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Budget 2014-15: Essential tax reforms – II

CHAPTER 3

ASSESSMENT OF INCOME

Part 1 – Scope of Assessment of Income

31. The income of any year shall include –

(1) in the case of a resident person, all income received or due to be received from all sources in Pakistan and outside by or on behalf of such person;

(2) in the case of a non-resident person all income received or due to be received from a source in Pakistan; and

(3) from a source outside Pakistan to the extent it is derived from a business controlled in or a profession set up in Pakistan by or on behalf of such person.

32. The following incomes shall be deemed to be received or due to be received in Pakistan:

(1) all income received or due to be received, directly or indirectly, through or from any business connection in Pakistan, or through or from any property in Pakistan, or through or from any asset or source of income in Pakistan, or through the transfer of a capital asset situated in Pakistan; and

(2) any salary for service rendered in Pakistan.

33. All incomes for the purposes of assessment shall be classified under the following heads of income –

(1) Income from salary,

(2) Income from house property,

(3) Income from business or profession,

(4) Income from other sources,

(5) Income from long-term sources,

(6) Income from undisclosed sources.

34. (1) The total annual income shall be the sum of incomes from all heads mentioned in section 33 excluding income from long-term sources under section 27(6), income from undisclosed sources under section 28, income on which no income tax is payable under Part 3 and income in respect of which special rates of income tax are applicable under Part 4 of Chapter 2 and after following set off of losses provided for under Part 8 of this Chapter.

(2) The Net Annual Income shall be the total annual income as reduced by deductions under Part 9 of this Chapter.

(3) The gross annual income shall be the net annual income as increased by the income from undisclosed sources under section 28, income on which no income tax is payable under Part 3 and income in respect of which special rates of income tax are applicable under Part 4 of Chapter 2 of the Act.

(4) The gross total income shall be the gross annual income as increased by the income from long-term sources under section 27(5) of the Act.

Part 2 – Income from Salary

35. Salary means any payment, whether due or not, in respect of an employment, given in cash to the employee or to an associate of the employee or to a third party at the request of the employee or his associate and shall include, except to the extent prescribed by the Federal Government-

(1) Any wages annuity or pension, gratuity, fees, perquisites or allowances, profit in lieu of or in addition to salary or wages, advance of salary, payment received in respect of any period of leave not availed of, or annual accretion to a fund recognised by the Commissioner of Provident Fund which is contributed by the employer;

(2) any assets, goods or services provided at less than the fair market value to the extent of the difference; and

(3) any salary or arrears of salary, paid, allowed or due from any employer in the year and from any other employer in any other year provided it has not already been assessed to tax.

36. The following deductions shall be allowed before determining the income from salary –

(1) a sum of Rs. 80,000 as reduced by any income assessable under the Act for each of the spouse and the first two children who are dependent on the employee,

(2) any leave travel concession or assistance received or due to be received as prescribed by the Federal Government,

(3) any allowance received or expenditure incurred or due to be incurred by the employee in respect of residential accommodation occupied by him as prescribed by the Federal Government; and

(4) any allowance to meet expenses wholly, necessarily and exclusively incurred in the performance of duty as prescribed by the Federal Government.

Part 3 – Income from House Property

37. The annual value of any property consisting of any buildings or lands appurtenant thereto of which the assessee is owner, excluding such portions as may be being used for any business or professional purposes, shall be assessed as income from house property.

38. The annual value as referred to in section 37 shall be the sum for which the said property may reasonably be expected to be let from year to year or the rent received or receivable during the year, whichever is more.

39. The following deductions shall be allowed before arriving at the income from house property –

(1) the taxes in respect of the property paid during the year;

(2) a sum equal to twenty percent of the annual value;

(3) compensation calculated at the rate of 12% of expenditure incurred for acquiring the property; and

(4) where the property was vacant during a part of the year, that part of the annual value which is proportionate to the period of vacancy, provided that this allowance shall be given in respect of one such property only.

Part 4 – Income from Business or Profession

40. The following income shall be assessed as income from business or profession-

(1) the profits and gains, arising directly or indirectly, received or receivable by any person, relating to any business or profession which was carried on by the assessee at any time during the year,

(2) the value of any benefit of perquisite, whether convertible into money or not, arising directly or indirectly, from the business or profession;

(3) any share, salary, compensation, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm or a member of an association of persons, from the partnership of such a firm or the membership of such an association, as the case may be; and

(4) any debt, allowed as bad or doubtful under clause (3) of section 42, to the extent it is actually recovered during the year.

41. In respect of any capital expenditure including goodwill, to the extent it is wholly and exclusively necessary for carrying on the business or profession during the year, the fair market value of the asset represented by such expenditure or the actual expenditure incurred by the assessee during the year or previous to it if not claimed earlier, whichever is less, shall be debited to a Capital Reserve Account and shall be further dealt with as below:-

(1) any sum, at the option of the assessee provided it does not exceed the debit balance at any point of time, may be credited to the Capital Reserve Account and debited to the profit and loss account;

(2) the fair market value or the actual value received or receivable, whichever is more, on transfer of any asset represented by such expenditure including goodwill, shall be credited to the profit and loss account on the date of such transfer.

42. Revenue expenditure shall be dealt with as below:

(1) in respect of rent, rates, taxes, repairs and insurance for premises, machinery, plant, or furniture and wholly and exclusively for the purposes of business or profession during the year, the actual payment made during the year shall only be allowed;

(2) any expenditure on scientific research related to the business shall be allowed to the extent it is actually incurred during the year,

(3) any bad or doubtful debt shall be allowed to the extent it is bad or doubtful in the opinion of the Taxation Officer or as prescribed by the Board and has actually been written off in the books of accounts of the assessee;

(4) no personal expenditure in respect of any person, whether connected with the business or profession or not, shall be allowed;

(5) no expenditure to the extent, in the opinion, of the Taxation Officer or as prescribed by the Board, it is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment is made and to the legitimate needs of the business or profession of the assessee, shall be allowed.

43. It shall be compulsory for every person having income from profits and gains of business or profession to maintain books of account, if the gross receipts or sales exceed the sum prescribed by the Board.

44. Notwithstanding any provisions of this Part, the Board may prescribe any method for computing the income from profits and gains of business or profession in any case or class of cases.

Part 5 – Income from Other Sources

45. The following incomes shall be assessed as income from other sources –

(1) income on which no income tax is payable as per clauses (1), (2), (3) and (6) of section 25;

(2) family pension;

(3) income from transfer of capital assets not assessable under section 47(1) and computed in accordance with the provisions of section 48; and

(4) any other income which is not included in any other sections of the Act.

46. Actual expenditure incurred wholly and exclusively for earning any income from other sources shall be allowed to be deducted if it has not been claimed as deduction under any other provision of the Act.

Part 6 – Income from Long-term Sources

47. The following incomes shall be assessed as income from long-term sources –

(1) income from transfer of capital assets whether the capital asset has been held by the assessee for more than 12 months in the year in which it has been transferred; and

(2) any gratuities, payment in communication of pension, cash equivalent of the leave salary, compensations under any statute or schemes approved by federal or provincial governments or any payment at the time of voluntary retirement, received or due to be received by the employee, by virtue of his employment for more than 12 months.

48. The income from capital gains assessable under section 45(3) or 47(1) and income from long-term sources shall be computed, by deducting from the full value of the consideration received or due to be received, the following amounts, as may be applicable –

(1) indexed cost of acquisition of the asset;

(2) indexed cost of any improvement thereto;

(3) expenditure incurred wholly and exclusively in connection with the transfer;

(4) amount deposited in an annuity scheme for a minimum period of 10 years as notified by the Federal Government; and

(5) amount spent for buying a residential house provided the assessee does not own another residential house.

Part 7 – Income from undisclosed sources

49. The following receipts, credits, expenditures or investments shall be assessed as income from undisclosed sources in the year in which any such sum is received or credited or the expenditure is incurred or the investment is made and about which the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Taxation Officer, satisfactory:

(1) credits in the books of accounts;

(2) investments which are not recorded in the books of account;

(3) any stock, money, bullion, jewellery or other valuable article or thing found in the possession of the assessee;

(4) any amount by which the amount expended, or where it is less than the fair market value, the fair market value of any investment or any stock, bullion, jewellery or other valuable article or thing found in the possession of the assessee exceeds the amount recorded in this behalf in the books of account;

(5) the amount covered by any expenditure or part thereof; and

(6) any amount which is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank.

50. Where the transactions in respect of any investment, stock, money, bullion, jewellery or other valuable article or thing found in the possession or under the control of a person is not recorded in the books of accounts regularly maintained by him and,

(1) the person fails to make a statement on oath that such income has been received by him from a particular source during a year for which the due date for filing the return of income is not over, or

(2) having made such a statement withdraws it or does not disclose it in the relevant return of income or does not file such a return, the amount representing such transactions shall be assessed as income from undisclosed sources.

51. Where the assessee has concealed or furnished inaccurate particulars of any income, such income as is covered by such particulars shall be assessed as income from undisclosed sources.

52. If in respect of any fact or material related to the computation of the total income of any person –

(1) such person fails to offer an explanation or offers an explanation which is found by the Taxation Officer to be false, or

(2) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of total income have been disclosed by him, then, the amount added or disallowed in computing the income shall be assessed as income from undisclosed sources.

53. No money deposited in the National Deposit Account as notified by the Federal Government shall be assessable under this Chapter and no explanation as regards the source of such money shall be required to be given provided that –

(1) no amount shall be allowed to be withdrawn for a minimum period of 3 years from the date of deposit; and

(2) no compensation shall be payable on such deposit.

Part 8 – Set-off of losses

54. Where the net result of computation in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set-off against his income from any other source under the same head.

55. Where the net result of computation under any of the heads of income from or house property or business or profession or other sources is a loss, the assessee shall be entitled to have the amount of such loss set-off against any other of these heads of income.

56. Notwithstanding any provision of this Part, no income on which income tax is not payable under Part 3 or in respect of which special rate of tax is applicable under Part 4 of Chapter 2 of the Act, shall be allowed to be set-off against any loss.

57. No loss under any head of income, which could not be set-off under the provisions of this part of the Act, shall be allowed to be carried forward to next year.

Part 9 – Deductions to be made in computing net annual income

58. Any deposit in the name of the individual under any scheme notified by Federal Government, such that no amount including the compensation could be withdrawn for a minimum period of three years, provided the deposit does not exceed 20 percent of the total annual income and is made out of it, shall be deducted from the total annual income.

59. Any investments mentioned in section 58, not exceeding 20 percent of total annual income and made out of it in the name of any member of the family in the case of an individual or any member in the case of a Hindu Undivided Family, shall be deducted from total annual income.

60. Any payments out of the total annual income not exceeding 20 percent of it, to a person whose income is exempted from income tax under Part 2 of Chapter 2 of the Act subject to any conditions, general or specific, that the Federal Government may like to impose on the control and management of that person and notify, shall be allowed to be deducted from total annual income.

61. Any sum as notified by the Federal Government in the case of a person or a class of persons affected by flood, typhoon, hurricane, cyclone, earthquake or other convulsions of nature, or riot or civil disturbance, or, accidental fire or explosion or action taken by an enemy or action taken in combating an enemy (whether with or without a declaration of war) shall be allowed to be deducted from the total annual income of the assessee before giving any deduction under sections 58, 59 and 60 and the limit of 20% shall be applicable on the total annual income as reduced by any deduction under this section.

CHAPTER 4

PROCEDURE FOR ASSESSMENT

Part 1 – Procedure

62. The following persons shall file a return of income for every year in the prescribed form;

(1) All persons whose net annual income exceeds Rs. 400,000;

(2) All persons whose incomes are exempted under Part 2 of Chapter 2 of the Act, unless exempted by the Board;

(3) Every person to whom a notice is issued by the Taxation officer in the prescribed form requiring him to file the Return of Income within one month of receiving the notice or, with the permission of the Additional/Deputy Commissioner, earlier.

(4) In all other cases, as the Board may prescribe.

63. Where a return is filed by a person under section 62 and he discovers an omission or a wrong statement therein, he may file a revised return before any order or any notice is issued to him under any clause of section 65.

64. The return shall be filed under section 62 before the following dates in the financial year following the year:

(1) where the net annual income is less than Rs. 500,000 or where it is filed under Section 62(2), by the end of September;

(2) where the net annual income is less than Rs. one million, by the end of October;

(3) where the net annual income is Rs. one million or more, by the end of December.

65. (1) If the Taxation Officer is satisfied without requiring the presence of the assessee or the production by him of any evidence, that a return filed under section 62 is correct and complete, or that it requires rectification of any mistake apparent from record, he shall, within one year from the end of the financial year in which the return is filed, assess the income of the assessee on the basis of such return or such rectification, as the case may be, and determine the sum payable by the assessee or refundable to the assessee.

(2) An assessee may object to the order made under clause (1), by making an application to the Taxation Officer within one month in which the order is served on him and the Taxation Officer after considering such objections shall assess the income of the assessee and the tax payable by him or refundable to him, within one year from the end of the financial year in which such objections are received.

(3) Where in the opinion of the Taxation Officer –

(a) the return filed under section 64 is required to be examined; or

(b) particulars of any income are required to be investigated; or

(c) particulars of any income have not been furnished or have been wrongly furnished, he may serve on the assessee a notice requiring him to produce or cause to be produced such accounts, documents, statements or information as the Taxation Officer may require, after recording the reasons for issuing the notice in writing.

(4) The notice under sub-clause (a) of clause (3) shall be issued before the expiry of two years from the end of the financial year in which the due date as mentioned in section 64 falls.

(5) The notice under sub-clause (b) or (c) of the clause (3) shall be issued before the expiry of four years with the approval of the Additional/Deputy Commissioner and eight years with the approval of the Commissioner, from the end of the year to which the particulars of the said income, in the opinion of the Taxation Officer, relate.

(6) Where a notice under clause (3) has been served on the assessee, the Taxation officer shall, after hearing such evidence as the assessee may produce or the Taxation Officer may require to be produced and after taking into account all relevant materials which he has gathered, make an assessment or revise the assessment of the income of the assessee and determine the sum payable by him or refundable to him within one year from the end of the financial year in which the notice is served.

(7) Where the assessee fails to respond to the notice under clause (3) or to comply with all the terms of the notice, the Taxation Officer after taking into account all the relevant materials he has gathered, shall assess the income to the best of his judgement and determine the sum payable by the assessee.

(8) Where as a result of –

(a) any mistake apparent from record; or

(b) any order passed under any provision of the Act including Chapter 9, any order passed under the Act is required to be rectified, the Taxation Officer shall pass such an order of rectification within one year from the end of the financial year in which such mistake or order is intimated to the assessee;

Provided that where such an order affects the assessee in any adverse manner, he shall be given a reasonable opportunity of being heard.

(9) If the Commissioner, either of his own motion or on an application made by the assessee, considers that any order passed by the Taxation Officer is erroneous or prejudicial to the compensations of revenue or of the assessee, he may, after giving the opportunity of being heard to the assessee, call for and examine the record of any such proceedings and make or cause to be made such enquiry as he deems necessary, and, pass such order as is justified including an order enhancing, reducing, modifying or cancelling the assessment or directing a fresh assessment:

Provided that no such order, either by the Commissioner himself or through the Taxation Officer, shall be passed after the expiry of two years from the end of the financial year in which the order being revised by the Commissioner was passed.

Part 2 – Special Cases

66. (1) Where a person dies, his legal representative or the executor shall be liable to pay any sum, which the deceased would have been liable to pay under the Act if he had not died.

(2) Any proceeding taken or which could have been taken against the deceased before his death shall be continued or initiated, as the case may be, against the legal representative or the executor, and all the provisions of the Act shall apply to him accordingly.

(3) The liability of a legal representative or the executor shall be limited to the value of the estate of the diseased:

Provided that, if he creates a charge on or disposes of or parts with any part of such estate, he shall also be personally liable to that extent.

67. (1) Every representative assessee shall be deemed to be an assessee for the purposes of the Act.

(2) Assessment shall be made in the name of the representative assessee in respect of the income for which he is the representative assessee.

(3) The representative assessee shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially and any sum payable under the Act in respect of such income shall be recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.

(4) Every representative assessee who, as such, is liable to pay any sum under the Act as estimated by him or intimated to him by the Taxation Officer, shall be entitled to recover the sum so payable from the person on whose behalf it is paid, or to retain out of any moneys that may be in his possession or may come to him in his representative capacity, an amount equal to the sum so payable.

Part 3 – Settlement of Cases

68. There shall be a settlement committee consisting of one Chief Commissioner and two Commissioners of Inland Revenue as prescribed by the Board for the settlement of the cases in accordance with the provisions of this Chapter.

69. An assessee who is aggrieved against the assessment of any part of his income or any liability under any provisions of the Act, may, within one month of receiving such order, make an application in such form and in such manner as may be prescribed, to the settlement committee to have the case settled in accordance with the provisions of this Chapter.

70. After examination of the records and the report of the Taxation Officer and after giving a reasonable opportunity of being heard to both the assessee and the officer either in person or through the authorised representative, the committee shall pass such order, as it thinks fit.

71. Every order passed under section 70 shall provide for the terms of settlement including any demand for tax, compensation or penalty or whether prosecution proceedings are required to be initiated or not and any other matter to make the settlement effective.

72. The settlement shall be void if the committee subsequently finds that it has been obtained by fraud or misrepresentation of the facts and in that event all the provisions of the Act shall apply as if no such application was ever filed.

73. Any sum due under the provisions of this Chapter shall be recovered under the provisions of Part 6 of Chapter 6 likely any other dues under other provisions of the Act.

74. Where there is a mistake apparent from record, the settlement committee may rectify the order under section 70, as it thinks fit but not after one year of passing such order.

75. Every order of settlement passed under section 70 shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided under this Chapter, be reopened in any proceedings under the Act or under any other law for the time being in force.

76. Any proceedings under this Chapter before the settlement committee shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purposes of section 196, of the Pakistan Penal Code (XLV of 1860).

CHAPTER 5

ENFORCEMENT

77. Where the Commissioner, in consequence of information in his possession, has reason to believe that –

(1) any person has failed to comply with any requirements of a notice under section 12 of the Act; or

(2) any person is not likely to comply with any requirements of a notice under section 12 of the Act; or

(3) any person is in possession of money, valuables or asset which he has not disclosed or in respect of which he is not likely to have any satisfactory explanation, then, he may authorise any inland revenue authority to

(a) enter and search any building, place, vessel, vehicle or aircraft where such books of accounts or documents or such money, valuables or asset or such person whose personal attendance is required are likely to be available;

(b) break open the lock of any door, box, locker, safe, almirah, or other receptacle for exercising the powers conferred by clause (a) where the keys thereof are not available;

(c) search any person who has got out of, or is about to get into, or is in, the building, place, vessel, vehicle or aircraft, if the authorised officer has reason to suspect that such person has secreted about his person any such books of account or documents or money, valuables or assets;

(d) seize any such books of account or documents, or money, valuables or assets;

(e) place marks of identification on any books of accounts or documents or make or cause to be made extracts or copies therefrom; and

(f) make a note or an inventory of books of account or documents, or of money, valuables or assets found therein.

78. The authorised officer may requisition the services of any police officer or of any officer of the Federal Government, or of both, to assist him for the purposes of section 77 and it shall be the duty of every such officer to comply with the requisition.

79. The authorised officer may serve an order on the owner or the person who is in immediate possession or control of such books of accounts, documents, money, valuables or assets that he shall not remove, part with or otherwise deal with it except with the previous permission of such officer and such officer may take such steps as may be necessary for ensuring compliance with this section.

80. The authorised officer shall have all the powers provided under section 12 for making such investigation as may be required and any statement made by any person during such investigation may be used in evidence in any proceeding under the Act.

81. Where any books of accounts, documents, money, valuables or any assets are found in the possession or control of any person, it shall be deemed to be true and belonging to that person or owned by that person unless the explanations offered by him are satisfactory in the opinion of the authorised officer.

82. Where on the basis of books of accounts, documents, money, valuables, assets or any other evidence found during the search or thereafter, the authorised officer is of the opinion that any income was required to be disclosed under the provisions of the Act but was not disclosed or where it was not required to be disclosed because the due date for filing the return of income was not over, it was not entered in the books of accounts regularly being maintained by the assessee, he shall pass an order Taxation such income as income from undisclosed sources for that year in which the search action was taken and determine the liability in respect of such income payable by the assessee within one year of taking such action.

83. The authorised officer shall apply the money, valuables or assets seized under section 77 or restrained under section 79 towards liability determined under section 82 or any other liability under any other provisions of the Act in the manner prescribed by the Board and release the balance to the person from whose custody it was seized alongwith the books of accounts or documents, if in his opinion these are not required or any other proceeding under the Act.

84. The person, from whose custody any books of accounts or documents are seized under section 77 or restrained under section 82, may make copies thereof, or take extracts therefrom, in the presence of the authorised officer or any other person empowered by him in this behalf, at such place and time as the authorised officer may appoint in this behalf.

85. The Additional/Deputy Commissioner shall exercise the following powers to collect information for the determination of income or any liability under the provisions of the Act in the case of the assessee or of any other case or in general-

(1) Where any books of accounts or documents, which are in his opinion relevant for any proceeding under the Act, have been taken into custody by an officer or an authority under any law for the time being in force, he may requisition such books of accounts or documents and require such officer or authority to deliver such books of accounts or documents to an inland revenue authority as authorised by him;

(2) he may require any person to furnish information regarding names and addresses of any other person or persons available with him or details of any transactions entered into by him or details of any books of accounts, documents, valuables or assets belonging to him or belonging to others but in his custody or in his knowledge;

(3) he may authorise any authority to enter any place at which a business or profession is carried on during the hours at which such place is open for the conduct of business or profession –

(a) to inspect such books of accounts or documents as may be available;

(b) to verify or check the cash, stock or other valuable article or thing found therein; and

(c) to collect such information as may be relevant to or useful for any proceeding under the Act.

(To be continued)

(The views expressed and proposals made in this article are not necessarily those of the newspaper)

Huzaima Bukhari and Dr Ikramul Haq, "Budget 2014-15: Essential tax reforms – II," Business recorder. 2014-04-12.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Economy-Pakistan , Tax policy , Tax reform , Taxation , Budget 2014-15 , Pakistan