CAF 2: TAXATION PRINCIPLE AND COMPLIANCE CHAPTER 4: BASIC CONCEPTS OF TAXATION
6 DETERMINATION OF TAX LIABILITY
6.1 Computation of tax liability and tax rates (Sec 4 read with First Schedule)
f Definition: Sec 2(63)
Tax means any tax imposed under the Ordinance and includes any penalty, fee or other charge or any sum or
amount leviable or payable under the Income Tax Ordinance, 2001.
x Income tax shall be imposed on every person having taxable income for each tax year at the applicable rates
as mentioned in the first schedule to the Income Tax Ordinance, 2001.
x First Schedule of the Income Tax Ordinance,2001 prescribes different tax rates for different classes of
persons in the following manner:
Tax rates for salaried individual
Where the income of an individual chargeable under the head “salary” exceeds 75% of his taxable income, the
rates of tax to be applied shall be as set out in the following table, namely:
Sr. No. Taxable Income Rate of Tax
1. Where the taxable income does not exceed Rs. 600,000 0%
2. Where taxable income exceeds Rs. 600,000 but does 1% of the amount exceeding Rs. 600,000
not exceed Rs. 1,200,000
3. Where taxable income exceeds Rs. 1,200,000 but does Rs. 6,000 plus 11% of the amount
not exceed Rs. 2,200,000 exceeding Rs. 1,200,000
4. Where taxable income exceeds Rs. 2,200,000 but does Rs. 116,000 plus 23% of the amount
not exceed Rs. 3,200,000 exceeding Rs. 2,200,000
5. Where taxable income exceeds Rs. 3,200,000 but does Rs. 346,000 plus 30% of the amount
not exceed Rs. 4,100,000 exceeding Rs. 3,200,000
6. Where taxable income exceeds Rs. 4,100,000 Rs. 616,000 plus 35% of the amount
exceeding Rs. 4,100,000
A surcharge shall also be payable by every salaried individual @ 9% of the Gross tax liability where taxable
income exceeds Rs.10 million.
Tax rates for non-salaried individuals and Association of Persons
Sr. No. Taxable Income (Rs.) Rate of Tax
1. Where the taxable income does not exceed Rs.600,000 0%
2. Where the taxable income exceeds Rs.600,000 but does 15% of the amount exceeding
not exceed Rs. 1,200,000 Rs.600,000
3. Where taxable income exceeds Rs. 1,200,000 but does Rs. 90,000 plus 20% of the amount
not exceed Rs. 1,600,000 exceeding Rs. 1,200,000
4. Where taxable income exceeds Rs. 1,600,000 but does Rs. 170,000 plus 30% of the amount
not exceed Rs. 3,200,000 exceeding Rs, 1,600,000
5. Where taxable income exceeds Rs. 3,200,000 but does Rs. 650,000 plus 40% of the amount
not exceed Rs. 5,600,000 exceeding Rs. 3,200,000
6. Where taxable income exceeds Rs. 5,600,000 Rs. 1,610,000 plus 45% of the amount
exceeding Rs.5,600,000
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CHAPTER 4: BASIC CONCEPTS OF TAXATION CAF 2: TAXATION PRINCIPLE AND COMPLIANCE
Tax Rate for a Professional Firm:
If an association of persons is a professional firm that cannot incorporate due to legal or regulatory rules, the tax
rate of 45% listed under serial number 6 of the Table will be reduced to 40%.
Surcharge for High Earners: 10% on Gross Tax Liability for Income Exceeding Rs. 10 Million
A surcharge at the rate of 10% of the gross tax liability shall be payable by all non-salaried individuals and
Associations of Persons (AOPs) whose taxable income exceeds Rs. 10 million.
Computation of income tax payable
The income tax payable shall be computed as under:
x Tax liability – Withholding (advance tax)
x Tax Liability = (Taxable Income x Rate of Tax) – Tax Credits / Tax reduction
If a taxpayer is allowed more than one tax credit for a year, the credits shall be applied in the following order:
a) Any foreign tax credit; then
b) Any tax credit allowed for,
i. Charitable donations (Sec 61)
ii. Contribution to approved pension fund (Sec 63)
iii. Interest paid on low cost housing loan (Sec 63A)
iv. Point of sale machine (Sec 64D)
v. Certain person (Sec 65F)
vi. Specified industrial undertakings (Sec 65G)
Any such amount which is taxable as a separate block or under final tax regime (FTR) shall not be included in the
computation of taxable income under Normal tax regime (NTR) according to the provisions of the Income Tax
Ordinance, 2001.
The computation of income under each head of income and tax credits is discussed in detail in the ensuing
chapters. However, the method for determination of tax liability and tax payable (refundable) on taxable income
is given hereunder:
Computation of tax
Gross tax (Including surcharge @ 10%/9% in case income is > 10 million) XXX
Less: Tax reductions & credits (XX)
Net Tax XXX
Tax already paid including adjustments (XX)
Balance XXX
(a) Tax Refundable
(b) Tax Payable or
(c) Tax nil
Tax rebates and reductions available to a person are elaborated in respective chapters.
50 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN