Introduction to Income Tax Ordinance 2001
Introduction to Income Tax Ordinance 2001: In Indo-Pak Subcontinent, the history of levy of taxes in very old. The Income Tax Act of 1886 was a general income tax that had been imposed on traders by some of the provinces beginning in 1878.
Its basic scheme, by and large, survives till today. It introduced the definition of ‘agricultural income’ which is almost the same as in Income Tax Ordinance, 2001. This Act continued for 32 years, until repealed by the
Income Tax Act of 1918.
The 1918 Act consolidated a number of wartime amendments. A graduated super tax on income over Rs 50,000 and on the undistributed profits of the corporations and other entities was introduced by the Super Tax Act of 1917 and continued in force through modifications by the Super Tax Act of 1920.
The Income Tax Act and Super Tax Act were later on consolidated in another Act i.e. the Income Tax Act of 1922. This Act remained in force in Pakistan till 30th June 1979, when General Mohammad Zia ul Haq, in his capacity as President-cum-Chief Martial Law Administrator, decided to enforce a new law, the Income Tax Ordinance, 1979 with effect from 1st July 1979.
The 1979 Income Tax Ordinance was amended through innumerable Presidential Ordinances, annual Finance Acts/ Ordinances and Statutory Regulatory Orders (SROs) issued by Executive under delegated authority enjoyed by it and thus many of its lacunae were removed over a long period of time.
After 23 years of its existence when substantive amendments and judicial pronouncements made it a workable, better understandable and acceptable piece of legislation for everybody, in 2001 the then Military Ruler decided to abandon the time-tested law without any valid justification and Promulgated the New Ordinance on 13th September 2001 and made effective from 1st July 2002 vide SRO 381(I)/2002 dated 15th June 2002 before it gone through 600 amendments made through Finance Act 2002.
Income Tax is levied under the Income Tax Ordinance, 2001 which is administered by the Federal Government. It applies to all individuals, companies, firms, association of persons and other artificial judicial persons. A Normal tax year runs from 1st July to 30th June in Pakistan. Taxability of an entity in Pakistan depends on its residential status.
It can be determined as under:
Condition for qualifying as a ‘Resident’
- Present in Pakistan for 183 days or more in tax year or
- Is an employee of the Government whether physically in Pakistan or not.
- Companies incorporated in Pakistan
- A company incorporated outside Pakistan, if control and management of the company affairs is situated wholly in Pakistan at any time of the year
- It is a Provincial or Local Government
Association of Persons
An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the situated wholly or partly in Pakistan.
Domestic income + Global income (subject to tax treaties)
Income that arises in Pakistan (subject to tax treaties)
RESIDENTIAL STATUS & TAXABILITY IN PAKISTAN
- A resident person is liable to be taxed on his world income.
- A Non-Resident person is liable to be taxed for his Pakistan source income only.
HEADS OF INCOME
Income is classified and accordingly taxable under the following heads:
Income from Salaries
Income arising on account of employment is taxable in the hands of the employee
Income from Properties
It is a charge on the potential of property to generate rental income i.e Fair Market rent not merely the actual rent
Income from Business
Income earned by a taxpayer on exercise of a business or profession less deductible tax credits and allowances
Capital gains are gains arising on the disposal of specified capital assets
Income from other sources
Income which does not come in all the other heads comes in this section.
Taxation for Expatriates
It is a common trend for expatriates to take up employment in Pakistan. Strategic investors also depute (under a secondment arrangement) senior level personnel to take up key managerial positions in their Pakistan venture.
Every expatriate engaged as an employee by Liaison Office and Branch Office operating in Pakistan is required to obtain work visa prior to commencement of employment in Pakistan.
Common concerns of such expatriates are Taxability in Pakistan. A resident individual shall be exempt in respect of his foreign-source income which is not brought/ received in Pakistan if he is resident only by reason his employment and he is present in Pakistan for not exceeding 3 years.
The tax rate for companies in Pakistan does not differentiate between foreign and domestic firms. This once again underlines the fact that Pakistani laws are very favorable towards foreign investment (under Pakistani law, there is no distinction between tax on profits of domestic and foreign companies).