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Karachi, Pakistan
This Blog has been developed for online guidance and coaching of CA students.

Sunday, February 20, 2011

Tax Credit against Profit on Debt to Employee

Q: Is tax credit for 'profit on debt' u/s 64 of the ITO-2001 allowed to an employee who has used concessional loan from employer in construcion/acquisition of new house?

Ans. Tax credit on profit on debt u/s 64 is allowed against a profit on debt paid by a person to any of the persons listed in sub-section (1) of sec 64 i.e. Scheduled Bank, NBFC, Govt, Local Govt, Public Listed Co., or any statutory body.

An employee shall be allowed a tax credit aginst profit on debt deemed to have been paid u/s 13(8) of ITO-2001 by him to his employer if the employer is among any of the persons listed in Sec.64(1). In case the person is employee of any other person e.g. individual, tax credit u/s 64 shall not be allowed.

Friday, February 18, 2011

Business Losses

Q1: Is inter-head setting off allowed for broght forward normal business losses?

Ans. Brought fwd normal business loss is not allowed inter head setting off. Normal business loss for the current year is allowed setting of from income under any other head. Current loss not being able to be set of is carried forward to the next tax year, and is set of only from income under the head Income from Business. [Reference S.57(1)]

Q2: Which of the two following broght fwd loss is set of first: depreciation loss or normal business loss.

Ans. According to Sec. 57(4), depreciation loss is set of first by adding it in the depreciation deductions for the the year, and thereafter b/f normal business loss is set of from net income.

Meaning of Construction Materials Supplied by Govt

Q: What does this phrase mean: " payment made by the Govt to a contractor for construction material supplied to the contractor by such Govt." [Used in Section 153(5)(ba)]

Ans. In construction contracts given by a Govt to contractors, the Govt sometimes makes part payment in the form of contruction materials. For example a contract amounting to Rs. 30 (m) is awarded by Govt to a private contractor for construction of a road. Out of this amount Rs. 25 (m) are given in cash, whereas construction material worth Rs. 5 (m) is given to the contractor. In such situations tax is not required to be deducted u/s 153 from the contract amount representing the contruction materials [i.e. Rs. 5 (m) in this example]. Thus, tax is be deducted at 6% of Rs. 25 (m) only.

Thursday, February 17, 2011

Purchases from and Supplies to Un-registered Person (Sales Tax)

Q: What are the implications of purchases made from and supplies made to unregistered person under the Sales Tax Act, 1990?

Ans. No input tax credit is allowed on purchases made from unregistered person, whereas out put tax is charged on supplies made to unregistered person.

Wednesday, February 16, 2011

What is Separate Block of Income

Q: What is Separate Block of Income? Explain with examples.

Ans. The method of computation of taxable income and tax thereon is to first compute the income under each head of income by deducting 'deductions allowed', if any, from 'amount chargeable' under the head. Incomes under all five heads are then added up to get 'total income', from which are reduced 'deductible allowances'. The resulting amount is called 'taxable income'. Tax rates given in the first schedule to ITO-2001 are then applied to the whole amount of the taxable income to determine the tax liability of the person for the year.

However, there are few exceptions to this method of computation of tax liability. There are some incomes which are treated separately as a 'separate block of income'. These types of income are given below:

(1) incomes subject to final tax (FTR) are not included in any head and are to be treated separately.

Example: Dividend recieved by an individual amounting to Rs. 200,000 from which tax has been deducted at sources at Rs. 20,000.

(2) certain incomes are subject to lower tax rates than are normally applicable, such as income from property, capital gains, and golden handshake amount etc. Though such incomes are taken into account while computing taxable income but are subtracted from it at the time of application of tax rates.

Example:

Income from Business..................................800,000
Income from Property....................................400,000
Total income................................................1,200,000
L:Deductible Allowance.................................50,000
Taxable Income...........................................1,150,000
L:Income from Property.................................400,000
Taxable Income ( for Normal rates).................750,000
Income from Property ( for Reduced rates)....... 400,000

Sunday, February 13, 2011

Advance Tax

Q: List down various types of incomes which are not taken into consideration while calculating advance tax?

Ans:

1. Dividends (S.5)

2. Certain payments to non-residents (S.6)

3. Shipping and air transport income of a non-resident person (S.7)

4. Income from Property

5. Salary

6. Income that is subject to deduction/ collection of tax under Division II or Division III, or Chapter XII and which is subject to final taxation.


A taxpayer deriving income exclusively from one or more of these sources is not required to pay advance tax. In case a person derives incomes subject of advance tax and incomes not subject to advance tax, the person is required to pay advance tax only in relation to incomes that are subject to advance tax.

[See Para 22.1.2 of 'Taxation in Pakistan' or Sec. 147(1) of the ITO-2001]

Friday, February 11, 2011

Meaning of 'Securitization"

Q: What is the meaning of ''securitization"?

Ans. It means sale of accounts recievables by any person (called 'originator') to Special Purpose Vehicle (SPV) which then collects those recievables from the debtors. Note that only a public limited company, a trust or a company controlled or managed by Fed/Provincial Government can function as SPV after getting registered with the SECP.

(Concept of securitization is relevant for Sec. 28(1)(b) and Sec. 153(5) (d) of the ITO-2001)