Income Tax Important Definitions

DEFINITIONS

1)      Accumulated Profit: in relation to distribution of payment of dividend includes profit earned and retained in the business i.e. the undistributed profit transferred to any reserve account or kept in un-appropriated profit account up to the date of distribution or date of liquidation. Reserve can be made up of wholly or partly of any allowance, deduction, or exemption admissible under the Ordinance.

2)      Amalgamation: means the merger of one or more banking companies or non-banking financial institutions, insurance companies or companies managing industrial undertakings or companies engaged in providing services and not being trading company, in either case one of them should be a public company. The company so merged shall be called amalgamating company and company with which these are merged or which is formed as a result of merger is called amalgamated company. Recent example of ABN Amro Bank merged with Royal Bank of Scotland (RBS).

3)      Assessment:  The entire process of computation of income and levy of tax is called assessment.  It is an act of making an order of assessment. Assessment is the process of determining the amount of income / profit or loss and the process of levying of tax. It includes re-assessment or amendment of assessment.

4)      Association of persons: includes a firm, a Hindu undivided family, an artificial juridical person and any body of persons formed under a foreign law but does not include a company.(sec 80). 

5)      Business includes any trade, commerce, manufacture, profession, vocation or adventure or concern in the nature of trade, commerce, manufacture, profession or vocation. Trade includes commercial dealings i.e. frequent selling / buying of goods with view to earn profit. Commerce is a little wider term of trade. Manufacture is making of articles by physical labour or machinery i.e. conversion of raw material into finished goods. Adventure or concern in the nature of trade means that a single and isolated transaction may fall within the definition of business if the intention to do business is proved.

6)      Company means:
    a company defined in Companies Ordinance 1984 (i.e. means a company formed and registered under the Companies Ordinance), a body corporate formed by or under any law in force in Pakistan, a modaraba (Islamic mode of financing), a body corporate formed by or under any law of a country outside Pakistan, trust, a co-operative society or finance society, a foreign association which CBR has declared to be a company for the purposes of this Ordinance, a Provincial Government or local authority.(sec 80)

7)      Capital Assets (Section 37): means property of any kind including stocks and shares held by a person, whether or not connected with a business but does not include:

a)                  Stock in trade, consumable or raw material held for business

b)                  Property on which a person is entitled to depreciation /amortization

c)                  Any immovable property

d)                  Personal effects

8)      Charitable Purpose includes relief of poor, education, medical relief and advancement of any other object of general public utility.

9)      Debt means amounts payable including accounts payable and amounts owing under promissory note, bills of exchange, debenture, securities, bonds or other financial instruments.

10)  Dividend includes – any distribution by a company of accumulated profits to its share holders either cash or otherwise 

To the extent the company possesses accumulated profits:

a)                  Any distribution to its share / debenture holders

b)                  Any distribution to shareholders on its liquidation

c)                  Any distribution to shareholders on reduction of capital

d)                  Any advance or loan to shareholder of a private company or trust or any payment on behalf of or for the benefit of such individual shareholder

e)                  Any after tax profit of a branch of a foreign company operating in Pakistan when it is remitted outside Pakistan.

It does not include:

a)                  Distribution of share or debenture where the holder is not entitled to participate in the surplus assets. (Non-participating shareholders)

b)                  Any advance or loan to shareholder of banking company or finance company.

c)                  Any dividend paid to set off any previously paid sum, which has already been treated as dividend.

11)  Employee: means an individual engaged in employment. Employer: means any person who engages and remunerate an employee and Employment: includes: directorship or any other office involved in the management of a company; a position entitling the holder to a fixed or ascertainable remuneration or the holding or acting in any public office.

12)  Firm means the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

13)  Finance Society includes: a co-operative society which accepts money on deposits or otherwise for the purpose of advancing loans or investment. 

14)  Fee for Technical Services: means consideration for rendering any managerial, technical or consultancy services but does not include consideration for services rendered in relation to construction, assembly or like project or consideration that would be chargeable to tax as salary

15)  Income includes any amount chargeable to tax under this Ordinance, any amount subject to withholding tax on import, dividend, payment to non-resident, payments for goods & services, Export and prize & winnings, commission on petroleum product, brokerage commission, stock exchange transaction and transport business.  Surprisingly it includes any loss of income. The deduction of tax from these sources is the final discharge of tax liability. It does not include bonus share. Any amount treated as income under this Ordinance (called deemed income)

16)  Industrial Undertaking: means undertaking setup in Pakistan and (i) which employs 10 or more person & involves use of electrical energy or (ii) 20 or more persons but does not involve use of electric energy. And (iii) engaged in manufacture of goods or ship building or generation of energy or working of any mine or oil-well. The FBR may declare any other undertaking to be an industrial undertaking.

17)  KIBOR (Karachi Inter-bank Offered rate): It is the average of interest rate announced by the banks from their head offices at Karachi for charging interest to other banks. It may be daily/ monthly / quarterly.

18)  Non-Profit Organization: means any person other than an individual and  which is:

a)                  Established for religious, educational, charitable, welfare or development purpose or for the promotion of an amateur sport;

b)                  Formed and registered under any law as NPO;

c)                  Approved by Commissioner and

d)                  None of the assets of such person confers a private benefit. (Q.No. 1(b) 2004)

19)  Person: includes an individual (a natural human being – male or female), a Company or association of persons incorporated, formed, organized or established in Pakistan or else where, federal government, a foreign government, or public international organization. (sec 80) 

20)  Profit on debt means any profit, yield, interest, discount, premium or other amount received on Debt. OR any service fee or charges in respect of debt.

21)  Public Company means a company remained listed on stock exchange till  the end of  tax year OR a company whose at least 50 % shares are held by Federal Government or Foreign Government or Foreign company owned by foreign government OR Unit Trust like NIT unit. 

22)  Permanent Establishment means fixed place of business through which the business of the person is wholly or partly carried on and includes – a) a place of management, branch, office, factory or workshop OR (b) a mine, oil or gas well, query OR (c) agricultural or forestry property OR (d) a building site OR (d) the furnishing of services including consulting services through employees OR (e) a person acting in Pakistan a agent has authority to conclude contracts or maintaining stock OR (f) any substantial equipment installed capable of giving rise to income. 

23)  Principal Officer used with reference to company and AOP: A director, a manager, secretary, agent, accountant or any similar officer and any person connected with management or administration of the company or AOP upon whom the Commissioner has served notice of treating him as principal officer. 

24)  Royalty means: any amount paid or payable as consideration for the use of or right to use any patent, copy right,  invention, design or model, secret formula, or process, trademark or other like property or right including visual images or sounds transmitted through satellite, cable or fiber.  It also includes the supply of any technical or industrial or commercial or scientific knowledge experience or skill or the use of any such equipment. It includes disposal of any such right or property.

25)  Residential status of a person: Resident / Non-resident: (Section 81-84)

a)                  Individual is resident if: his stay in Pakistan in total is 183 days or more in a tax year OR is an employee of Federal or Provincial Govt posted abroad

b)                  Company is resident if it is incorporated or formed by or under any law for the time being in force in Pakistan OR the control and management of the affairs of the company is situated wholly in Pakistan OR it is a provincial government or local authority.

c)                  AOP shall be resident if the control and management of the affairs of the AOP is situated wholly or partly in Pakistan in tax year.

TWO IMPORTANT FEATURES OF TAXATION

a)      Source Jurisdiction: It is very important to see the source and origin of income accrued. The country where the income has been earned has the first right of taxation. We have to determine whether it is Pakistan source income or foreign source income. If it is Pakistan source income no matter who is receiving it whether he is resident or non-resident; it would be taxable in Pakistan.

b)      Residence Jurisdiction: However if it is foreign source income but it is accrued to a resident person; it would also be taxed in Pakistan on the basis of resident jurisdiction but  any tax paid in foreign country shall be credited to his tax liability if both countries has tax avoidance treaty.

26)  Speculation business means any business in which a contract for the purchase and sale of any commodity including shares is periodically or ultimately settled otherwise than actual delivery. (sec 19).

27)  Small Company means: A company registered on or after 1^st July 2005 under the Companies Ordinance 1984 and which (i) has paid up capital plus undistributed reserves not exceeding Rs 25 million (ii) has annual turnover not exceeding Rs 250 million  (iii) have not more than 250 employees and (iv) is not formed by splitting up or reconstitution of existing company. 

28)  Special Purpose Vehicle (SPV) means: an institution registered with SECP (Securities and Exchange Commission of Pakistan) for the purpose of securitization. The securitization means process whereby SPV raises funds by issue of TFC (Term Finance Certificates) to make payment to Originator and acquires the title or right in the receivables or other assets. The Originator is person who transfers to SPV any asset in the form of present or future receivables as a consequence of Securitization.

29)  Tax year (section 74): 

a)                  Normal tax year is a period of 12 months ending on 30^th June to be denoted by the calendar year in which the said date falls.

b)                  Special tax year: The Commissioner may allow a person showing compelling need to use 12 months period other than normal tax year as special year and shall be denoted by the calendar year relevant to normal tax year in which the closing date of special tax year falls.

30)  Taxable income of a person shall be the total income for the year reduced by the total deductible allowances i.e. zakat, workers welfare fund, workers profit participation fund).

31)  Total Income is the sum of income under each of the heads of income for the year: i.e. Salary, Income from property, and Income from business, capital gain and income from other sources.

32)  Tax means tax imposed on taxable income and includes penalty additional tax & fee or other charges or any sum leviable or payable under this Ordinance.

33)  Tax Payer means any person who derives taxable income and includes its representative OR  any person required to deduct tax / collect at source OR any person required to furnish a return of income OR any person required to pay tax under this Ordinance.