CHAPTER 5

BASICS
Contents
1. Person

2. Residential status

3 Scope of Income

4. Tax year

By: Mohsin Iqbal

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 1: PERSON: [Sec 80]
As per sub-section (1) of section 80, following are treated as person:

1. An individual;( whether he/she is alive or dead or whether he/she be a man, woman or child)
2. A company;
3. An association of persons(AOP); or
4. The Federal Government, a foreign government, a political subdivision of a foreign government,
or public international organisation.

2: RESIDENTIAL STATUS:
A person will be a resident in Pakistan for a tax year if the person is:

▪ a resident individual, resident company or resident association of persons for the year; or
▪ the Federal Government.

A very important point to note from the above discussion is that residential and non-residential status
of any person is to be determined in respect of each tax year as it may vary from year to year. A
person can be resident in tax year 2023 (01 July 2022 to 30 June 2023) but may be a non-resident in
tax year 2024 (01 July 2023 to 30 June 2024).

2.1 Resident individual: [Sec 82]

Residential status for tax purpose has no relation with nationality. Residential status of an individual is
based on number of days he is physically present in Pakistan during a tax year. Therefore, a foreigner
can also be a resident person for Pakistan tax purpose. On the other hand, a Pakistan national can
become non-resident for tax purpose.

Resident:
An individual will be a resident individual for a tax year if the individual:
a) is present in Pakistan for a period of, or periods amounting in aggregate to,183 days or more in
the tax year;
b) is an employee or official of the Federal Government or a Provincial Government posted abroad
in the tax year.
c) A citizen of Pakistan who is not present in any other country for more than 182 days during the
tax year or he is not a resident taxpayer of any other country.
Note: The amendment is made basically for those Pakistani citizens who do not stay in one country
for 182 days and remain non-resident for all the countries they reside during the year.

Rule 14 of Income Tax Rules:

Rule 14 of the Income Tax Rules, 2002 states the method for computing the number of days of stay of
an individual in Pakistan. The said rule read as under:
• Part of a day that an individual is present in Pakistan (including the day of arrival in, and the day of
departure from, Pakistan) counts as a whole day of such presence;

By: Mohsin Iqbal

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 • the following days in which an individual is wholly or partly present in Pakistan count as a whole
day of such presence, namely:

i. a public holiday;
ii. a day of leave, including sick leave;
iii. a day that the individual’s activity in Pakistan is interrupted because of a strike, lock-out or
delay in receipt of supplies; or
iv. a holiday spent by the individual in Pakistan before, during or after any activity in Pakistan;
and

• A day or part of a day where an individual is in Pakistan solely by reason of being in transit
between two different places outside Pakistan does not count as a day present in Pakistan.

Example (Assume tax year starts from 01/07/2022 and ends 30/06/2023)

Determine the residential status in each of the following cases:

a) Mr. Majnu is living in a village of Pakistan. He went to China for attending some business meetings 0n 31st July
2022 and remained there till 28th Feb. 2023 and then returned back. Determine his residential status for TY
2023?
b) Mr. Obama is citizen of USA, he came to Pakistan on 1st July 2022 and stayed in Pakistan till December 2022.
Determine his residential status for TY 2023?
c) Mr. Dewana left Pakistan on 1st June 2022 and came back to Pakistan on 31 January 2023. Determine his
residential status for TY 2023?

d) Mr. Habibi is a citizen of Dubai, he visited Pakistan twice in TY 2023. His first trip was from July 15,2022 to
November 13,2022 and his second trip was from February 10,2023 to April 25,2023. Determine his residential
status for TY 2023?

Ans:

a) Non-resident (31+31+30+31+30=153)

b) Resident (31+31+30+31+30+31=184)

c) Non-resident (1+28+31+30+31+30=151)

d) Resident (17+31+30+31+13+19+31+25=197)

Example

A person’s stay in Pakistan is more than 183 days but he is non-resident.

Assume Mr. Ali reached in Pakistan on March 01,2021 and left the country on October 12,2021.

Determine his residential status for TY 2021 and 2022?

Ans: Non-resident in both years.

By: Mohsin Iqbal

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 2.2 Resident company: [Sec 83]
A company will be a resident company in Pakistan for a tax year if:

i. it is incorporated or formed by or under any law in force in Pakistan

ii. the control and management of its affairs is situated wholly in Pakistan at any time in the
year; or
iii. it’s a Provincial Government or Local Government in Pakistan.

2.3 Resident association of persons(AOP): [Sec 84]

An association of persons will be a resident association of persons for a tax year if the control and
management of the affairs of the association is situated wholly or partly in Pakistan at any time in the
year.

2.4 Government:
Government is always resident. (Government individuals are always resident.)

Example

Explain the residential status of the following persons for the tax year 2023:

(i) Mr. Gumsum is working as Director Operations in the Ministry of Tourism. On 15 July 2022 he was
posted to Pakistan Embassy in Italy for two years.
(ii) Anderson LLC was incorporated as limited liability Company in UK. The control and management of its
affairs was situated wholly in Pakistan. However, with effect from 01 November 2022, the entire
management and control was shifted to UK.
(iii) On 01 February 2023, Mr. Bhatti a citizen of Pakistan was sent to Pakistan by his UK based company to
work on a special project. He left Pakistan on 23 August 2023
(iv) BBL is a non-listed public company incorporated under the Companies Act, 2017. All the shareholders
of the company are individuals. The control and management of affairs of the company during the year
was outside Pakistan.
(v) Mr. Kala a property dealer in USA came to Pakistan on 01 February 2022. During his stay upto 02
August 2022 in Pakistan, he remained in Peshawar upto 30 June 2022 and thereafter till his departure
from Pakistan, in Quetta. Assume that Commissioner has granted him permission to use calendar year
as special tax year.

By: Mohsin Iqbal

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Answer

(i) Being an employee of Federal Government, Mr. Gumsum would be treated as resident
irrespective of number of days he stays in Pakistan.
(ii) A company will be resident if control and management of the affairs of the company is situated
wholly in Pakistan at any time in the year. Therefore, company is resident irrespective of the fact
that it was incorporated in UK.
(iii) The stay of Mr. Batti for the purpose of tax year 2023 is 150 days (28+31+30+31+30). Since his
stay in Pakistan is less than 183 days in tax year 2023, he is non-resident for tax purposes.
However, if he is not present in any other country for more than 182 days during the tax year or
he is not a resident taxpayer of any other country then he will be treated as resident of Pakistan.
(iv) If a company is incorporated or formed by or under any law in force in Pakistan, it is treated as a
resident company. Such company cannot be treated as non-resident merely on the basis that
the control and management of the affairs of the company were situated abroad. Therefore,
BBL is a resident company.
(v) It is immaterial where he stayed in Pakistan. Number of days will be counted from the day of his
arrival in Pakistan to the day of his departure in the following manner: Accounting period 01
January 2022 to 31 December 2022 (Tax year 2023)

Month No. of days

February 2022 28
March 2022 31
April 2022 30
May 2022 31
June 2022 30
July 2022 31
August 2022 2
Total 183

Since he was present in Pakistan for 183 days, therefore, he is resident individual. Mr. Kala would not be
resident individual, had the tax year been a normal financial year ending on 30 June 2022.

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3: SCOPE OF INCOME:
A resident person is taxable for his worldwide income subject to agreement for the avoidance of
double taxation (tax treaty) and non-resident is taxable only for his Pakistan source income subject tax
treaty.
Exceptions:
A person will be resident of Pakistan tax purpose but his foreign source income will be exempt in
Pakistan in the following four cases:

3.1 Foreign Source Income Of Short Term Resident:

Foreign source income of short term resident is exempt in Pakistan.
Short term resident is an individual if:
(i) the person is a resident individual solely by reason of the individual’s employment
and
(ii) the person’s stay in Pakistan does not exceed 3 years.
(iii) the person has not brought into or received his/her foreign source income in
Pakistan
▪ This exemption will not be available to:
(i) any income derived from a business of the person established in Pakistan; or
(ii) any foreign source income brought into or received in Pakistan by the person.

3.2 Foreign Source Income of Returning Expatriate:

Foreign Source Income of returning expatriate will be exempt from tax in the year in which the
person became resident and following one tax year.
Returning expatriate is an individual if he/she:

• Was not resident for Pakistan tax purpose in any of the 4 preceding tax years; and
• Is resident in current year

3.3 Foreign Source Salary Of Resident Individual:

Foreign source salary of resident individual is exempt in Pakistan if:

▪ He has paid foreign income tax on foreign source salary or his employer has deducted tax at
source from salary and paid it to the revenue authority of the foreign country; and
▪ Citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax year.

4.4 Tax Treaty:

Tax treaty will apply in case of any contradiction between local laws and tax treaty.

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Example: (Scope of income)

1) During the year, Mr. Jones, a resident individual, derived an income of Rs. 500,000 from his
business in Pakistan. He also earned an amount of USD 5,000 from his business in foreign
country. He did not bring that amount in Pakistan. Exchange rate on that day was Rs./USD 60.
His taxable income is:
a. Rs. 500,000 b. Rs. 300,000 c. Rs. 800,000 d. none of these
2) During the year, Mr. Kaka, a non-resident individual, derived an income of Rs. 500,000 from his
business in Pakistan. He also earned an amount of USD 5,000 from his business in foreign
country. The exchange rate on that day was Rs/USD 60. His taxable income is:

a. Rs. 500,000 b. Rs. 300,000 c. Rs. 800,000 d. none of these

3) Mr. Devdas was working as a Chief Financial Officer at Dawood Pak. Ltd since many years. He
resigned on 31st March of this year went to UK where tax is not deducted. The detail of his
income is as follows to compute taxable income:
Salary from Pakistan Company 600,000
Salary from UK Company 400,000
Business income from Pakistan 500,000
Business income from UK 200,000
a. Rs. 1,100,000 b. Rs. 1,700,000 c. Rs. 1,300,000 d. 600,000
4) Mr. Chu-in-lie has been employed in Pak Ltd. For two years to provide engineering services for
the construction of an electricity Dam in Pakistan. During the year he provided you the following
information to compute his tax liability:
Salary from Pak Ltd 1,200,000
Business income from China 800,000
Business income from Pakistan 700,000
Business income from Dubai 500,000
Salary received from China Company 600,000

Dubai business income was received in Pakistan bank account whereas, China business income
is received in China. Tax has been deducted on all amounts except in UAE.
b. Rs. 1,200,000 b. Rs. 5,500,000 c. Rs. 2,400,000 d. 1,300,000
5) Mr. Zakhmi returned to Pakistan after 6 years of his dedicated service in UK to compute his
taxable income.

Salary from Pak Ltd 600,000

Business income from UK 400,000
Business income from Pakistan 800,000
Business income from UAE 1,000,000
Salary received from China Company 1,200,000

UAE business income was received in Pakistan bank account whereas, China business income is
received in China. Tax has been deducted on all amounts except in UAE.
a. Rs. 1,400,000 b. Rs. 2,600,000 c. Rs. 4.000,000 d. 2,800,000

By: Mohsin Iqbal

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4. Tax year: [Sec 74]
There are three kinds of tax years:

1. Normal tax year

2. Special tax year
3. Transitional tax year

Normal tax year:

Normal tax year is a period of twelve months from 1st July to 30th June and is denoted by the calendar
year in which the tax year ends.

Special tax year:

Any income year other than 30th June is special tax year and is denoted by the calendar year relevant to
normal tax year in which the closing date of the special tax year falls.
Persons Accounting Year Type of Tax Year Tax Year
Nestle Ltd. March 1,2017 to Feb 28,2018 Special 2018
Mr. Khan Jan 1,2016 to Dec 31,2016 Special 2017
ABC Firm July 1,2015 to June 30,2016 Normal 2016
XYZ Co. Sep 1,2015 to August 31,2016 Special 2017

The Board has authority to prescribe any special tax year in respect of any particular class of taxpayer.
For example, in respect of certain classes of assesses following special tax years are specified by the
Board.
Classes of persons Special tax year
Companies manufacturing sugar 1 st October to 30th September
All persons exporting rice 1 st January to 31st December
All banks & insurance companies 1 st January to 31st December

Transitional tax year:

Where the tax year of a person changes as a result of an order by the Commissioner of Income tax either
from the normal tax year to special tax year or vice versa, the period between:

▪ the end of the last tax year prior to change; and

▪ the date on which the changed tax year commences

will be treated as a separate tax year, to be known as ‘transitional tax year’.

Example

Mr. Kanjoos is using a normal tax year. He has obtained permission from Commissioner to use a
special tax year which will end 30th November each year. His current normal tax year is just ended on
June 30th 2015. You are required to show his normal tax year, transitional tax year and special tax
year.

Year Normal tax year Transitional tax year Special tax year
Starting from 1st July 2014 1st July 2015 st
1 December 2015
Ending on 30th June 2015 th
30 November 2015 30th November 2016
Tax year TY 2015 TY 2016 TY 2017

By: Mohsin Iqbal

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 4.1 Change in tax year:
1) The Board;
• In case of class of persons having a special tax year may permit, through official
Gazzette, to use normal tax year; and
• In case of class of persons having a normal tax year may permit, through official
Gazzette, to use special tax year
2) A person using a special tax year may apply in writing to the Commissioner to allow him to use
normal tax year and the Commissioner may by an order, allow him to use normal tax year and
vice versa.
3) The Commissioner will grant permission only if the person has shown a compelling need to use
special tax year or normal tax year, as the case may be, and the permission will be subject to
such conditions, if any, as the Commissioner may impose.
4) If the Commissioner wants to reject the application, he will provide an opportunity of being
heard to the person and will record in the order the reasons for such rejection.
5) If the Commissioner wants to withdraw his permission granted earlier, he will provide an
opportunity of being heard to the person and will record in the order the reasons for such
withdrawal.
6) A person dissatisfied with any order of Commissioner, may file a review application with the
Board. The decision of the Board will be final.

By: Mohsin Iqbal

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 ICAP PAST PAPERS QUESTIONS
Q.1
Under the provisions of the Income Tax Ordinance, 2001 state the rules relating to residential status of
an Association of Person (AOP). Also explain the taxability of income of AOP, in the hands of the firm
and its members. (05)

(Q.5 (a) March 2015)

Q.2
Under the provisions of the Income Tax Ordinance, 2001 explain the following:
(a) Special tax year (03)
(b) Transitional tax year (03)
(Q.3 March 2016)
Q.3
Under the provisions of Income Tax Ordinance, 2001 and rules made thereunder:
(a) Discuss the residential status for tax year 2017 in each of the following situations:

i. On 21 September 2016 Asif proceeded to Dubai to join his new job. Due to certain professional
issues with his employer in Dubai, he resigned on 1 May 2017 and came back to Pakistan. On 16
May 2017 he got a new job in Pakistan which he continued till 30 June 2017.
(02)
ii. Sami Associates is an association of persons and provides accounting services in Dubai. On 2
January 2017, the entire management and control of its affairs was shifted from Karachi to
Dubai. (02)

(b) Explain the treatment of foreign source income for tax year 2017 under each of the following
independent situations:

i. Joseph, a South African cricket coach is working in Pakistan under an employment contract since
20 July 2014. During the tax year 2017, he earned foreign source income from his business
established in South Africa and brought 25% of the income to Pakistan. (04)
ii. On 15 January 2016 Farhan returned to Pakistan from London after 10 years and has been living
in Pakistan since then. During the tax year 2017, he received GBP 5,000 as return from his
investment in London. (02)

(Q.2 September 2017)

Q.4
On 1 December 20X7 Bruce Lee was appointed by a Chinese company as a Technical Director for
Pakistan. He has provided you the following details:
Arrival in Pakistan 15 December 20X7
Joined office in Pakistan 20 December 20X7
Visit to Dubai on an official trip 21-30 March 20X8
Visit to South Korea for vacations 12-21 April 20X8
Visit to northern areas of Pakistan for personal trip 4-9 June 20X8
In view of the provisions of the Income Tax Ordinance, 2001 and related Rules thereunder, comment on
the residential status of Bruce Lee for the tax year 20X8. (03)
(Q.3(c) March 2018)

By: Mohsin Iqbal

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Q.5
Kaleem Limited (KL) is a listed company and its accounting year ends on 30 June. KL is now considering
to change its accounting year from 30 June to 30 September.
Under the provisions of the Income Tax Ordinance, 2001:

a. briefly describe normal, special and transitional tax year. (06)

b. state the requirements regarding change in tax year from normal to special. (02)
c. state the tax year corresponding to the income year ended 30 September 20X8 and the
due date for filing the return of income. (02)
(Q.2 September 2018)
Q.6
Jean Francois, a French designer, often visits to Pakistan for promotion of his products. During his last
visit he stayed in Pakistan from 10 July 20X8 to 25 February 20X9. Determine the residential status of
Jean Francois for tax year 20X9, assuming that the Commissioner has granted him permission to use
calendar year as special tax year. (02)
(Q.3(a) September 2019)
Q.7
State the provisions of the Income Tax Ordinance, 2001 relating to each of the following:
i. Change of tax year from special to normal (02)
(Q.3(a) September 2021)

Q.8
Under the provisions of the Income Tax Ordinance, 2001, discuss the taxability of foreign source
income of the following resident persons for tax year 2022. (Computation of tax amount, if any, is not
required)

(a) Li, a Chinese engineer, has been working since March 2020 as a production manager in a Karachi
based company, Karam Limited. During the tax year 2022, his bank account in China was credited with
CNY 40,000 on account of rental income for his apartment situated in China. He remitted 40% of this
amount to his bank account in Pakistan. (03)

(b) Omar, a Pakistani national, came into Pakistan on 1 September 2021 after 20 years of service in
UAE. On 1 January 2022, his bank account in UAE was credited with AED 50,000 on account of dividend
received from a UAE based company. He remitted 50% of this amount to his bank account in Pakistan.
(03)
(c) Sidra, a Pakistani national, left Pakistan on 1 July 2021 for employment in a Singapore based
company at a monthly salary of SGD 10,000. However, due to personal reasons, she returned back to
Pakistan on 20 December 2021 and remained in Pakistan till 30 June 2022. She brought the entire
foreign salary amount to Pakistan. (02)

(Q.4 September 2022)

By: Mohsin Iqbal

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 Q.9

Under the provisions of the Income Tax Ordinance, 2001 determine the residential status for tax year
2024 in each of the following cases:
i. Arshad, an Emirati gold merchant, arrived in Pakistan for the first time on 15 March 2023, and
departed the country on 30 September 2023.
ii. Chang Li, a Chinese sugar manufacturer, arrived in Pakistan on 1 March 2023. During his stay
until 1 September 2023 in Pakistan, he resided in Sargodha, Punjab until 31 May 2023 and
thereafter until his departure from Pakistan, he stayed in Ghotki, Sindh. Assume that a
calendar year serves as his special tax year. (04)

(Q.3(a) March 2024)

Q.10
Arsalan, a citizen of Pakistan, is employed by an international banking organization, based in United
Kingdom. The following details outline Arsalan’s travel and work assignments across different
countries during the tax year 2024:
Period Country name
1 Jul – 15 Oct 2023 United Kingdom
16 Oct – 31 Dec 2023 United Arab Emirates
1 Jan – 26 Jan 2024 Pakistan (On vacation)
27 Jan – 2 Mar 2024 United Kingdom
3 Mar – 30 Jun 2024 Pakistan (Work from home)
Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder, assess the
residential status of Arsalan for the tax year 2024. (04)
(Q.2(a) September 2024)

By: Mohsin Iqbal

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