,000/- per month. The company has provided him other benefits as
follows:
i. House Rent Allowances Rs. 10,000 PM
ii. Conveyance Allowances Rs. 10,000 PM
iii. Medical Allowances Rs. 6,000 PM

24 | P a g e
 Income from Property
He has rented out his house to XYZ Limited at a monthly rent of Rs.60,000 pm and receive
advance not adjustable Rs.700,000/-.
His taxable Business Income is Rs. 1,200,000/- Required: Please compute tax payable.

Q-3:
Mr. Haris is an employee of ABC company. He has provided you with the following details for
the tax year 20X9. He joined on August 1, 20X8. His basic salary is Rs. 40,000/month and
education allowance and entertainment allowance of Rs.5,000/month and Rs.6,000/month
respectively. Employer has offered him two options either to take home in factory premises or
take a monthly cash allowance of Rs.20,000. Mr. Haris has opted for monthly remuneration.
He has rented out his house to PQR Limited at a monthly rent of Rs.60,000 pm on January 2020
and receive advance not adjustable Rs.700,000/-.
His taxable Business Income is Rs. 1,200,000/-

Zakat Deducted by Banks Rs.5,000/-, Tax deducted from Salary Rs.8,000/-, tax collected on cell
phone Rs.3,000/-. Required: Please compute tax payable.

Concept of Co-ownership
Q-4:
Mr. Father has rented out his house to PQR Limited at a monthly rent of Rs.60,000 pm on
January 2020 and receive advance not adjustable Rs.700,000/-. Required: Please compute tax
payable.

Q-5:
Ali, Umair and Hassan are three sons of Mr. Father and they have rented out their house to PQR
Limited at a monthly rent of Rs.60,000 pm on January 2020 and receive advance not adjustable
Rs.700,000/-. Required: Compute tax liability of three sons by assuming that they are equal
shareholders.

Concept of WHT (Duty of Tenant to withheld tax)

Withhodling Agent
Company Always
Individual Shall deduct tax when gross rent including advnce exceeds Rs.1,500,000/-

Situation Tenant Owner Annual Rent WHA Amount of Tax Payment

1 Individual Individual 400,000 N - 400,000
2 Individual Individual 1,000,000 N - 1,000,000
3 Individual Individual 2,000,000 Y 210,000 1,790,000
4 Individual Company 400,000 N - 400,000
5 Individual Company 1,000,000 N - 1,000,000
6 Individual Company 2,000,000 Y 300,000 1,700,000
7 Company Individual 120,000 Y - 120,000
8 Company Individual 900,000 Y 50,000 850,000
9 Company Individual 2,000,000 Y 210,000 1,790,000
10 Company Company 100,000 Y 15,000 85,000
11 Company Company 900,000 Y 135,000 765,000
12 Company Company 2,000,000 Y 300,000 1,700,000

25 | P a g e
 Capital Gain

Contents
a) Definition
b) Gain
c) Disposal
d) Capital Assets
e) Taxation and Classification
f) Exceptions
Definition
The definition of capital gain is immense important.
Capital gain means, the gain arising from the disposal of capital assets.
The three important terms are important to understand:
1. Gain
2. Disposal
3. Capital Asset
Gain
Gain arising on the disposal of a capital asset and shall be computed as following formula,
A – B= C
Where —
 A is the consideration received by the person on disposal of the asset (sale price or Fair
Market value whichever is high).
 B is the cost of the asset, and
 C is the capital gain.
Cost
The cost of an asset purchased by a person shall be the sum of the following amounts,
namely: —
a) The total consideration given by the person for the asset
b) Fair market value of any consideration in kind determined at the time the asset is acquired
c) Any incidental expenditure incurred by the person in acquiring
d) Disposal cost of the asset; and
e) Any expenditure incurred by the person to alter or improve the asset.

Disposal

i. Sold
ii. Exchanged,
iii. Transferred
iv. Distributed
v. Cancelled
vi. Redeemed
vii. Relinquished
viii. Destroyed
ix. Lost
x. Expired
xi. Surrendered.
xii. Gift
xiii. Inherited
xiv. Liquidation

26 | P a g e
 Capital Gain
xv. To spouse to live a part.
xvi. 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.
xvii. 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.
xviii. Disposal of a part of an asset.
Capital Assets:

Capital assets means property of any kind held by a person, whether or not connected with a
business, but does not include –

 Stock-in-trade (except shares).

 Consumable stores or raw materials held for the purpose of business
 Depreciable assets
 Intangible assets
 Any movable property (excluding capital assets specified in section 38) held for personal
use by the person or any member of the person ‘s family dependent on the person.

Examples of capital Assets:

 Shares, Shares in AOP.

 Jewelry, Coins, Postage Stamps.
 Paintings, Antiques, Medallions.
 PTCL Vouchers, Modaraba Certificates, Derivatives, Membership in Stock
Exchange.
 Immovable property.
For one person as asset may be a capital asset and for other it may be business assets like jewelry
sold by a teacher is capital asset and gain shall be taxed under the head capital gain whereas, sold
by jewelers are stock in trade and gain shall be taxed under the head income from business.

27 | P a g e
 Capital Gain

Taxation of Capital Gains

HINT: The capital gain on the above assets is 25% exempt if the holding period is more than ONE year

S. No. Tax on Gain on land or Building Tax Rate

1. Gain is up to 5 Million 5%
2. Gain is up to 10 Million 10%
3 Gain is up to 15 Million 15%
4 More than 15 million 20%

Securities Taxation as a Securities Acquired Before Securities acquired between Securities acquired after
separate block 1-7-2013
1-7-2013 & 30-07-2016 01-07-2016

12 months or more but less 24 months or more

than 24 months

Tax Rates 0% 12.5% 7.5% 15%

28 | P a g e
 Capital Gain

Purchase/Acquisition Sale
Case Assets Price Price FMV/Break- Capital Gain/Loss
Mode Date FMV Mode Date
(Rs) (Rs) up value
Purchased Sold in
Listed company
A from 10.12.2017 360,000 350,000 Stock 31.07.2018 200,000 210,000 (140,000) Loss
shares Market Exchange
Unlisted Sold to a (900,000-500,000)=
B Inherited 15.07.2017 500,000 NIL friend
30.11.2018 900,000 850,000
company shares 400,000x75% = 300,000
Gifted to
his non- (1,400,000-750,000)=
C Jewelry Inherited 15.05.2017 750,000 NIL resident
20.12.2018 NIL 1,400,000
650,000x75% = 487,500
son
(300,000-400,000)=
D Sculpture Market 01.07.2013 N/A 400,000 Market 31.01.2019 300,000 (100,000) loss (No Tax
Treatment )
Under
Private Employee (2,200,000-1,600,000)=
E share
01.01.2018 1,600,000 1,300,000 Market 15.02.2019 2,000,000 2,200,000
company shares 600,000x75% = 450,000
scheme
5m-1.5m=3.5mx75%
F Sale of Plot Inherited 01.07.2013 1,500,000 NIL Market 15.03.2019 2,000,000 5,000,000
Gain = 2,625,000
To 3m-2.3m=700kx75%
Spouse to
G Sale of house Market 01.07.2016 2,100,000 2,300,000 Live
30.09.2018 NIL 3,000,000
Gain = 525,000
apart
Purchased
from
H Sale of Building father
01.07.2018 3,000,000 5,000,000 Market 31.12.2018 4,000,000 6,000,000 6m-3m = 3m (100% taxable)
(associate)
Pakistan
Modaraba Gift from
I Mother
01.06.2013 400,000 NIL Stock 31.07.2018 310,000 300,000 Exempt
certificates Exchange
Pakistan 1,800,000 - (1,500,000+
Derivative Gift from
J Mother
01.09.2014 1,500,000 NIL Stock 15.08.2018 1,800,000 1,700,000 0.5%x(1,800,000+1,500,000))=
products Exchange 283,500x7.5% = 21,263
Purchased Sold
Vouchers of
K from 01.10.2017 1,200,000 950,000 through 01.04.2019 800,000 750,000 (158,750) Loss
PTCL PTCL NCCPL

29 | P a g e
 Capital Gain

A rare
L Market 01.12.2018 200,000 350,000 Market 15.03.2019 400,000 412,000 (412,000-350,000)= 62,000
manuscript
Sold to a
Future Gifted
non- (450,000-250,000)=
N commodity from 01.11.2017 250,000 NIL resident
31.05.2019 450,000 420,000
Brother 200,000x5%= 10,000
contract friend
Purchased Gifted to
Exempt (Non-Recognition
O A Medallion from 01.08.2017 400,000 350,000 resident 30.06.2019 500,000 700,000
market daughter Rule)
Sold in
Gifted
Membership of Pakistan (7,000,000-4,000,000)=
P from 01.02.2016 4,000,000 NIL Stock
28.02.2019 7,000,000 6,000,000
a club father 3,000,000x75% = 2,250,000
Exchange
Q Personal car Market 01.11.2018 1,250,000 1,200,000 Market 31.03.2019 1,100,000 1,000,000 Capital Receipt (Exempt)
Gifted to (1,000,000-700,000)= 300,000
Mining rights of Paharh wife to
R Khan
01.04.2015 N/A 700,000 live a
31.07.2018 1,000,000 N/A
coal Exempt
part
Gifted
S Personal PC from 01.07.2014 N/A 80,000 Market 31.12.2018 110,000 N/A Capital Receipt (Exempt)
father
Sale of another (5,000,000-1,300,000)=
T Market 01.07.2017 1,500,000 1,300,000 Market 31.01.2019 1,700,000 5,000,000
plot 3,700,000x7.5% = 277,500
Investment
To a (900,000-800,000)=
U Shares in AOP was made 01.05.2016 N/A 800,000 friend 31.05.2019 900,000 N/A
in an AOP 100,000x75% = 75,000

30 | P a g e
 Class Practice Question

Salary, Income from Property and Capital Gains

Following information has been provided to you by Mr. Bajwa Khan for the tax year 20X9:

Detail of emoluments from Packages Limited (employer):

Basic Salary 60,000 Per month
Medical Allowance 5,000 Per month
Cost of car for personal use 700,000 FMV on 1 October, 20X8 500,000
Free accommodation is provided
Joining date: 1 October, 20X8

He has rented out a building to Mr. Imran Khan on 1 October, 20X8 at a monthly rent of Rs.75,000/- and
received Rs.500,000/- as un-adjustable amount. Previously, this building was rented out to Mr. Nawaz Khan
who was paying rent Rs.50,000/- per month. Mr. Nawaz Khan vacated that building on 31 July, 20X8 and
received back Rs. 300,000/- advance which he had paid in June 20X3. He incurred Rs.20,000 to repair the
building. The ALV of this building is Rs. 1,200,000/-. 30% of this building is being used by Mr. Bajwa Khan
for his furniture business. He has paid Rs.100,000/- interest to HBL against the loan taken for the construction
of this building.

During the year he disposed of the following assets:

Purchase Date of
Assets Sale Price
Price Purchase
Rupees Rupees
Private Co. Shares 50,000 30,000 August 20X1
Share in an AOP 700,000 400,000 September 20X4
Shares of Public Co. 100,000 120,000 June, 20X3
Coins 30,000 50,000 Jan, 20X4
Jewelry 250,000 150,000 July 20X7
Sale of plot 5,000,000 2,000,000 Oct, 20X6
Sale of House 15,000,000 1,000,000 Jan, 20X0
Packages Ltd (Listed Co.) Shares 125,000 75,000 July, 20X7

He is also running a part time business of furniture. His business sale during the year is Rs.3,500,000/-, cost
of sale Rs.1,500,000/- and administrative expense Rs.520,000/-. Administrative expenses included zakat
deducted by bank Rs.20,000/- and donation Rs.25,000/- paid to an institution listed under clause 61 of second
schedule of Income Tax Ordinance, 2001.

Detail of WHT
Cell phone 8,400
Telephone 6,000
Salary 2,000

Required:
From the above information, please compute his tax payable or refundable. (Assume X mean 1: 20X7 =
2017).

31 | P a g e
 Income from business

18. Income from business.

1. The following incomes of a person for a tax year, other than income exempt from tax under this
Ordinance, shall be chargeable to tax under the head “Income from Business”–
a. the profits and gains of any business carried on by a person at any time in the year;
b. any income derived by any trade, professional or similar association from the sale of goods
or provision of services to its members;
c. any income from the hire or lease of tangible movable property;
d. the fair market value of any benefit or perquisite, whether convertible into money or not,
derived by a person in the course of, or by virtue of, a past, present, or prospective business
relationship
Example:
Mr. Engineer contracted with DHA to build phase- 120 in Lahore. DHA decided to give them
Rs.100 million and 1 canal plot in the same phase. The fair market value of the plot was
Rs.10 million. The total business income is Rs.110 million (100+10).

Explanation (ITO).-
For the purposes of this clause, it is declared that the word ‘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, Circular No.29 of 2002 or in any other scheme issued by the State Bank of
Pakistan.

e. any management fee derived by a management company (including a modaraba management

company)
2. 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”.
Example:
Mr. Sood deposited Rs.1 million in HBL bank. HBL issued loan to Mr. Majboor Rs.1 million.
HBL charged interest from Mr. Majboor Rs.200,000/- and paid interest to Mr. Sood Rs.
100,000/-. The taxable income of HBL under the head BUSINESS shall be Rs. 200,000/- and
taxable income of Mr. Sood shall be Rs. 100,000/- under the head INCOME FROM OTHER
SOURCES. Mr. Sood is running a business of cloth in Azam cloth market

3. 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 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”.
Examples:
1- ABL bank (scheduled bank) owned a building in Lahore and let out the same building to Noor
Enterprises at ALV of Rs. 500/- and also leased 5 cars at annual rent of Rs.200/-. ABL also taken a
building on rent in Karachi for his office purposes. The upper portion of that building is given on
rent to Mr. Bhai Jaan at an annual rent of Rs.50/-. Total income (Rs. 750/-) received from Lahore

32 | P a g e
 Income from business

building (owned), Karachi building (being a tenant) and lease of car shall be taxed under the head
BUSINESS income.
2- Mr. Ameer is running a business of rent-a-car and also owned a building in Lahore. He let out the
same building to Noor Enterprises at ALV of Rs. 500/- and also leased 5 cars at annual rent of
Rs.200/-. Mr. Ameer also taken a building on rent in Karachi for his office purposes. The upper
portion of that building is given on rent to Mr. Bhai Jaan at an annual rent of Rs.50/-. The detail of
taxable income shall be as follows
Income from Property Rs. 500
Income from Business Rs.200
Income from Other Sources Rs.50
Total Taxable Income Rs.750

4. 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”
19. Speculation business.
1. Where a person carries on a speculation business –
a. that business shall be treated as distinct and separate from any other business carried
on by the person;
b. this Part shall apply separately to the speculation business and the other business of
the person;
c. Common expenditures shall be made as if the profits and gains arising from a
speculation business were a separate head of income;
d. any profits and gains arising from the speculation business for a tax year computed
shall be included in the person’s income chargeable to tax under the head “Income
from Business” for that year; and
e. any loss of the person arising from the speculation business sustained for a tax year
shall be treated separately under section 58. (not under section 57 i.e. Carry forward of
business losses)
Definition:
2. In this section, “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 –
a. 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;
b. 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

33 | P a g e
 Income from business

c. 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.
Example:
In August 2015, 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 2015. ME also agreed to repurchase the entire lot at the price prevailing on
the date of sale. In October 2015 price of maize increased to Rs. 18,240 per metric ton and
LT sold the entire lot to ME without taking delivery. (CA-Inter, Spring 2016)

Ans: The gain Rs.1,220,000 [500 x (18,240 – 15,800)] is taxable under the head speculative
income.

Section 20: Deductions in computing income chargeable under the head

(1) A deduction shall be allowed for any expenditure incurred by the person in the year wholly and
exclusively for the purposes of business.

Example:
Salary, wages, repair, stationery etc.

(1A) Animals which have been used for the purposes of the business or profession otherwise than as
stock-in-trade and have died or become permanently useless for such purposes, the difference
between the actual cost to the taxpayer of the animals and the amount, if any, realized in respect of
the carcasses or animals.

Example:
 Habib Dairy Ltd purchased three cows for dairy business at Rs.100,000/- each in tax year 20X1.
Vaccination cost of each cow was Rs.2,000/-. One cow became permanently disabled and was sold at
Rs.20,000/- in tax year 20X3. Compute the deductions allowed under the business income
ANS: In tax year 20X1 total business expenditures will be Rs.6,000/- (2,000 x 3). Similarly,
no expenditures will be allowed in 20X2. In tax year 20X3 Rs.80,000 (100,000-20,000) will
be charged as business expense.
 Cost of sale included Rs. 400,000 in respect of the cost of two cows as they became permanently
useless for milking purposes. These cows were originally purchased for TL’s dairy farm in
Faisalabad for Rs. 200,000 each. TL sold these cows in the market for Rs. 80,000 each, for which no
entry has been made in the accounts. (ATX-June -16)
ANS: Cost, net of sale, is an allowable deduction, which means 400,000 – 160,000 (80kx2) =
240,000 should be deducted from account. Rather 240k the company has deducted Rs.400k. The
additional cost of Rs.160,000 should be added back in the profits of the company

(2) Where expenditures incurred in acquiring a depreciable asset or an intangible, with a useful life
of more than one year or is pre-commencement expenditure, the person must depreciate or amortize
the expenditures. (because capital expenditures are not allowed).

34 | P a g e
 Income from business

Examples:
 Office building purchased at Rs.50 million. This is not a business expenses rather depreciation shall
be charged.
 Administrative expenses included Rs.4.8 million, paid against purchase of industrial software having
a useful life of three years. This amount will be added back in the accounting profit and amortization
for the year will be deducted to reach at taxable income.
 Administrative expenses included an expenditure of Rs.2,000,000 on sales promotion. It has been
estimated that the benefit of such expenditure will extend to 3 years and, therefore, the same is being
amortized over a period of 3 years. However, for tax purposes, the whole of the expenditure has been
claimed.
ANS: add back Rs.2,000,000/- and deduct Rs.666,667 (2,000,000/3).
(3) Where any expenditure is incurred by an amalgamated company on legal and financial advisory
services and other administrative cost relating to planning and implementation of amalgamation, a
deduction shall be allowed for such expenditure.

Examples:
A Ltd. and B Ltd. merged to form a new company X Ltd. X Ltd. paid Rs.5 million for the
merger. 5 million is allowed as an expense to X Ltd. These expenditures are not allowed to A
Ltd and B Ltd.

Section 21: Deductions not allowed

Following expenditures are not allowed as an expense:

(a) any tax paid or payable by the person in Pakistan or a foreign country, levied on the profits or
gains of the business or assessed as a percentage or otherwise on the basis of such profits or
gains;
Examples:
Following tax payments are not allowed as business expense:
 Tax paid at the time of filing of tax return;
 Tax assessed by the commissioner of inland revenue;
 Sales tax claimable as input tax
 Tax payable on foreign source income.
 Withholding tax of Rs.600,000 i.e. 20% of purchase price, paid in August 20X5.
Following payments are allowed as business expense:
Custom duty paid at import stage
Short Sales tax liability paid of previous year
Vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars

(b) any amount of tax deducted under from an amount derived by the person;
Example:

35 | P a g e
 Income from business

Payment received against supply of goods Rs.95,500/- net of tax deducted @ 4.5%. The total
taxable income shall be Rs.100,000/- (95,500/95.5x100) because tax deducted shall not be
allowed as an expense.

(c) If payment is made for any expenditures (revenue and capital) without deduction of tax,
where a person was required to deduct or collect tax. If tax should not be deducted, and
payment is made without deduction of tax, then this is not a default and expense shall be
allowed. (unless the person has paid or deducted and paid the tax)
Example:
 Zahoor Ltd business expenses included rent of branch office Rs.360,000/- and manager salary
Rs. 350,000/-. Income tax has not been withheld from salaries and rent. Rent expenses are not
allowed as an expense because payment is made without deduction of tax whereas, salary is
allowed as tax expense because tax should not be deducted as it is below Rs.400,000/-.
 Hameed paid Rs. 50,000/- as consultancy to a non-resident without deduction of tax, this amount
is not allowed as an expense.
 Bashir paid Rs. 50,000/- as consultancy to Mr. Michael (a non-resident) without deduction of tax
because he has taken exemption certificate from tax department. This amount is allowed as an
expense because tax was not deductible.
If stock is purchased and payment is made without deduction of tax then 20% amount shall be
added back. (all other expenditures are fully disallowed)

Example:
Stock Enterprises, purchased stock (raw material and finished goods) of Rs.100,000/- and
made a payment of Rs.100,000/- against services. The payments were made through cheques
but tax was not deducted. Total expenditures disallowed will be:

Stock (100,000 x 20%) Rs.20,000/-

Services Rs.100,000/-

If a person does not deduct or collect tax while making payment against business expenditures
but he pays that tax from business or he pays tax by commissioner demand, then that expenditure
will be allowed as an expense but not the tax paid (tax born by the employer is an expense).

Example:
 Hameed paid Rs. 50,000/- as consultancy to a non-resident without deduction of tax (@10%) but he
deposited Rs.5,000/- as tax in government treasury. Total expense allowed is Rs.50,000/-. Tax deposited
Rs.5,000/- is not allowed as an expense.
 Mr. Raees paid salary of Rs. 500,000/- to his manager for the current year without deduction of tax of
Rs.2,000/- but he deposited Rs.2,000/- as tax in government treasury. Total expense allowed will be
Rs.502,000/-. Tax deposited Rs.2,000/- is allowed as an expense because according to section 13, tax
born by the employer shall be a part of salary.
Example (KP):

36 | P a g e
 Income from business

A Ltd transferred an asset to Mr. Z on account of sales promotion scheme taxable under the head income
from other sources and 20% tax is paid by A Ltd which is required to be collected from Mr. Z. In this case
20% tax payment would not be allowable tax expense for A Ltd. However, the following issues would emerge
for A Ltd:

- Transfer of asset would be treated as disposal of asset; and

- Tax gain or loss would be worked out at FMV at the time of transfer of asset minus cost and other
admissible deductions, if any, under the head business or capital gain, as the case may be.

When a person is not required to deduct tax?

Few more examples where tax is not required to be deducted are:
- where salary of an employee does not exceed the basic exemption
- where payment in aggregate during a financial year is less than:
 Rs.75,000 for purchase of goods – section 153(1)(a);
 Rs.30,000 on account of services – section 153(1)(b); and
 Rs.10,000 on account of execution of contracts - SRO 826 dated 24.8.1991.
- where payment to a non-resident is not chargeable to tax in Pakistan
- Individual and AOP (not included in specific category such as educational institutions) paying rent of less than
Rs.1.5 million in a year

(ca) - Commission expense shall be inadmissible which is in excess of 0.2% of gross amount of
supplies of items listed in 3rd Schedule of the Sales Tax Act where the recipient of commission is
not appearing in the active taxpayers’ list under the Income Tax Ordinance

Examples:
Administration expenditures includes commission expenditure of Rs. 66,000 paid to Mr. Hameed
against supply of retail goods (listed under 3rd Schedule of Sales Tax Act). The gross sales value
of these items were Rs.3,000,000/-. Mr. Hameed was not listed in active taxpayers’ list. Only
Rs.6,000/- (0.2% x 3,000,000) is allowed as commission and Rs.60,000/- shall be added back in
accounting profit to reach at taxable income.

If Mr. Hameed list in active taxpayers’ list then nothing shall be disallowed.
section 108B - Transactions under dealership arrangements
Where a person supplies products listed in 3rd Schedule of the Sales Tax Act or any other products as prescribed by
the FBR, under a dealership arrangement with the dealers who are not registered under the Sales Tax Act and are not
appearing in the active taxpayers’ list under the Income Tax Ordinance, an amount equal to 75% of the dealer’s
margin shall be added to the income of the person making such supplies. 10% of the sale price of the manufacturer
shall be treated as dealer’s margin.

Effectively, 7.5% of the sale value shall be included in the income of the supplier in the above case.

Examples:
Vital Limited supplied tea having sale value of Rs. 1,000/kg to Razaq Sons (dealer), who is not
registered under Sales Tax Act and also inactive in income tax. Razaq is entitled 5% commission
on the sale value. During the year Rs75/- will be added in the income of Vital Limited. (1,000 x
10% = 100 x 75%). Although Razaq sons actual commission is 5% (Rs50/kg) but for tax

37 | P a g e
 Income from business

purposes 10% (Rs100/kg) will be deemed as margin and 75% of Rs.100/- i.e. Rs.75/kg will be
added in Vitals’ income.

If Razaq Sons list in income tax active taxpayers’ list or register in Sales Tax then nothing shall
be added.

(d) any entertainment expenditure in excess of such limits or in violation of such conditions as
may be prescribed;
Examples:
 Administration expenditures includes entertainment expenditure of Rs. 128,000 incurred on arrival of
foreign customers for business purposes are allowed as an expense
 Administration expenditures includes entertainment expenditure of Rs. 130,000 incurred by the
director for his family are not allowed as an expense.

(e) Any contribution made by the person to a fund that is not a recognized provident fund
approved pension fund, approved superannuation fund or approved gratuity fund.
Examples:
 Salary expenses included, contribution to an un-approved provident fund of Rs.500,000/- . this is not
allowed as an expense.
 Salary expenses included, contribution to an approved provident fund of Rs.500,000/- . this is allowed
as an expense.
(f) Any contribution made by the person to any provident or other fund established for the
benefit of employees of the person, unless the person has made effective arrangements to
secure that tax is deducted under section 149 from any payments made by the fund in respect
of which the recipient is chargeable to tax under the head "Salary";
Example:
Salary expenses included, contribution to an un-approved provident fund of Rs.500,000/-
however, the organization has made effective arrangements to secure that tax shall be deducted
under section 149. this is allowed as an expense.

(g) any fine or penalty paid or payable by the person for the violation of any law, rule or
regulation. However, business penalties are allowed.
Examples:
 Cost of sales included Rs. 45,000 paid as fine for violation of contract with a customer for delay in
supply of goods. This deduction is allowed.
 Operating expenses included penalty of Rs. 25,000 imposed by the Commissioner Inland Revenue for
late filing of annual return of income for the tax year 20X7. This expense is not allowed.

(h) Any personal expenditures incurred by the person;

Example:
Administration expenditures includes entertainment expenditure of Rs. 130,000 incurred by
the director for personal hoteling purposes are not allowed as an expense

38 | P a g e
 Income from business

(i) any amount carried to a reserve fund or capitalized in any way;

Example:
Sinking fund reserve created to redeem a loan is not allowed.

(j) any profit on debt, brokerage, commission, salary or other remuneration paid by an
association of persons to a member of the association;
Example:
Salary and wages include, salary paid by AOP to Mr. Rasheed and Mr. Hameed Rs.50,000/-
and Rs.35,000/- per month. AOP has also paid Rs.25,000/- per month to Mr. Atta (son of Mr.
Rasheed) who is working as marketing manager for the firm.

Answer: Payment to Mr. Atta is allowed whereas, salary to Mr. Rasheed and Mr. Hameed is
disallowed

(l) any expenditure for a transaction, paid or payable under a single account head which, in
aggregate, exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a bank or
by crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer
of amount from the business bank account of the taxpayer:

Provided that online transfer of payment from the business account of the payer to the business
account of payee as well as payments through credit card shall be treated as transactions through the
banking channel, subject to the condition that such transactions are verifiable from the bank
statements of the respective payer and the payee:

Provided further that this clause shall not apply in the case of:
(a) expenditures not exceeding ten thousand rupees;
(b) expenditures on account of
(i) utility bills;
(ii) freight charges;
(iii) travel fare;
(iv) postage; and
(v) payment of taxes, duties, fee, fines or any other statutory obligation;
Example:
Sr. Transaction Decision

1 Total office expenditures during the year were Rs.150,000/-. All 20,000 is Disallowed
payments were made through cross cheques except Rs.20,000/- and
Rs.9,000/- in cash.
2 Total office expenditures during the year were Rs.49,000/-. All Nothing is disallowed
payments were made through cross cheques except Rs.20,000/- and
Rs.9,000/- in cash.
3 Total Freight charges during the year were Rs.150,000/-. The whole Nothing is disallowed
expenditures were incurred in cash.

39 | P a g e
 Income from business

4 Director of the company paid printing charges Rs.150,000/- through Disallowed

his personal bank account.

(m) any salary paid or payable exceeding fifteen thousand rupees per month other than by a crossed
cheque or direct transfer of funds to the employee ‘s bank account;

(n) except as provided in Division III of this Part, any expenditure paid or payable of a capital
nature; and

Example:
Administrative expenditures included Rs.500,000/- software purchased for the company.
Answer: Disallowed, rather amortization is allowed under this Ordinance

(o) any expenditure in respect of sales promotion, advertisement and publicity in excess of 10% of
turnover incurred by pharmaceutical manufacturers.

Sr. Transaction Decision

1 Remington Pharma (a manufacturer) turnover for the year was Rs.20 Only Rs.2 million is
million. Sales promotion expenditures incurred were Rs.5 million. allowed as exp.

2 Hashish Pharma (a trader) turnover for the year was Rs.20 million. Nothing is disallowed
Sales promotion expenditures incurred were Rs.5 million.

3 Resham Textile’s turnover for the year was Rs.20 million. Sales Nothing is disallowed
promotion expenditures incurred were Rs.5 million.

40 | P a g e
 Tax Credits

Less: Tax Credits

Full Time Teacher or a Researcher Allowance Separate Working F Catego
Foreign Tax Credit Separate for each head of income F
Less: Average Relieves: ry - A
Contribution to an Approved Pension Fund C
Allowances for Investment in Shares / SUKUKS / Insurance Premium Paid I Catego
Donations to Charitable Institutions D
Health insurance premium H ry - B
Tax Liability

Average Relieves = )
1
Catego
Less: Advance Tax (xxx)
Tax Payable xxx ry - C

Brief Summary
F F C I D H
Individuals All Persons Individuals Ind./ AOP All Persons Ind./ AOP
25 % Actual / Avg. 20% 20% 30% 5%
- 2,000,000 0 150,000

Explanations:
Type of Credit Conditions Necessary Calculation of Credit
Full Time Teacher He should a full time teacher or a researcher,
or Researcher  Employed in a non-profit education or research
Allowance institution.
(Clause 2 part III  Institution is duly recognized by Higher Education
Tax liability of salary x 25%
of 2nd Schedule) Commission (HEC),
(FTTA)  a Board of Education or
 a University recognized by the HEC, including
government training and research institution,

Foreign Tax Credit a) A person must be resident Lower of

u/s 103 (FTC) b) Foreign income is taxable in Pakistan Actual Tax Paid
c) There is no tax treaty between both countries. Or
d) Tax is paid within two years after the end of the The Pakistan tax payable in respect of
tax year in which the foreign income to which the income at average rate of tax:
the tax relates.
( see also losses chapter for more practice)

Average Relieves
Type Conditions Amount Lower of
An Individual holds NTN or Valid CNIC. 1- Actual amount
S 63
Driving income under the head salary or income from business
Contribution to an 2- 20% of taxable
(chargeable to tax).
Approved Pension
Contributes or pay premium in the year in approved pension fund income
Fund
under the Voluntary Pension System Rules, 2005.
S 62 A resident filer person other than a company 1- Actual investment
Allowances for  Acquiring new shares OR SUKUKS offered to the public by a

1
Taxable Income including share from AOP

41 | P a g e
 Tax Credits

Investment in listed Co. or shares acquired from the Privatization (2shares, sukuks or
Shares (Insurance Commission of Pakistan (original allottee).
insurance)
Premium Paid)  Shares (not Sukuks) are required to be held for 24 months
from the date of purchase. (reversal of tax credit) 2- 20% of taxable
(NOT FOR OR 3
income
COMPANY)  Any life insurance premium paid on a policy to a life insurance
company registered by the Securities and Exchange 3- Rs.2,000,000/-
Commission of Pakistan.
 Having salary or business income (chargeable to tax)
 Insurance policy is not surrendered within 2 years of its
acquisition (commissioner will re-compute taxable income of
previous years)

Paid by a crossed cheque or in kind to: 1- Actual amount

S 61
 Any board of education, educational institution or any 4
Donations to 2- 30% of taxable
university in Pakistan run by Govt.
Charitable
 any govt. hospital or relief fund income
Institutions
 Any non-profit organization.
A resident filer person other than a company; 1- Actual amount
S 62 A
Health insurance premium (contribution) paid;
Tax Credit for 2- 5% of taxable
To any insurance co. (registered under ins. Ordinance); &
Investment in
Deriving income from salary or income from business (chargeable income
Health Insurance
to tax).
(Other than a Co.) 3- Rs150,000/-
A person employing freshly qualified graduates from a university 1- Annual salary paid
S 64C or institution recognized by Higher Education Commission shall to the freshly
Tax Credit for be entitled to a tax credit in respect of the amount of annual salary qualified graduates
Persons paid to the freshly qualified graduates for a tax year in which such 2- 5% of taxable
Employing Fresh graduates are employed. income
Graduates Note:- number of freshly qualified graduates not exceeding fifteen
percent of the total employees of the company in the tax year

Deductible Allowances:
Donation u/c 61 of 2nd Schedule Paid Persons Max. 20% or 30% of taxable income
Profit on Debt - S 60 C Paid / payable Individuals Max. 50% of taxable income / 2 million
Education Expense – S 60 D Paid Individuals Max. 25% of taxable income etc.
Zakat Paid Persons No limit
(Formula to compute limit of taxable income = Total income x 30%/130%)

2
S 2(58) shares in relation to a company, includes a Modaraba certificate and the interest of a beneficiary in a trust
(including units in a trust)
3
Taxable income excluding share from AOP)
4
20% for Company

42 | P a g e
 Tax Credits

Illustration -1
Mr. Zeshan is working as full time teacher in a HEC recognized university with taxable salary of
Rs. 105,000/month. Mr. Hameed is working as a registrar in the same university with taxable
salary of Rs.100,000/month. Compute their taxable income and tax liability.
Mr. Zeshan Taxable Salary (Full time teacher)
Salary 105,000 12 1,260,000

Taxation 36,000
Less: Full time teacher allowance 25% (9,000)
Tax Liability 27,000
Mr. Hameed Taxable Salary (Registrar)
100,000 12 1,200,000
Tax Liability 30,000

Illustration - 2
Mr. Zeshan is working as full time teacher in a HEC recognized university with taxable salary of
Rs. 105,000/month. He has Taxable business income of Rs.400,000/-. Compute his taxable income
and tax liability.
Mr. Zeshan Taxable Salary (Full time teacher)
Taxable Salary 105,000 12 1,260,000
Business Income 400,000
Taxable Income 1,660,000

Taxation (salaried) 75.90% 76,000

Less: Full time teacher allowance 25% (9,000)
[30,000+10%x(1,260,000-1.2M)]x25%
67,000

Illustration - 3
Mr. Zeshan is working as full time teacher in a HEC recognized university with taxable salary of
Rs. 105,000/month. He has also earned taxable business income of Rs.1,000,000/-. Compute his
taxable income and tax liability.
Mr. Zeshan Taxable Salary (Full time teacher)
105,000 12 1,260,000
Business Income 1,000,000
Taxable Income 2,260,000

Taxation (Non-salaried) 56% 229,000

Less: Full time teacher allowance 25% (9,000)
[30,000+10%x(1,260,000-1.2M)]x25%
220,000

43 | P a g e
 Tax Credits

Illustration - 4
Mr. Zeshan is working as full time teacher in a HEC recognized university with taxable salary of
Rs. 105,000/month. He has also earned taxable business income of Rs.1,000,000/-. He is also
doing a job in another company at a monthly salary of Rs.30,000/-Compute his taxable income
and tax liability.
Mr. Zeshan Taxable Salary
UCP 105,000 12 1,260,000
Other 30,000 12 360,000
Business Income 1,000,000
Taxable Income 2,620,000

Taxation (Non-salaried) 62% 294,000

Less: Full time teacher allowance 25% (9,000)
[30,000+10%x(1,260,000-1.2M)]x25%
285,000
Illustration - 5
Mr. Zeshan is working as full time teacher in a HEC recognized university with taxable salary of
Rs. 105,000/month. He has earned taxable business income of Rs.1,000,000/-. He is also working
in Virtual University as a full time teacher at a monthly salary of Rs.30,000/-Compute his taxable
income and tax liability.
Mr. Zeshan Taxable Salary (Full time teacher)
UCP 105,000 12 1,260,000
Virtual Uni. 30,000 12 360,000
1,620,000
Business Income 1,000,000
Taxable Income 2,620,000

Taxation (Non-salaried) 62% 294,000

Less: Full time teacher allowance 25% (18,000)
[30,000+10%x(1,620,000-1.2M)]x25%
276,000

44 | P a g e
 Tax Credits

Illustration - 6
Mr. Zeshan is working as full time teacher in a HEC recognized university with taxable salary of
Rs. 50,000/month. He has earned taxable business income of Rs.1,000,000/-. He is also working in
Virtual University as a full time teacher at a monthly salary of Rs.30,000/-Compute his taxable
income and tax liability.
Mr. Zeshan Taxable Salary (Full time teacher)
UCP 50,000 12 600,000
Virtual Uni. 30,000 12 360,000
960,000
Business Income 1,000,000
Taxable Income 1,960,000

Taxation (Non-salaried) 49% 184,000

Less: Full time teacher allowance 25% (4,500)
[5%x(960,000-600,000)]x25%
179,500

Illustration - 7 Foreign Tax Credit

Mr. Zeshan, is a resident of Pakistan and he is working as full time teacher in UCP with taxable
salary of Rs. 200,000/month. He has earned taxable business income of Rs.1,000,000/- from UK
where he has paid tax Rs.30,000/-. Zakat deducted by the bank Rs.5,000/-. Compute his taxable
income and tax liability.

Mr. Zeshan Taxable Salary (Full time teacher) Rupees

UCP 200,000 12 2,400,000
Business Income - UK 1,000,000
Total Income 3,400,000
Less: Zakat (5,000)
Taxable Income 3,395,000

Taxation (Non-salaried) 71% 468,750

Less: Full time teacher allowance 25% (45,000)
[90,000+15%x(2,400,000-1,800,000)]x25%
423,750
Less: Foreign Tax Credit
Actual OR 30,000
Tax/Taxable Income x Foreign Source Income 124,816 (30,000)
393,750

45 | P a g e
 Tax Credits

Illustration -8
Mr. Michael, is a non-resident of Pakistan and he is working as full time researcher in UCP with
taxable salary of Rs. 200,000/month. He has earned taxable business income of Rs.1,000,000/-
from UK where he has paid tax Rs.30,000/-. Zakat deducted by the bank Rs.5,000/-. Compute his
taxable income and tax liability.

Mr. Michael Rupees

Salary from UCP 200,000 12 2,400,000
Business Income - UK 1,000,000 Exempt
Total Income 2,400,000
Less: Zakat (5,000)
Taxable Income 2,395,000

Taxation (salaried) 100% 179,250

Less: Full time teacher allowance 25% (45,000)
[90,000+15%x(2,400,000-1,800,000)]x25%
134,250

Illustration - 9
Mr. Preshaan, is a resident of Pakistan and he is working as full time teacher in UCP with taxabl
salary of Rs. 200,000/month. He has earned taxable business income of Rs.1,000,000/- from UK
where he has paid tax Rs.30,000/-. He has also taxable income from USA Rs.200,000/- where he
has paid tax Rs.50,000/-. Compute his taxable income and tax liability.

Mr. Preshaan Taxable Salary (Full time teacher) Rupees

Salary - UCP 200,000 12 2,400,000
Business Income - UK 1,000,000
Business Income - USA 200,000
Taxable Income 3,600,000
Taxation (Non-salaried) 67% 520,000
Less: Full time teacher allowance 25% (45,000)
[90,000+15%x(2,400,000-1,800,000)]x25%
475,000
Less: Foreign Tax Credit
UK
Actual OR 30,000
Tax/Taxable Income x Foreign Source Income 131,944 (30,000)
USA
Actual OR 50,000
Tax/Taxable Income x Foreign Source Income 26,389 (26,389)
418,611

46 | P a g e
 Tax Credits

Illustration - 10
Mr. Double Preshaan, is a resident of Pakistan and he is working Zahoor textile Ltd with a
taxable salary of Rs. 200,000/month. He has earned taxable business income of Rs.1,000,000/-
from UK where he has paid tax Rs.30,000/-. He has also taxable income from USA Rs.200,000/-
where he has paid tax Rs.50,000/-. Compute his taxable income and tax liability.

Mr. DP Taxable Salary Rupees

Salary - Zahoor Textile 200,000 12 2,400,000
Business Income - UK 1,000,000
Business Income - USA 200,000
Taxable Income 3,600,000

Taxation (Non-salaried) 67% 520,000

Less: Foreign Tax Credit
UK
Actual OR 30,000
Tax/Taxable Income x Foreign Source Income 144,444 (30,000)
USA
Actual OR 50,000
Tax/Taxable Income x Foreign Source Income 28,889 (28,889)
461,111

Contribution 10,000
Tax/Taxable Income x Contribution (1,280.86)
Donation
Tax/Taxable Income x Donation 30,000 (3,842.59)
Investment in Shares
Tax/Taxable Income x Investment in Share -
Investment in Life Insurance 100,000
Tax/Taxable Income x Inv. In life insurance (12,808.64)
443,179

47 | P a g e
 Tax Credits

Illustration - 10 a
Please compute the tax liability of Mr. Investment. Taxable Salary income is Rs.2.4 million and
business income is Rs.1.2 million. He invested in state life insurance policy Rs.100,000/-

Mr. Investment Taxable Salary Rupees

Salary Income 2,400,000
Business Income 1,200,000
Taxable Income 3,600,000

Taxation (Non-salaried) 67% 520,000

Investment in Life Insurance 100,000

Tax/Taxable Income x Inv. In life insurance 720,000 (14,444)
Tax liability 505,556

Illustration - 10 b
Please compute the tax liability of Mr. Investment. Taxable Salary income is Rs.2.4 million and
business income is Rs.1.2 million. He invested in state life insurance policy Rs.800,000/-

Mr. Investment Taxable Salary Rupees

Salary Income 2,400,000
Business Income 1,200,000
Taxable Income 3,600,000

Taxation (Non-salaried) 67% 520,000

Investment in Life Insurance 800,000

Tax/Taxable Income x Inv. In life insurance 720,000 (104,000)
Tax liability 416,000

48 | P a g e
 Tax Credits

Illustration - 10 c
Please compute the tax liability of Mr.Donation. Taxable Salary income is Rs.2.4 million and
business income is Rs.1.22 million. He donated Rs. 20,000/- to Shaukat Khanum hospital and
Rs.50,000 to Kashaf Foundation.

Mr. Donation Rupees

Salary Income 2,400,000
Business Income 1,220,000
Total Income 3,620,000
Less: Donation (Shaukat Khanum) (20,000)
Taxable Income 3,600,000

Taxation (Non-salaried) 67% 520,000

Donation 50,000
Tax/Taxable Income x Donation 1,080,000 (7,222)
Tax liability 512,778

Illustration - 10 d
Please compute the tax liability of Mr. Donation. Taxable Salary income is Rs.3 million and
business income is Rs.620,000. He donated Rs. 20,000/- to Shaukat Khanum hospital and
Rs.1,100,000 to Lahore Board of Education.

Mr. Donation Rupees

Salary Income 3,000,000
Business Income 620,000
Total Income 3,620,000
Less: Donation (Shaukat Khanum) (20,000)
Taxable Income 3,600,000

Taxation (salaried) 83% 390,000

Donation 1,100,000
Tax/Taxable Income x Donation 1,080,000 (117,000)
Tax liability 273,000

49 | P a g e
 Tax Credits

Illustration - 10 e
Please compute the tax liability of Mr. Share. Taxable Salary income is Rs.1.2 million and
business income is Rs.620,000. He donated Rs. 20,000/- to Shaukat Khanum hospital and
purchased Packages Ltd (listed company) shares from Packages as an original allottee for
Rs.500,000/-

Mr. Share Rupees

Salary Income 3,000,000
Business Income 620,000
Total Income 3,620,000
Less: Donation (Shaukat Khanum) (20,000)
Taxable Income 3,600,000

Taxation (salaried) 83% 390,000

Investment in shares 500,000

Tax/Taxable Income x investment in shares 720,000 (54,167)
Tax liability 335,833

Illustration - 10 F
Please compute the tax liability of Mr. IGI. Taxable Salary income is Rs.1.2 million and business
income is Rs.620,000. He donated Rs. 20,000/- to Shaukat Khanum hospital and contributed
Rs.600,000/- towards IGI insurance plan (IGI is an approved institution). The tax deducted for the
year is Rs.100,000/-

Mr. IGI Rupees

Salary Income 3,000,000
Business Income 620,000
Total Income 3,620,000
Less: Donation (Shaukat Khanum) (20,000)
Taxable Income 3,600,000

Taxation (salaried) 83% 390,000

Contribution to approved pension fund 600,000

Tax/Taxable Income x investment in pension fund 720,000 (65,000)
Tax liability 325,000

Less: Advance Tax (100,000)

Tax Payable 225,000

50 | P a g e
 Sales Tax

Sales Tax
Part – 1 Explanation & Understanding (not to be crammed)

The concept of Sales tax is closely related to profit and loss account as prepared in financial accounting. In
profit and loss account we deduct expenditures from revenue (sales) to arrive at profit or loss. Similarly in
sales tax we deduct input tax (sales tax on expenditures) from output tax (sales tax on revenue).

This can be best illustrated with the following example:-

Sales Rupees
Sale of goods 900,000
Less: Sales Returns (30,000)
Net Sales 870,000
Less: Expenditures
Purchases 220,000
Less: Purchases Returns (20,000)
Imports 150,000
Electricity Exp. 70,000
Suigas Exp. 30,000
Printing and Stationery Exp. 10,000
Salaries and Wages 120,000
Depreciation 25,000
605,000
Profit / ( Loss ) 265,000

We are familiar with sales & expenditures now look into the idea of output tax & input tax which is the
foundation of sales tax liability.

A. Sales v/s Output Tax

a) In accounting Sales include supply of

Goods and Services
Less: Returns

According to Sales Tax Laws “output tax” (Sales X Sales Tax Rate) is the tax on supply

Supply includes:
 Supply of Goods and Services
 Goods Taken by owners (drawings)
 Goods taken by employees
Less: Returns

Difference:

51 | P a g e
 Sales Tax

In accounting we just take the sales and supplies values which meet the accounting criteria and drawings &
goods given to employees are not considered sales. Whereas, in sales tax all goods which are carried out of
the stock of the business are subject to sales tax provisions, whether sold or taken by owner or employees.
In accounting we simply take the supply value of goods and services but in sales tax we take the tax amount
on the supply value. Like in accounting Rs.900,000/- is the value whereas in Sales Tax Rs. 153,000/- (
900,000 x 17% ) is output tax. (Current sales tax rate is 17%).
In the above example sale is Rs-900,000 and output tax is Rs 153,000.

B. Purchases (Expenditures) v/s Input Tax

In accounting we include all expenditures like:

 Purchases
 Imports
 Salaries and wages
 Printings and stationery
 Depreciation
 etc.

Input tax means tax paid or payable on expenditures e.g. tax paid on purchases is Rs.37,400/- (220,000 x
17%). Keep in mind we deduct all expenditures from sales but we don’t pay sales tax on all expenditures. It
means we consider only those expenditures on which we pay sales tax and ignore all others.
A list of expenditures is given below:

Expenditures Subject to
Sales Tax
Purchases Yes
Imports Yes
Electricity Expenditures Yes
Sui Gas Exp. Yes
Clearing Agent Fee Yes
Courier Charges Yes
Printing and Stationery Yes
Salaries and Wages No
Depreciation No
Interest No

Difference:
In accounting we deduct expenditures without any conditions but in SALES TAX LAWS we consider tax on
expenditures (Input Tax) IF THEY MEET THE CONDITIONS (see heart rule of input tax).

C. Sales Tax V/S Profit & Loss Account

Now we produce a comparison of profit and loss account and sales tax liability.

Output tax = O/P

Input tax = I/P

52 | P a g e
 Sales Tax

Above discussion shows that output tax is on sales and input tax is on expenditure like sales

As Profit = Sales – Expenditures

Similarly Sales tax liability = Output – Input

Now apply sales tax rate on the P/L to arrive at sales tax liability

Sales Rupees Sales Tax Rate Output Tax

Sales of goods 900,000 17% 153,000 O
Less: Sales Returns (30,000) 17% (5,100)
UT PUT
870,000 147,900
Less: Expenditures Tax
Purchases 220,000 17% 37,400
Less: Purchases Returns (20,000) 17% (3,400)
Imports 150,000 17% 25,500
Electricity Bills 70,000 17% 11,900
Suigas Bills 30,000 17% 5,100
Printing and Stationery 10,000 17% 1,700
Salaries and Wages 120,000 N/A N/A I
Depreciation 25,000 N/A N/A
605,000 78,200 N PUT
Taxable Income 265,000 Sales Tax Liability 69,700 Tax
Tax liability @ 29% 76,850

Sales Tax Liability = O/P – I/P

Other Important Issues

a) Sales Tax is General Sales Tax – GST

b) Sales Tax is Value Addition Tax - VAT
c) Sales Tax is In-Direct Tax

a) General Sales Tax

Income tax is not called as General Income Tax – GIT whereas, Sales Tax is called GST because there are
different rates of income tax are applicable on different persons BUT there is one rate i.e. 17% currently, is
applicable across the border (exceptionally on some products different rates are applicable).

b) Sales Tax as Value Addition Tax - VAT

Assume Mr. Y ( a registered person in sales tax) purchased goods worth Rs.100,000/- from Mr. X and paid
Rs.17,000/- (100,000 x 17%) as sales tax (total Rs. 117,000/- paid). Mr. Y further sold these goods to Mr. Z at
a price of Rs.120,000/- and received sales tax Rs. 40,400/- (120,000 x 17%) and total payment by Mr. Z is
Rs.140,400/-. Sales Tax Liability = O/P – I/P (20,400 – 17,000) = Rs.3,400/-, this amount (3,400) is arrived
at by multiplying 20,000 with 17%. Rs.20,000/- is the value added by Mr. Y in the above case.

53 | P a g e
 Sales Tax

c) Sales Tax as In-Direct Tax

Assume a complete supply chain from importer to consumer. Sale of one person is the purchase of
other person; output of one person is the input of other person. It is worth mentioning that the total
tax deposited in government treasury is Rs.3,400/-, this is the same amount which is paid by
consumer. So, the tax paid by importer is recovered from wholesales, tax paid by wholesaler is
recovered from retailor and tax paid by the retailor is recovered from consumer and the whole tax
burden is born by the consumer. This is reason why sale tax is called in-direct tax.

Supply chain (when goods are taxable and not mentioned under 3rd Schedule)

Persons Purchase Input Tax Sale Output FBR

@ 17% Tax NBP
Rupees
Importer (X) 10,000 1,700 12,000 2,040 1700 + 340
Wholesaler ( Y ) 12,000 2,040 15,000 2,550 510
Retailer (Z) 15,000 2,550 20,000 3,400 850
Consumer ( K ) 20,000 3,400
3,400

Supply chain (when goods are taxable and mentioned under 3rd Schedule)

Assume that goods are mentioned under third schedule and raw material is purchased by the
manufacturer to produce these goods. The whole tax is paid by the manufacturer.

Persons Purchase Input Tax Sale Output FBR

@ 17% Tax NBP
Rupees
Manufacturer (M) 10,000 1,700 12,000 3,400 1700 + 1,700
Wholesaler ( Y ) 12,000 3,400 15,000 3,400 0
Retailer (Z) 15,000 3,400 20,000 3,400 0
3,400

54 | P a g e
 Sales Tax

Heart RULES of Sales Tax

1. Tax Rates
i. General Sales Tax rate is 17% if goods are supplied to registered person, drawings and
goods taken by employees etc.
ii. 3% further tax is applicable (and payable as a bottom line) if goods are supplied to un-
registered (*exceptions are important for exam purposes).
iii. Commercial Importer will pay 20% tax i.e. 17% + 3% value addition tax. (special
procedure rules)
iv. Reduced rates of 5% (import of raw cotton), 8% (white crystalline sugar), 10 (flavoured
milk) % are applicable under 8th Schedule on some specific imports. (means input and
out shall be taken at these rates).
v. Reduced rates (0% or 6%) are also mentioned under SRO 1125 dated 31-12-2011 on five
sector i.e. textiles, carpets, sports, surgical and leather goods.
vi. Sales Tax can be applied on fixed bases i.e. on the plant capacity.
vii. Rs250 per SIM card and Rs.500 per smart mobile phone. (9th schedule).
viii. A fixed tax of Rs 1.2/electricity unit consumed shall be charged by the electricity
distributor companies along with electricity bills from marble and granite manufacturer
which shall be full and final discharge of tax liability and no tax shall be charged after
that.
ix. Specified retailor has an option to pay fixed tax @ 2% of total turnover including exempt
supplies. (Special Procedure Rules)
x. Minimum sales tax liability can also be determined where a person is not filing his tax
return, or does not register himself or even not register in income tax (para 5.3 ST
General Order 3 of 2004).
xi. FBR has a power to fix the price of any product for sales tax purposes.
2. Tax is applicable when (time of supply) goods are supplied.
3. Tax is also applicable on advance receipts (other than security deposit).
4. Normal trade discount is allowed on supply value.
5. In case of goods return, debit and credit notes are required to be issued by the registered person
within 180 days but this limit is not applicable for advance receipts. (Special Procedure Rules
)Exam hint: normally we treat debit note in working, whereas credit note in the main question.)
6. Input can only be claimed by a registered person but a person liable to be registered is required
to pay out put tax.
7. The buyer of goods shall holds Sales Tax Invoice (B/E , Treasury Challan or electricity bill etc.)
This is the primary criteria to claim input tax.
8. Input tax can be claimed for the last 6 tax periods (1 tax periods = 1 month. The commissioner
has power to allow tax credit even after 6 months OR tax payer can apply for refund within 1
year)
9. The purchaser has paid the tax.

55 | P a g e
 Sales Tax

10. The supplier of goods has paid the tax to the FBR.
11. No input tax where CREST (computerized risk based evaluation of sales tax) has identified
discrepancy.(can be allowed on provisional basis but after that supplier should ask to show that
invoice.
12. Input tax can be claimed if goods are purchased on credit basis (except electricity & gas bill) but
amount shall be paid within 180 days. If payment is not made within prescribed period then input
claimed shall be reversed. (for examination there will be no treatment if 180 days completes
before the current month or after the current month).
13. In put can be claimed if goods are used in taxable activities (kp 3.19).
14. Goods / services are taxable. (Input tax shall not be claimed against exempt goods)
15. Input tax shall not be allowed on fake invoice.
16. No input tax on vehicle (otherwise as stock in trade)
17. Payment against Supply value exceeding Rs. 50,000/- must be paid through banking channels. (if
payment is made in in-kind and cash then 50,000 limit is not applicable, payment must be made
through banking channel even below 50,000)
18. Common input tax can be allowed on proportional basis.
19. Input tax is restricted up to 90%5 of output tax (exam hint: exceptions are important).
20. If values are provided inclusive of sales tax, compute sales tax by tax fraction formula as (Value
x 17% / 117%.).
21. No tax on interest that’s why if interest/mark-up is included in the value, we should exclude from
value to apply GST.
22. No input on further tax paid during a period of un-registration.
23. No input tax on building material, paint, gas and electric appliances etc. otherwise than stock in
trade. (however, can be claimed on pre-fabricated buildings).
24. No input tax is available on Import/purchase of agricultural machinery listed under 8th
schedule.(input can be claimed on other machinery imported under 8th schedule)
25. No input tax shall be allowed on the following goods (otherwise than stock in trade):
 Food, beverages and consumption on entertainment.
 Garments
 Gift and give- aways
 Residential supply of gas and electricity
 Office equipments (excluding fiscal register)
 Crockery and cutlery etc.
26. Goods destroyed / wastage or raw material
 Unfit/expired goods returned and destroyed No input tax
 Goods destroyed and insurance claim received No input tax
 Goods destroyed other than above reason input tax shall be claimed
5
Exceptions are given to this rule where a person can claim full input tax. Like this this restriction is not applicable to
fixed assets, importer who paid value addition tax on imports and its imports exceeds 50% of total taxable supplies and
person dealing with zero rated supplies and where, zero rated supplies exceed 50% of its total taxable supplies.

56 | P a g e
 Sales Tax

 Normal wastage during production input claim

 Wastage during production and sold input claim and sale shall be
treated as supply.
27. For retail items (listed under 3rd Schedule) tax will be calculated on the retail price rather on the
sale price and tax shall not be held on these items.
28. Commercial imports are subject to custom duty and 3% VAT whereas, supply of commercial
import does not attract custom duty. (exam hint: In question do separate working for commercial
imports and supply and incorporate in the normal tax liability).
29. Un-adjusted input tax related to commercial imports shall be carried forward.
30. The tax payer shall furnish information required by the FBR otherwise he will not be allowed to
claim input tax.
I.

Schedule Goods and Rate of Tax

Third (3) 17% of Retail Goods
Fifth (5) Zero rated
Sixth (6) Exempt
Eighth (8) (New) Special Tax Rates for Specified Goods
Ninth (9) (New) Fixed Tax on Mobile Phone etc.

57 | P a g e
 Sales Tax

ST-1 (Simple Trading business)

Mr. Ameer has sold furniture at Rs.150,000/- which was purchased by him at Rs.100,000/-.

ST-2 (Simple Manufacturing business)

Mr. Ameer has sold furniture worth Rs.150,000/- and incurred the following expenditures to manufacture
this:

wood Rs.50,000/-, Polish Rs.10,000/-, Glue Rs.5,000/-, Nail etc. Rs.3,000/- and Electricity Bill Rs. 12,000/-

ST-3 (Trading of third Schedule goods) 3rd Schedule

Mr. Ameer has purchased Tea bags (a 3rd schedule item) for re-sale at a price of Rs.8,000 whereas its listed
price was Rs.10,000/- and he sold at listed price.

ST-4 (Manufacturing of third Schedule goods) 3rd Schedule

Mr. Ameer has manufactured Tea bags (a 3rd schedule item) for sale. Total cost incurred to manufacture teas
was Rs.8,000 whereas its listed price was Rs.10,000/- and he sold at to a distributor at Rs. 8,500.

ST-5 (Export business) 6th Schedule

Mr. Ameer has exported furniture worth Rs.150,000/- and incurred the following expenditures to manufacture
this:

Wood Rs.50,000/-, Polish Rs.10,000/-, Glue Rs.5,000/-, Nail etc. Rs.3,000/- and Electricity Bill Rs. 12,000/-

ST-6 (Taxable purchases and exempt sale) 6th Schedule

Mr. Ameer sold books worth Rs.150,000/- and incurred the following expenditures to manufacture these
books: paper Rs.50,000/-, ink Rs.10,000/-, Glue Rs.5,000/- and Electricity Bill Rs. 12,000/-

ST-7 (Taxable purchases and exempt goods exported-As Manufacturer) 6th Schedule

Mr. Ameer has exported books which were manufactured by him at Rs.150,000/- and incurred these
expenditures: paper Rs.50,000/-, ink Rs.10,000/-, Glue Rs.5,000/- and Electricity Bill Rs. 12,000/-

ST- 8 (Taxable purchases and exempt goods exported- As Trader) 5th Schedule

Mr. Ameer has exported books at Rs.150,000/- and these books were purchased by him at Rs.77,000/-.

ST- 9 (Zero rated purchases and export- As Trader) 5th Schedule

Mr. Ameer has exported bi-cycles Rs.150,000/- and these bi-cycles were purchased by him at Rs.77,000/-.

ST- 10 (Dealing with Misc. goods with known expenditures) 3rd + 5th +6th schedule

Mr. Ameer has sold furniture worth Rs.150,000/- and incurred the following expenditures to manufacture this
furniture: Wood Rs.50,000/-, Polish Rs.10,000/-, Glue Rs.5,000/-, Nail etc. Rs.3,000/- and Electricity Bill Rs.
12,000/- He has also purchased Tea bags (a 3rd schedule item) for re-sale at a price of Rs.8,000 whereas its

58 | P a g e
 Sales Tax

listed price was Rs.10,000/- and he sold at listed price. He has exported plastic chairs at Rs.150,000/- and
these chairs were purchased by him at Rs.77,000/-.

ST- 11 (Dealing with Misc. goods with common expenditures) 3rd + 5th +6th schedule

Mr. Ameer has purchased paper worth Rs.150,000/-. He sold paper in the local market at Rs.50,000/-. Some
of paper was exported at Rs.100,000/- and some paper was used in the manufacturing of books which were
sold in the local market at Rs.75,000/-. He also paid electricity bill Rs.15,000/-

ST-12 (Reduced tax items - Manufacturing business) 8th Schedule

Mr. Ameer has sold Gollas worth Rs.100,000/- and incurred the following expenditures to manufacture it:

sugar Rs.20,000/- (8%) , Canned Milk Rs.10,000/- (12%), and Electricity Bill Rs. 10,000/-

ST- 13 (Closing stock with 100% input claimed) Exceptional Circumstances

Mr. Ameer has imported plates, during the month of January, at a cost of Rs. 1 million. The rate of custom
duty is 10%. These plates were sold at Rs.2 million over a period of three months. 20% sale was made in
January, 50% sale was made in February and 30% sale was made in March. Assume no other purchases were
made during this period and 90% restriction is not applicable to him.

ST- 14 (Closing stock with 90% input claimed and rest C/F) Normal Rule

Mr. Ameer has imported plates, during the month of January, at a cost of Rs. 1 million. The rate of custom
duty is 10%. These plates were sold at Rs.2 million over a period of three months. 20% sale was made in
January, 50% sale was made in February and 30% sale was made in March. Assume no other purchase were
made during this period.

ST-15 (Taxable purchases and exempt sale by Manufacturer and Distributor) 6th Schedule
Mr. Ameer (manufacturer) sold books to Mr. Ghareeb at Rs.30,250/- and incurred the following expenditures
to manufacture these books: paper Rs.10,000/-, Glue Rs.5,000/-, Card board Rs.7,000/-, and Electricity Bill
Rs. 3,000/-.

Mr. Ghareeb (distributor) purchased these books from Mr. Ameer and sold at a price of Rs.32,250/-
Required: Please compute sales tax liability of both persons.

ST-16 (Taxable purchases and exported by Manufacturer and Distributor) 6th Schedule and 5th Sch.
Mr. Ameer (manufacturer) exported books to USA at Rs.26,000/- and incurred the following expenditures to
manufacture these books: paper Rs.10,000/-, Glue Rs.5,000/-, Card board Rs.7,000/-, and Electricity Bill Rs.
3,000/-.
Mr. Ghareeb (distributor) purchased books from local manufacturer at 26,000/- and sold at a price of
Rs.28,000/-
Required: Please compute sales tax liability of both persons.

ST-17 (Taxable purchases and sold retail goods) 3rd Schedule

Mr. Soap (manufacturer) sold soap to Mr. Ghareeb at Rs.26,000/- whereas its retail price was Rs.30,000/-
printed on the soaps. He incurred the following expenditures to manufacture these Soaps: Glycerin
Rs.10,000/-, Salts Rs.5,000/-, perfumes Rs.7,000/-, and Electricity Bill Rs. 3,000/-.
Mr. Ghareeb (distributor) purchased these soaps from Mr. Ameer and sold at a price of Rs.28,000/-

59 | P a g e
 Sales Tax

Required: Please compute sales tax liability of both persons.

ST-18 (Taxable purchases and sold retail goods) 3rd and 5th Schedule
Mr. Soap (manufacturer) and exported to USA at Rs.26,000/-. He incurred the following expenditures to
manufacture these Soaps: Glycerin Rs.10,000/-, Salts Rs.5,000/-, perfumes Rs.7,000/-, and Electricity Bill Rs.
3,000/-.
Mr. Ghareeb (distributor) purchased soaps from local manufacturer at 26,000/- and sold at a price of
Rs.28,000/- whereas its printed price was Rs.30,000/-
Required: Please compute sales tax liability of both persons.

ST-19 (Manufactured goods supplied to Registered persons)

60 | P a g e
 Sales Tax

61 | P a g e