TAXATION NOTES (4)
Income from business
Profits or gains of any business carried on by a person during the year
Income derived from trade, profession etc.
Gains arising from revaluation/impairment of fixed assets/investments or unrealized
gain etc. are not taxable as these are not real profits and can only be taxed when these
are actually realized.
Deductions allowed
Any expenditure incurred by a person in the year, wholly and exclusively for
business purposes
(Tax) Depreciation/amortization on assets
Deductions not allowed
An expense may be an accounting expense but inadmissible for tax purposes and therefore
shall be added back in the accounting profit when calculating taxable income. For example
the following:
Entertainment (means the provision of meals, refreshments, and reasonable
leisure facilities in accordance with the tradition of business) except:
o Abroad, in connection with business
o In Pakistan, on local/foreign customers
o At meetings of directors/shareholders
o Refreshment of employees
o Entertainment of persons directly related to business
o At the opening of branches
Contribution to a non recognized provident fund/gratuity fund/pension fund
Fine/penalty for violation of law
Personal expenditures incurred by person
Donations (allowed as a tax credit)
Any provision (e.g doubtful debts, warranties etc)
Expenditure of a capital nature
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Any expenditure for a transaction>Rs.250,000 in aggregate per annum, under a
single head of account made other than by crossed cheque/draft/pay
order/online transfer (will not apply to expenditure on account of utility bills,
freight charges, travel costs, postage, payment of taxes)
Single payment in cash >Rs.25,000
Any salary paid/payable >Rs32,000 per month other than by crossed cheque or
direct transfer of funds to employee bank account
Amounts subject to withholding tax paid without tax deduction: salary/rent etc.,
etc.
Accounting depreciation (instead tax depreciation allowed as deduction)
Other expenditures not allowable:
o 10% expenditure attributable to purchase from a person who is not an
NTN holder
o 8% expenditures attributable to sales claimed by any person who is
required to integrate with FBR but fails to do so.
o 50% of expenditures attributable to sales is inadmissible if the payment
exceeding Rs.200,000 is received in cash against a single invoice
Bad debts
Conditions for admissibility:
a. The debt is written off in the accounts
b. The debt previously included in taxable business income
c. There are reasonable grounds to believe that the debt is irrecoverable
Recovery of a bad debt already allowed as a tax deduction is a taxable amount
Non payment of a liability
Where a person has been allowed a deduction on account of an expenditure and liability
in respect of such expenditure is not paid within three (3) years of the end of the tax
year in which it was allowed, such liability shall be treated as income from business after
the expiry of above said three years.
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