Chapter 4 (a): Basic Concepts of Taxation

Chapter 4 (a)
Basic Concepts of Taxation

Tax year [Sec. 74]

1) Normal tax year
Normal tax year is a period of twelve months ending on the 30th day of June and is denoted by the
calendar year in which the said date (30 June) falls. { Calendar year, period of 12 months, ends on
December 31}
2) Special tax year
Where a person is allowed, to use a 12 months’ period different from normal tax year, such tax year is
called Special tax year and shall be denoted by the calendar year relevant to normal tax year in which the
closing date of the special tax year falls.
Type of
Persons Accounting Period Tax year
Tax year
Nestle Pakistan March 01, 2010-February 28,2011 Special TY 2011
Mr. Amir October 1, 2021 – September 30, 2022 Special TY 2023
ABC Associates July 1, 2004 – June 30, 2005 Normal TY 2005
Salahudin and
Special TY 2010
Sons October 1, 2008 – September 30, 2009
Iftekhar Limited July 1, 2010 – June 30, 2011 Normal TY 2011
2 (a). The Board has authority to change the tax year of a particular class of taxpayer from normal to
special and from special to normal by a notification in the official Gazette.
For example, following special tax years are specified by the Board+
Classes of persons Special Tax Year
Companies manufacturing sugar 1st October to 30th September
All persons exporting rice 1st January to 31st December
All banks & insurance companies 1st January to 31st December
3) A person may apply, in writing, to the Commissioner to allow him to use a 12 months’ period, other than
normal tax year, as special tax year and the Commissioner may allow him. The order will be passed by the
Commissioner if the condition mentioned below (in sub-section (5)) is fulfilled.
4) A person using a special tax year, may apply in writing, to the Commissioner to allow him to use normal
tax year and the Commissioner may allow him. The order will be passed by the Commissioner if the
condition mentioned below (in sub-section (5)) is fulfilled.
5) The Commissioner shall grant permission to change tax year from normal to special and from special to
normal only if the person has shown a compelling need. The Commissioner may impose conditions while
granting permission.
6) Before passing an order of change in tax year, the Commissioner shall provide an opportunity of being
heard to the applicant. If the application is rejected, the Commissioner shall mention in order the reasons
for rejection.
7) The Commissioner may by order, after providing an opportunity of being heard, withdraw the permission
granted regarding change in tax year.
8) An order of change in tax year [under sub-section (3) or (4)] shall take effect from 1st day of the special tax
year or the normal tax year.
11) A person dissatisfied with an order {under sub-section (3), (4) or (7)} may file a review application to the
Board, and the decision by the Board shall be final.
9) Transitional tax year
Where the tax year of a person changes either from the normal tax year to special tax year or vice versa, the
period between
 the end of the last tax year prior to change and
 the date on which the changed tax year commences
shall be treated as a ‘transitional tax year’.
Example
The normal tax year of XYZ Limited was the period from 01 July 2022 to 30 June 2023. On an application
by XYZ Limited, Commissioner granted approval to adopt special tax year of 30 September each year.
Identify the normal, special and transitional tax years and their respective periods.
Year Period Tax Year
Normal Tax year 01 July, 2022 to 30 June, 2023 2023
Transitional tax years 01 July, 2023 to 30 September, 2023 2024
Special Tax year 01 October, 2023 to 30 September, 2024 2025
Chapter 4 (a): Basic Concepts of Taxation

Exercise:
Determine the tax year in respect of each accounting periods mentioned below:
a) 1.09.2021 to 31.08.2022
b) 1.01.2022 to 31.12.2022
c) 1.04.2022 to 31.03.2023
d) 1.05.2022 to 30.04.2023
e) 1.07.2022 to 30.06.2023
Answer
For all the five cases mentioned above, relevant tax year will be 2023 i.e. calendar year relevant to normal
tax year [1.07.2022 to 30.06.2023) in which the closing date (31.08.2022, 31.12.2022, 31.03.2023,
30.04.2023, 30.06.2023) of special year falls.

Taxable income (Sec 9)

The taxable income of a person for a tax year shall be the total income other than exempt income of the person
for the year reduced (but not below zero) by the sum of any deductible allowances of the person for that tax
year.
Total Income other than exempt xxx
Less: Deductible Allowances (Discussed below) (xxx)
Taxable Income xxx
Question:
Mr. Waqar has disclosed the following data for TY 2019: Rs.
Salary Income 350,000
Business Income 250,000
Zakat paid under Zakat and Ushr Ordinance 170,000
Calculate his taxable income?
Answer
Salary Income 350,000
Business Income 250,000
Total income 600,000
Less: Zakat (170,000)
Taxable Income 430,000

Total Income [Sec. 10]

The total income is sum of -
(a) Person‘s income under all heads of income for the year; and
(b) Person‘s income exempt from tax under any of the provisions of this Ordinance.

Heads of income [Sec. 11]

1) For imposing tax and calculating total income, all income shall be classified under the following heads:
a) Salary;
b) Income from property
c) Income from Business;
d) Capital Gains; and
e) Income from Other Sources.
2) The income of a person under a head of income for a tax year shall be the total chargeable to tax amounts
derived by the person under the head as reduced by the total allowed deductions.
3) Where total deduction allowed to a person for a tax year under a head of income exceed the total amounts
chargeable to tax, the person shall be treated as sustaining a loss for that head.
4) A loss for a head of income for a tax year shall be dealt with in accordance with Chapter 11.
5) The income of a resident person under a head of income shall be computed by adding:
 Pakistan-source income and
 Foreign-source income.
6) The income of a non-resident person under a head of income shall be computed by considering only amounts
that are Pakistan-source income.
Source of Income Resident Non Resident
Pakistan source Chargeable Chargeable
Foreign source Chargeable Not-Chargeable
Chapter 4 (a): Basic Concepts of Taxation

DEDUCTIBLE ALLOWANCES
Zakat [Sec.60]
1) A person shall be entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax
year under the Zakat and Ushr Ordinance, 1980
2) Any allowance or part of an allowance under this section for a tax year that is not fully deducted while
calculating Taxable income (under section 9) for the year shall not be:
 refunded,
 carried forward to a subsequent tax year, or
 carried back to a preceding tax year.
Note: if question is silent, assume zakat has been paid un Zakat and Ushr ordinance.
Zakat paid to relatives/ friends etc will not be deducted.

Worker’s welfare fund (Sec 60A)

A person shall be entitled to a deductible allowance for the amount of any Workers’ Welfare Fund (WWF) paid
by the person in the tax year under Workers’ Welfare Fund Ordinance, 1971 or under any law relating to the
Workers’ Welfare Fund enacted by Provinces after the Eighteenth Constitutional Amendment Act, 2010.
However, no deductible allowance will be allowed where any amount is paid to provinces by trans-provincial
organizations (a person having operations in more than one province).
Worker’s participation fund (Sec 60B)
A person shall be entitled to a deductible allowance for the amount of any Workers’ Participation Fund paid by
the person in a tax year in accordance with the provisions of the Companies Profit (Workers’ Participation) Act,
1968 under any law relating to the Workers’ profit participation Fund enacted by Provinces after the eighteenth
Constitutional Amendment Act, 2010. However, no deductible allowance will be allowed where any amount is
paid to provinces by trans-provincial organizations (a company having operations in more than one province).
Deductible allowance for education expenses (Sec 60D)
1) Every individual shall be entitled to a deductible allowance in respect of tuition fee paid by the individual
in a tax year provided that the taxable income of the individual is less than Rs.1,500,000.
2) The amount of an individual‘s deductible allowance allowed for a tax year shall not exceed the lesser of —
a) 5% of the total tuition fee paid by the individual in the year;
b) 25% of the person’s taxable income for the year; and
c) an amount computed by multiplying 60,000 with number of children of the individual.
3) Any allowance or part of an allowance for a tax year that is not able to be deducted for the year shall not be
carried forward to a subsequent tax year.
4) Allowance shall be allowed against the tax liability of either of the parents making payment of the fee on
furnishing national tax number (NTN) or name of the educational institution.
5) Allowance shall not be taken into account for computation of tax deduction from Salary under section 149.