This blog is written by Mr. M. Shafaat Ali, Assistant Manager, Taxation Advisory Services. Please read this blog and provide your valued comments.
Income from Business- Inadmissible Deduction
Income from business is a 3rd source of income from which a person can drive income. Income from business is chargeable to tax under section 18 of the Income Tax Ordinance, 2001. Let us define business and deduction allowed against the income under the ITO, 2001.
A business is an organization or enterprising entity engaged in commercial, industrial, or professional activities. Businesses can be for-profit entities or nonprofit organizations that operate to fulfill a charitable mission or further a social cause. Business is also the organized efforts and activities of individuals to produce and sell goods and services for profit.
Deductions Not Admissible (Section 21)
Certain expenses have been charged to profit and loss account by the business entity, but these expenses are not admissible for the purpose of taxation, these expenses have been add back to the net profit of the company. The following expenses are not admissible by the tax authorities under the ITO, 2001.
- Amount paid or payable on account of any cess, rate or tax levied on profits or gains of business or assessed as percentage or otherwise on the basis of such profits or gains. Tax shall include any tax paid or payable in Pakistan or in a foreign country. Note: In case where sales tax paid by a tax payer is not charged by him to his customers, such sales tax shall be allowed as deduction.
- Any amount of tax deducted at source under division III of Part V of Chapter X. being tax deducted at source u/s 149 to 158.
- Any sum paid on account of salary, profit on debt, brokerage, commission, rent, payment to non-resident, payment for services or fee paid by the person unless tax is paid or deducted at source and paid under Income Tax Ordinance, 2001.
- Any entertainment expenditure in excess of such limits or in violations of such conditions as may be prescribed.
Limits prescribed for allowing any expenditure on entertainment are as under (Rule 10).
Expenditure should be incurred in deriving income from business chargeable to tax and should not be in excess of following limits or in violation of condition specified:
- a) Such expenditure is: –
- Incurred outside Pakistan on entertainment in connection with business transactions: or
- Allocated as head office expenditure; or
- b) Incurred in Pakistan on the entertainment of foreign customers & suppliers;
- c) Incurred on the entertainment of customer & clients at the person’s business premises
- d) Incurred on the entertainment at the meeting of shareholders, agents, directors or employees
- e) Incurred on entertainment at the opening of branches.
Note All these person (who are entertained) should be related directly to the person’s business.
- Any contribution to un-recognized provident fund, unapproved pension, superannuation or gratuity funds. Moreover, contributions to any fund unless effective arrangements are made to deduct tax shall also be inadmissible.
- Any sum paid by an association of persons to a member of the association on account of profit on debt, commission, salary, brokerage or any other remuneration.
- Any expenditure paid or payable exceeding Rs. 10,000 on a single item is inadmissible if the balance under relevant head of account exceeds Rs.50,000 and the payment is made otherwise than through crossed bank cheque or crossed bank draft or crossed pay order or any other crossed banking instrument showing transfer of amount from the business bank account of the taxpayer.
- Provided that online transfer of payment from the business account of the payer to the business account of payee as well as payments through credit card shall be treated as transactions through the banking channel, subject to the condition that such transactions are verifiable from the bank statements of the respective payer and the payee.
However, this shall not be applicable in case of payments for:
- freight charges; –
- travel fare; –
- postage; –
- utility bills; and –
- taxes, duties, fee, fines or other statutory obligation
- Salary exceeding Rs.15,000 per month not paid through crossed cheque or bank transfer to employee’s account.
- Any payment of a fine or penalty for the violation of any law or rule or regulation.
- Any personal expenditure.
- Any amount carried to a revenue fund or capitalized in any way.
- Any capital expenditure. However, depreciation or amortization shall be allowed in respect of a depreciable asset, intangible or pre-commencement expenditure.
Hafiz Muhammad Shafaat Ali