Welcome to the Income Tax Frequently Asked Questions (FAQs)

Navigating the complexities of income tax can be challenging, but we're here to help. This page is designed to provide clear and concise answers to your most pressing tax-related questions. Whether you're seeking guidance on taxable income, exemptions, deductions, or allowances, our goal is to simplify the tax process and empower you with the information you need. Browse through the queries or submit your own to get expert insights and practical advice tailored to your concerns. Let's make understanding income tax straightforward and stress-free!

Q: How to save advance income tax on K-Electric Bill?

A: KnS Institute of Business Studies by Mr. Munir Shafi

Chapter 2 - Charge of Tax

Q: What is a tax credit?

A: A tax credit is like a discount on the amount of tax you need to pay to the government. For example, if you owe $1,000 in taxes and you have a $200 tax credit, you only need to pay $800. It directly reduces the tax amount, not just your income.

Q: In what order are tax credits applied if a taxpayer has more than one tax credit for a tax year?

A: A taxpayer is allowed more than one tax credit for a tax year, the credits shall be applied in the following order:

• Any foreign tax credit allowed under section 103 (Foreign Tax Credit Section).
• Any tax credit allowed under Part X of Chapter III i.e. Tax credits.
• Any tax credit allowed under sections 147 and 168.

Q: Tax on foreign income i.e. money earned by Pakistanis working abroad and transferred to Pakistan.?

A: Subsection 1 of section 103 states that “'Any foreign source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary.”

Subsection 2 of section 103 states that “A resident individual shall be treated as having paid foreign income tax in respect of foreign source salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue authority of the foreign country in which the employment was exercised.”

In short, a resident individual's foreign source salary is exempt from tax if foreign income tax has been paid on the salary. This condition is satisfied if the employer has withheld the tax and remitted it to the revenue authority of the foreign country where the employment was performed.

Q: What is Super Tax?

A: Super tax is an additional tax imposed on individuals or entities with high levels of income or profits.

Q: What is undistributed profit?

A: Undistributed profit refers to the portion of a company's net profit that is not distributed to shareholders as dividends. Instead, it is retained by the company for reinvestment or other purposes. If a company earns $1,000,000 in net profit and decides to pay $300,000 as dividends, the remaining $700,000 is the undistributed profit.

Q: How much tax on undistributed profit?

A: From 2017 to 2019, public companies (except banks or modarabas) had to pay 5% extra tax on their profits if they didn’t share at least 20% of their after-tax profits as cash dividends within six months of the year ending.

Exceptions:

• Companies that are tax-exempt under specific rules.
• Companies where the government owns 50% or more shares.

For 2017, companies could distribute cash dividends or bonus shares before the tax filing deadline.

Q: How much tax on Non-Residents who earn money from Pakistan through royalties, fees for offshore digital services, or fees for technical services?

A: Non-residents who earn money from Pakistan through royalties, fees for offshore digital services, or fees for technical services must pay tax at the rate specified in the law. The tax is applied to the total amount (gross) of the royalty or fees earned by the non-resident.

This tax does not apply if:

• The royalty comes from property or rights linked to a permanent business setup in Pakistan.
• The services that generate the fee are provided through a permanent business setup in Pakistan.
• The royalty or fees are exempt from tax under specific rules.
• If the exception applies, the royalty or fees will instead be treated as regular business income from the non-resident's permanent setup in Pakistan.

Q: How much tax on shipping and air transport income of a non-resident person?

A: A tax is imposed on non-residents operating ships or aircrafts for gross amounts received from carrying passengers, livestock, mail, or goods embarked in Pakistan and gross amounts received in Pakistan for carrying passengers, livestock, mail, or goods embarked outside Pakistan. The tax is calculated on the gross amount at the rate specified in Division V of Part I of the First Schedule. However, this section does not apply to amounts that are exempt from tax.

Q: How much tax on shipping of a resident person?

A: For resident persons engaged in the shipping business tonnage tax rates are:

• For ships and floating crafts flying the Pakistan flag: $1 per gross registered ton per year.
• For ships not registered in Pakistan, but chartered (excluding bare-boat charters): $0.15 per ton per chartered voyage, with a maximum of $1 per ton per year.
• For Pakistan resident ship-owning companies registered after November 15, 2019: $0.75 per ton of gross registered tonnage per year.

However, this section is applicable only until June 30, 2030.

Chapter 3 - Tax on Taxable Income

Q: How be the total income of a person determined?

A: The total income of a person for a tax year shall be the sum of the person’s income under all heads of income for the year and person’s income exempt from tax under any of the provisions of this Ordinance.

Q: How the income shall be classified?

A: all income shall be classified under the following heads, namely:

• Salary
• Income from Property
• Income from Business
• Capital Gains
• Income from Other Sources

Q: What is the definition of ‘Salary” and what types of incomes are part of “Salary”?

A: Salary refers to any amount received by an employee from employment, whether revenue-based or capital-based.

It includes:

• Remuneration: Pay, wages, leave pay, payment in lieu of leave, overtime, bonuses, commissions, fees, gratuities, and supplements for working conditions. Perquisites: Any non-monetary benefits, whether convertible to cash or not.

• Allowances
  • Cost of Living Allowance: Provided to help employees cope with inflation or higher living expenses in specific locations.
  • Subsistence Allowance: Covers basic necessities like food and lodging, often for employees working away from home.
  • Rent Allowance: Offered to assist employees in paying for their housing.
  • Utilities Allowance: Supports expenses for electricity, water, gas, or other utilities.
  • Education Allowance: Helps cover costs related to the employee’s or their dependents’ education.
  • Entertainment Allowance: Provided for expenses incurred during business-related entertainment activities.
  • Travel Allowance: Covers transportation costs for work-related travel.
    • Allowances Excluded from Taxation:
      
      • Allowances that are solely spent on job-related duties are not taxable. For example:
      • Travel allowance used strictly for official business trips.
      • Reimbursement for job-specific education expenses.
    • Taxable Allowances:
      • Fixed Salary Component: If the allowance is paid as a regular part of the employee's monthly salary, it is taxable. For example:
      • A fixed monthly travel allowance irrespective of actual travel.
      • Not Wholly Spent for Employer Purposes: If the allowance is not entirely used for job-related activities, the unused portion becomes taxable income. For example:
      • An education allowance partly used for personal educational pursuits.
• Reimbursements: Reimbursements refer to payments made by an employer to cover expenses incurred by an employee during their employment. These reimbursements are categorized based on whether they are job-related or non-job-related:
  • Job-Related Reimbursements (Exempt from Tax):
    • Expenses incurred exclusively and necessarily on behalf of the employer during the course of employment.
    • Examples:
      • Travel costs for attending business meetings or events.
      • Accommodation expenses for official trips.
      • Office supplies or equipment purchased for job-related purposes.
      • These payments are not taxable because they are considered direct business expenses reimbursed to the employee.
  • Non-Job-Related Reimbursements (Taxable):
    • Payments or reimbursements for expenses that are not wholly for job-related purposes or for personal use.
    • Examples:
      • Reimbursement for a personal mobile phone plan that is only partly used for work.
      • Payments for personal subscriptions or memberships unrelated to employment duties.
      • General living expenses covered by the employer, such as housing or meals unrelated to specific job assignments.
    These payments are treated as taxable income because they benefit the employee personally and are not tied directly to the employer’s business needs.
  Profits in Lieu of Salary: Profits in lieu of salary refer to payments or benefits received by an employee in addition to or instead of regular salary or wages. Profits in lieu of salary encompass any additional or replacement payments connected to employment, such as signing bonuses, termination compensation, restrictive covenants, and retirement benefits. These amounts are taxable as part of the employee’s total income unless specific exemptions apply. These amounts are taxable under employment income laws and include the following categories:
  • Payments for Entering or Changing Employment Conditions:
    • Compensation received for:
      • Agreeing to accept an employment offer.
      • Agreeing to changes in employment terms (e.g., reduced benefits or altered roles).
      • Example: A signing bonus for accepting a new job or agreeing to a transfer.
  • Termination-Related Compensation:
    • Payments received upon leaving employment, voluntarily or involuntarily, such as:
      • Redundancy Pay: Compensation for being made redundant.
      • Golden Handshake: Lump-sum payment upon retirement or termination.
      • Severance Packages: Payments for ending employment, whether part of a contract or voluntary.
      Such payments are considered part of employment benefits and are taxable.
  • Non-Deductible Fund Contributions: Payments received from funds like provident or retirement funds to the extent that they are not repayments of employee contributions. Example: A portion of a provident fund withdrawal representing the employer's contributions and growth may be taxable if not otherwise exempt.
  • Restrictive Covenant Agreements: Compensation for agreeing to restrictions after employment, such as: Not joining a competitor for a specific time or region. Example: A lump-sum payment in exchange for agreeing not to work for a competitor for two years.
  • Pensions and Annuities:
    • Pensions: Regular payments received after retirement, often as part of a retirement plan.
    • Annuities: Fixed payments received periodically, typically from an investment or retirement scheme.
    • Supplements: Any additional payments linked to pensions or annuities. These amounts are taxable as they are considered deferred employment income.
  • Other Taxable Amounts (as per Section 14 or Relevant Tax Laws): Any payment classified as salary or income under specific legal provisions, such as:
    • Performance bonuses or incentives.
    • Deferred salary payments.
    • Any other employment-related earnings as defined by tax laws.