This blog is written by Mr. Ikram Ul Haq, Manager Taxation and Corporate Services. Please read this well written blog and provide your valued comments.
Determination of taxable income
The computation is generally based on the audited financial statements, subject to certain adjustments. Directly or indirectly, any income derived from PE or any other business in Pakistan (through any asset, property or source of income or through the sale of a capital asset located in Pakistan) is subject to tax.
Expenses incurred to derive income from business that is subject to tax are allowed as deductions to arrive at taxable income. For Extensions (branches) of foreign companies, allocated head-office expenses may be deducted, up to an amount calculated by applying the ratio of Pakistani turnover to worldwide turnover.
Inventory for a tax year is valued at the lower of cost or net realizable value of the inventory on hand at the end of the year. The method of valuation should be applied consistently from year to year, but the tax authorities may give permission for change of method.
General provisions for bad debts are not allowed as deductions from income. However, if the income tax officer finds a debt irrecoverable, than a charge for specific bad debts may be allowed.
Depreciation recorded in the financial statements is not allowed for tax purposes. Tax depreciation allowances are allowed on assets, such as buildings 10%, plant and machinery & Vehicles 15%, IT equipment’s 30%, computers and furniture 15%, below ground installation 100%, owned by the company and used for business purposes. A full year depreciation allowance is allowed in the year the asset is placed in service, but in the year of disposal no depreciation allowance is allowed.
Certain other allowances relating to capital expenditure have been introduced. These allowances are summarized as below:
An initial depreciation allowance is available at a rate of 15% for buildings and at a rate of 25% for all other categories of eligible depreciable assets placed in service in Pakistan. The allowance is granted in the tax year in which the assets are first placed in use in Pakistan and used in the taxpayer’s business for the first time, or in the tax year in which commercial production begins, whichever is later.
A first-year depreciation allowance at a rate of 90% is allowed for plant, machinery and equipment installed by an industrial undertaking established in specified rural and underdeveloped areas. A first-year depreciation allowance at a rate of 90% is given for plant machinery and equipment installed for generation of alternate energy or manufacturing of mobile phones.
This allowance is available to an industrial undertaking set up anywhere in Pakistan and owned and managed by a company. The allowance is granted instead of the initial allowance.
Amortization of intangibles
Amortization of intangibles is allowed over the normal useful life of intangibles or ten years (whichever is less).
The amortization of expenses incurred before the commencement of business is allowed on a straight-line basis at an annual rate of 20%.
Relief for losses
Business losses, other than capital losses and losses arising out of speculative transactions may be carried forward to offset profit in subsequent years for a period not exceeding six years. Unabsorbed depreciation may be carried forward indefinitely.
Groups of companies
A group of companies comprising holding companies and subsidiaries in a 100% owned group can file its tax returns as one fiscal unit, relying upon certain conditions. In addition, on the satisfaction of certain conditions, group companies can surrender their assessed losses (excluding capital losses and losses brought forward) for the tax year to other group companies. The amount of loss to be surrendered is calculated in the ratio of the percentage of shareholding of the holding company in the subsidiary company. The option of group taxation is available to group companies that comply with the corporate governance requirement and group designation rules or regulations, as specified by the Securities and Exchange Commission of Pakistan.
Alternative corporate tax
If the corporate tax is less than 17% of the accounting income (excluding certain types of income and related expenses), alternative corporate tax is required to be paid as minimum tax. The difference between the corporate tax and alternative corporate tax can be carried forward to offset corporate tax for a maximum period of 10 years. For the 2018 tax year (income year ending on any day between 1 July 2017 and 30 June 2018), the tax rate is 30%.
Resident companies and non – resident banking companies are subject to a minimum income tax equal to 1.25% of gross receipts from sales of goods, services rendered and the execution of contracts, if the corporate tax liability is less than the amount of the minimum tax.
Advance tax payments
In general, advance tax is payable quarterly based on the tax to turnover ratio of the latest tax year. However, banking companies must pay advance tax on a monthly basis. If the tax liability is estimated to be more or less than the tax charged for the prior tax year, an estimate of tax liability can be filed and advance tax liability can be paid in accordance with such estimate, subject to certain conditions. For taxpayers other than banking companies, the due dates for the advance tax payments are 25 September, 25 December, 25 March and 15 June. Banking companies must pay advance tax by the 15th day of each month. Adjustable quarterly advance tax on capital gains from sale of securities is payable on the capital gains derived during the quarter by companies at a rate of 2% if the holding period is less than 6 months and 1.5% if the holding period is between 6 and 12 months.
Withholding tax is an interim tax payment that may or may not be the final tax liability. Amounts withheld that are not final taxes are credited to the final tax liability of the taxpayer for the relevant year.
An income tax return must be filed by 30 September of the following year if the company’s year-end is from 1 July through 31 December and by the following 31 December if the year-end is from 1 January through 30 June. Any balance due after deducting advance payments and withholding taxes must be paid when the tax return is filed.
Ikram Ul Haq