“In The Name of Allah, The

Most Merciful, The Most

Beneficent”

SUBJECTTAXATION

MANAGEMENTINSTRUCTOR

MR.M. USMAN WARIS

GROUP MEMBERSASMA YASMINANAM ZAHRASIDRA SALEEMANUM SEHAR

TOPICINCOME FROM

BUSINESS

ASMA YASMIN 1) BUSINESS 2) INCOME FROM BUSINESS 3) TYPES OF BUSINESS

BUSINESS [SECTION 2(9)]

According to Income Tax Ordinance 2001, the

term business includes: Trade Manufacturing Commerce Profession or Vocation Concern Adventure

TRADE

Trade means selling of goods for the purpose of making profit which a trader has purchased or manufactured.

MANUFACTURING

It means to work upon something by hand or machine as to convert it into a form which has greater value to consumers.

Example Conversion of wooden piece into a chair.

COMMERCE

It includes all the institutions and activities which are helpful in transferring goods from the place of production to the ultimate consumer.

Example Transportation Banking Insurance Advertising

PROFESSION OR VOCATION

Services rendered on the basis of manual skill or specialized knowledge and experience in a particular field is known as profession or vocation.

Example Doctors Engineer Accountant Carpenters

CONCERN

Any regulated system of the management of an organization which has an adequate degree of trade, commerce and manufacturing.

ADVENTURE

Any transaction is termed as an adventure in the nature of trade if some elements of trade are present therein.

NOTE

The business does not include employment.

INCOME CHARGEABLE UNDER BUSINESS [SECTION 18]

It includes: Profit and gain in tax year Any income derived by trade,

professional, AOP from sale of good or services

Income from hire or lease of tangible movable property

INCOME CHARGE…

Profit on debt Management fee derived by management

company Fair market value of any benefit or perquisite

derived in the course of business relationship

TYPES OF BUSINESS:

There are two types of business. Speculation Business Non-Speculation Business

SPECULATION BUSINESS: SEC 2 (61)

Speculation is a method of short-term investing whereby traders essentially bet on the direction an asset's price will move.

CATEGORIES OF INCOME

The income from business are to be shown separately under the following sub-heads:

Income from speculation business Income from non-speculation

business

 TAXABILITY OF SPECULATION BUSINESS [SECTION 19]

Treated as separate block of income Profits or gains are computed separately The principles of apportionment of expenditures

shall be applied (Section 67). Any profit and gains arising from the speculation

business for a tax year shall “income from business”

loss from speculation business can only be set off against the income of any other speculation business carried on by person (Section 58).

.

ANAM ZAHRAADMISSIBLE

& NON- ADMISSIBLE

DEDUCTION

ADMISSIBLE & NON- ADMISSIBLE DEDUCTION

WHAT IS DEDUCTION?

Any item or expenditure subtracted from grossincome to reduce the amount of income subject to tax.

ADMISSIBLE DEDUCTIONS

Expenses incurred for the purposes of business

Loss on animal used for business Depreciation & amortization of assets Amalgamation expenses incurred by an

amalgamated company

EXPENSES INCURRED FOR PURPOSES OF BUSINESS [SEC20 (1)]

Expenses fully related to business Expenses partially related to businessExample

- Salary - Loss of animals

- Interest - Rent for premises

- Training expenses - Bad debts

- Insurance premium - Repair charges

ANIMALS USED FOR BUSINESS [SEC20(1A)]

Animals used for purpose of business have died or become permanent useless ,the differences b\w the actual and the damage cost will be allowed.

EXAMPLE

Detail Amount

Actual cost of the animals to the taxpayer 1,00,000

Less: amount realized in respect of carcasses or animals 4,000

Amount allowed as deduction 96,000

 DEPRECIATION AND AMORTIZATION ON ASSETS [20(2)]

As per Income Tax Ordinance Depreciation and

Amortization is allowed regarding   Depreciable assets Intangible assets with useful life of more than one year Pre-commencement expenditure

AMALGAMATION EXPENSES [20(3)]

Any expenditure made by amalgamated company is allowed as a deduction. These expenses may be;

Legal expenses; Financial advisory services Other administrative costs relating to planning and implementation

EXAMPLE

Mr. Zahid has a taxable salary of Rs. 3, 60,000/- during the year.He was also running a Manufacturing concern of which the annual sales were

Rs.80,00,000/. The Gross profit was 25% of the annual sales. Following are further details

regardingexpenses of this business:Requirement: Find out tax liability of Mr.Zahid

Sr.# EXPENSES TOTAL TRANSACTION

MODE OF PAYMENT

1. Utility bills 80,000 5,00040,0005,000

30,000

CashCross ChequeCross Cheque

Cash

2. Donation to unapproved institution 20,000 8,00012,000

Cross ChequeCross Cheque

3. Building repair 60,000 5,0005,000

20,00030,000

Cross chequeCash

Cross ChequeCash

4. Machinery repair 40,000 15,0005,0005,000

15,000

CashCash

Cross ChequeCross Cheque

5. Rent paid of house used for personal purpose 20,000 12,000 Cash

8,000 Cash

SOLUTION Income from salary 3, 60,000 Income from Business: Sales 80, 00,000 Gross Profit 80,000@ 25% 20,

00,000 LESS: Admissible Deductions Utility Bills 80,000 Building Repair 30,000 Machinery Repair 40,000 1, 50,000

18,50,000 TOTAL INCOME

22,10,000  Tax Calculation Initial tax 1, 47,500 Add (22, 10,000-15, 00,000)@20% 1, 42,000 2, 89,500

NOTES

Utility bills can be paid in cash or cheque as are exempt from being paid through cross cheque.

Donations to unapproved institution are not admissible.

Rent paid of house used for personal purpose is not admissible.

DEDUCTIONS NOT ALLOWED [SECTION 21]

Tax Levied on Profits or Gains: [Section 21(a)]

Tax Deducted at Source [Section 21(b)]

Entertainment Expenditures [Section 21(c)]

Contribution to any Unapproved Fund [21(e)]

DEDUCTIONS NOT ALLO…

Fine or Penalty [Section 21(g)]

Personal Expenditure [21(h)]

Salary exceeding prescribed [sec 21(m)]

Capital expenditure

DEDUCTIONS NOT ALLO…

Transfer to Reserve Fund [21(i)]

Reward of Members of AOP [21(j)] Any Expenditure

Exceeding Prescribed Limit [21(l)]

SIDRA SALEEMMINIMUM TAX ON THE INCOME OF CERTAIN

PERSONS (SEC 113)

MINIMUM TAX APPLIED:

In case of Certain persons In case of Builders In case of Educational Institutions In case of Land Developers

MINIMUM TAX ON THE INCOME OF CERTAIN PERSONS (SECTION 113):

This section shall apply upon: A resident company. An individual having turnover of fifty millions rupees

or above. An association of persons having turnover of fifty

million rupees. The above mentioned persons shall pay minimum tax @

1% of the turnover. Minimum tax is to be paid if it exceeds the actual tax.

PROBLEM:

XYZ private limited has a taxable income of Rs. 6, 00,000/- for the tax year 2014. Its turnover during the year was Rs 5, 00, 00,000/-. Find its tax liability.

SOLUTION:

Income tax = 6, 00,000 @ 34% = 2, 04,000

Minimum tax liability = 5, 00, 00,000 @ 1% = 5, 00,000

Income tax liability is whichever of above two is higher. Hence

tax liability is Rs. 5, 00,000/-.

MINIMUM TAX ON BUILDERS (SEC 113A):

Minimum tax is levied on income of builders arising from construction and sale of residential, commercial or other buildings. Builders are required to pay minimum tax @ of Rs. 25/- per Square foot actually sold or booked for sale during a year.

Problem:M/S ABC Enterprises is an Association of Persons it is doing the business of constructing and selling building. During the year the income from the business is Rs. 8, 00,000/-. During the year actually M/S ABC Enterprises sold and booked 24,000 square feet of area.

Find out the tax liability of M/S ABC Enterprise:

Solution:

Income from business of construction is equal to 8, 00,000

Tax on 8, 00,000

Initial........................................................... 35,000

(8, 00,000-7, 50,000) @ 15% ..................... 7,500

Total Tax 42,500

Minimum Tax Liability on Builders (Rs. 25 per square feet booked or sold)

= Square feet booked or sold x 25

= 24,000 x 25 = 6, 00,000

Minimum Tax liability of Rs. 6, 00,000 calculated being a builder is higher than of the Normal Tax Rs. 42,500 hence tax payable is Rs. 6, 00,000.

COLLECTION OF ADVANCE TAX BY EDUCATIONAL INSTITUTIONS:

An Advance tax @ 5% on the amount of fee paid shall be collected by the educational institution. This means tuition fees and all charges. The tax is required to be collected in the same manner as the fee is charged, The advanced tax under this provision shall not be charged if the annual fee does not exceed Rs. 2, 00,000/-

MINIMUM TAX ON LAND DEVELOPERS:

Minimum Tax has been levied in income of land developers arising from development and sale of residential, commercial or other plots. The said developers shall pay tax @ of Rs.50/- per square yard actually sold or booked for sale during the year.

Problem: M/S XYZ Enterprise is an individual which is doing the business of developing and selling of land. During the year the income from business is Rs. 10, 00,000/-. During the year actually M/S XYZ Enterprise sold and booked 40,000 square yards of area.

Find out the Tax liability of M/S XYZ Enterprise.

Solution:income from business = 10, 00,000

Tax on 10, 00,000

Initial................................................................. 35,000

(10, 00,000-7, 50,000) @ 15% ..........................37,500

Total Tax 72,500

 Minimum Tax liability on land developers (Rs. 50 per square yard booked or sold):

= Square yard booked or sold x 50

= 40,000 x50 = 20, 00,000.

Minimum Tax liability of Rs. 20, 00,000 calculated being land developers is higher than of the normal Tax Rs. 72,500 .Hence payable is Rs. 20, 00,000.

 

ANUM SEHARSALES TAX

SALES TAX ACT:

Sales Tax Act 1951 has been substituted by a new Act

known as Sales Tax (amendment) act,1990.To meet countries economy.for the benefit of the tax payer or collection authorities.The new Act became effective on 1st November 1990.

WHAT IS SALES TAX?

It means: The tax , additional tax, or default surcharge

levie under this Act A fine, penalty, or fee imposed or charged Any other sum payable under the provision of

this Act or the rules made there under.

WHAT IS OUTPUT TAX?

In relation to a registered person,

means: Tax levied under this act on supply of goods, made by thepersons; Tax levied under the Federal Excise Act, 2005, in sales tax made as a duty

of exercise on manufacture or production of goods; Provincial sales tax levied on services rendered or provided by the person.

Output includes three types of supplies: Taxable Supplies Zero-Rated Supplies Exempt Supplies

WHAT IS INPUT TAX?

Purchases made by a registered person for business purpose such as supply of goods, import of goods by the person tax levied under this act.

RULES FOR INPUT TAX:

Purchases from registered person (purchases against tax invoices) 17%

Purchases from non-registered person (purchases against commercial invoices) Nil

Purchases from wholesaler 17%

Acquisition of fixed assets from non-registered person Nil

Goods imported 17%

Sales tax on electricity bill (in case of manufacturer only) allowed

Sales tax on telephone bill (in case of manufacturer only) allowed

Sales tax of sui gas bill (in case of manufacturer only) allowed

Sales tax of sui gas bill (residential colonies) Not allowed

Water charges paid Not allowed

Sales tax credit Totally allowed

Carry forward of input tax from previous month Totally allowed

Purchased of exempted goods Nil

Purchased of milk and vegetables with or without brand name Nil

Purchased of syrups / ice cream flavor imported 17%

Acquisition of fixed assets from registered person(add into input tax after adjustment of input tax)

17% of cost

NOTES:

Tax paid at import stage additional tax is 3%. As per section 8b (1) input tax is registered up-to 90% of

output tax. This section applied only to Registered Manufacturer. It does not apply to importer.

In case of person engaged in any Exempt Supply (Mentioned in Output Tax) Input Tax shall be adjusted as per following formula.

Total Input Tax × Taxable Supply ÷ Total Supplies

WHAT IS RETURN?

It means any return required to be furnish under the Sales Tax Act 1990.

There are following types of return: Monthly return Annual return Special return