Income Tax Ordinance 2001 - Federal Board of Revenue

1 Income TAX Ordinance , 2001 AMENDED UPTO TABLE OF CONTENTS SECTIONS CHAPTER 1 PRELIMINARY PAGE NO. 1. Short title, extent and commencement 1 2. Definitions 1 3. Ordinance to override other laws 25 CHAPTER II CHARGE OF TAX 4. Tax on taxable Income 26 4B. Super tax for rehabilitation of temporary displaced persons. 27 5. Tax on dividends 28 5A. Tax on undistributed Profits. 28 5AA. Tan on return on investments in Sukuks. 29 6. Tax on certain payments to non-residents 29 7. Tax on shipping and air transport Income of a non-resident person 30 7A. Tax on shipping of a resident person. 30 7B. Tax on profit on debt 31 7C. Tax on builders 31 7D. Tax on developers 32 8. General provisions relating to taxes imposed under sections 5, 6 and 7 33 CHAPTER III TAX ON TAXABLE Income PART I COMPUTATION OF TAXABLE Income 9. Taxable Income 35 10. Total Income 35 11. Heads of Income 35 PART II HEAD OF Income SALARY 12.

2 Salary 37 13. Value of perquisites 39 14. Employee share schemes 43 PART III HEAD OF Income Income FROM PROPERTY 15. Income from property 45 15A. Deductions in computing Income chargeable under the head Income from Property 46 16. Non-adjustable amounts received in relation to buildings 48 17. Omitted by the Finance Act, 2006. 49 PART IV HEAD OF Income Income FROM BUSINESS Division I Income from Business 18. Income from business 50 19. Speculation business 51 Division II Deductions General Principles 20. Deductions in computing Income chargeable under the head " Income from Business" 53 21. Deductions not allowed 53 Division III Deductions Special Provisions 22. Depreciation 57 23. Initial allowance 61 23A. First Year Allowance 62 23B. Accelerated depreciation to alternate energy projects. 62 24. Intangibles 62 25. Pre-commencement expenditure 65 26. Scientific research expenditure 65 27.

3 Employee training and facilities 66 28. Profit on debt, financial costs and lease payments 66 29. Bad debts 68 29A Provision regarding consumer loans 69 30. Profit on non-performing debts of a banking company or development finance institution 70 31. Transfer to participatory reserve 70 Division IV Tax Accounting 32. Method of accounting 71 33. Cash-basis accounting 71 34. Accrual-basis accounting 71 35. Stock-in-trade 72 36. Long-term contracts 74 PART V HEAD OF Income CAPITAL GAINS 37. Capital gains 75 37A. Capital gain on disposal of securities 77 38. Deduction of losses in computing the amount chargeable under the head Capital Gains 78 PART VI HEAD OF Income Income FROM OTHER SOURCES 39. Income from other sources 80 40. Deductions in computing Income chargeable under the head Income from Other Sources 82 PART VII EXEMPTIONS AND TAX CONCESSIONS 41. Agricultural Income 84 42.

4 Diplomatic and United Nations exemptions 85 43. Foreign government officials 85 44. Exemptions under international agreements 85 45. President s honours 86 46. Profit on debt 86 47. Scholarships 87 48. Support payments under an agreement to live apart 87 49. Federal Governments, Provincial Government and Local Government 87 50. Foreign-source Income of short-term resident individuals 88 51. Foreign-source Income of returning expatriates 88 52. Omitted by Finance Ordinance , 2002 89 53. Exemptions and tax concessions in the Second Schedule 89 54. Exemptions and tax provisions in other laws 91 55. Limitation of exemption 91 PART VIII LOSSES 56. Set off of losses 92 56A. Set off of losses of companies operating hotels. 92 57. Carry forward of business losses 92 57A. Set off of business loss consequent to amalgamation 93 58. Carry forward of speculation business losses 94 59.

5 Carry forward of capital losses 95 59A. Limitations on set off and carry forward of losses 95 59AA. Group Taxation. 97 59B. Group relief 97 PART IX DEDUCTIBLE ALLOWANCES 60. Zakat 100 60A. Workers Welfare Fund 100 60B. Workers Participation Fund 100 60C. Deductible allowance for profit on debt 100 60D. Deductible allowance for education expenses 101 PART X TAX CREDITS 61. Charitable donations 102 62. Tax credit for investment in shares and insurance 103 62A. Tax credit for investment in health insurance 105 63. Contribution to an Approved Pension Fund. 106 64. Omitted by Finance Act, 2015. 108 64A Section re-numbered as 60C 108 64AB Section re-numbered as 60D 108 64B. Tax credit for employment generation by manufacturers 108 65. Miscellaneous provisions relating to tax credits 109 65A. Omitted by the Finance Act, 2017 110 65B. Tax credit for investment 110 65C. Tax credit for enlistment 112 65D.

6 Tax credit for newly established industrial undertakings 112 65E. Tax credit for industrial undertakings established before the first day of July, 2011 114 CHAPTER-IV COMMON RULES PART I GENERAL 66. Income of joint owners 117 67. Apportionment of deductions 117 68. Fair market value 118 69. Receipt of Income 119 70. Recouped expenditure 119 71. Currency conversion 119 72. Cessation of source of Income 119 73. Rules to prevent double derivation and double deductions 120 PART II TAX YEAR 74. Tax year 121 PART III ASSETS 75. Disposal and acquisition of assets 123 76. Cost 123 77. Consideration received 125 78. Non-arm's length transactions 126 79. Non-recognition rules 126 CHAPTER V PROVISIONS GOVERNING PERSONS PART I CENTRAL CONCEPTS Division I Persons 80. Person 128 Division II Resident and Non-resident Persons 81. Resident and non-resident persons 130 82. Resident individual 130 83.

7 Resident company 130 84. Resident association of persons 131 Division III Associates 85. Associates 131 PART II INDIVIDUALS Division I Taxation of Individuals 86. Principle of taxation of individuals 133 87. Deceased individuals 133 Division II Provisions Relating to Averaging 88. An individual as a member of an association of persons 134 88A. Omitted by Finance Act, 2014 134 89. Authors 134 Division III Income Splitting 90. Transfers of assets 135 91. Income of a minor child 136 PART III ASSOCIATIONS OF PERSONS 92. Principles of taxation of associations of persons 137 93. Omitted by the Finance Act, 2007. 137 PART IV COMPANIES 94. Principles of taxation of companies 138 95. Disposal of business by individual to wholly-owned company 138 96. Disposal of business by association of persons to wholly-owned company 140 97. Disposal of asset between wholly-owned companies 142 97A.

8 Disposal of asset under a scheme of arrangement and reconstruction. 143 PART V COMMON PROVISIONS APPLICABLE TO ASSOCIATIONS OF PERSONS AND COMPANIES 98. Change in control of an entity 146 PART VA TAX LIABILITY IN CERTAIN CASES 98A. Change in the constitution of an association of persons 147 98B. Discontinuance of business or dissolution of an association of persons 147 98C. Succession to business, otherwise than on death 147 CHAPTER-VI SPECIAL INDUSTRIES PART I INSURANCE BUSINESS 99. Special provisions relating to insurance business 149 99A. Special provisions relating to traders 149 PART II OIL, NATURAL GAS AND OTHER MINERAL DEPOSITS 100. Special provisions relating to the production of oil and natural gas, and exploration and extraction of other mineral deposits 151 100A. Special provisions relating to banking business. 151 100B. Special provision relating to capital gain tax.

9 152 100C. Tax credit for certain persons 152 CHAPTER VII INTERNATIONAL PART I GEOGRAPHICAL SOURCE OF Income 101. Geographical source of Income 156 101A Gain on disposal of assets outside Pakistan 160 PART II TAXATION OF FOREIGN-SOURCE Income OF RESIDENTS 102. Foreign source salary of resident individuals 162 103. Foreign tax credit 162 104. Foreign losses 163 PART III TAXATION OF NON-RESIDENTS 105. Taxation of a permanent establishment in Pakistan of a non-resident person 164 106. Thin capitalization 166 PART IV AGREEMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION 107. Agreements for the avoidance of double taxation and prevention of fiscal evasion 168 CHAPTER VIII ANTI-AVOIDANCE 108. Transactions between associates 170 109. Recharacterisation of Income and deductions 171 109A Controlled foreign company. 171 110. Salary paid by private companies 173 111.

10 Unexplained Income or assets 174 112. Liability in respect of certain security transactions 177 CHAPTER IX MINIMUM TAX 113. Minimum tax on the Income of certain persons. 178 113A. Omitted by the Finance Act, 2016 180 113B. Omitted by the Finance Act, 2016 180 113C. Alternative Corporate Tax 181 CHAPTER X PROCEDURE PART I RETURNS 114. Return of Income 184 115. Persons not required to furnish a return of Income 190 116. Wealth statement 191 116A Foreign Income and assets statement 193 117. Notice of discontinued business 194 118. Method of furnishing returns and other documents 194 119. Extension of time for furnishing returns and other documents 196 PART II ASSESSMENTS 120. Assessments 199 120A. Omitted by Finance Act, 2013 200 121. Best judgment assessment 200 122. Amendment of assessments 202 122A. Revision by the Commissioner 205 122B. Revision by the Chief Commissioner 206 122C.