Income from Business

Business taxation Income from Business

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DEDICATION:

This project is a result of dedicated effort. We would like

to thank our project guide Prof. Mr. M.USMAN WARIS

for consultative help and constructive suggestions on the

matter in this project. We would also like to thank our

parents in making this project a successful one.


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ACKNOWLEDGEMENT:

We student of MASTER in COMMERCE (M.Com)

Studies Here-by declare that we have successfully

completed this project on Taxation management in

academic year 2013-2015.

It gives us immense pleasure to prepare this project

report on ‘Income from Business’. The information in-

corporate in this project is true and original to the best

of our knowledge.


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Project Report

INCOME FROM BUSINESS SECTION 18

(Taxation Management)

SUBMITTED TO:

Mr. M. Usman Waris

SUBMITTED BY:

Asma yasmin

Anam Zahra

Sidra Saleem

Anum Sehar


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TABEL OF CONTENTS:

Income Tax …….…............................................................7-29

Business...............................................................................08

Types of Business................................................................09

Taxability of Speculation Business....................................11

Sources of Business Income...............................................11

Taxable Business Income.............................................12

Exempt Business Income.............................................13

Admissible Business Deduction...................................13

Deductions Not Allowed...............................................21

Minimum tax on the income of certain persons..............25

Income Tax Return………………………………………30

Sales Tax.............................................................................33

Rules for Output Tax.........................................................34

Rules for Input Tax............................................................35

Sales Tax Return............................ ....................................40

Bibliography................................................................…...43


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Income Tax

Income from Business Sec 18:

Introduction of Business:

A business, also known as an enterprise or a firm, is an organization involved in

the trade of goods, services, or both to consumers. Businesses are prevalent in

capitalist economies, where most of them are privately owned and provide goods

and services to customers in exchange for other goods, services, or money.

Businesses may also be not-for-profit or state-owned. A business owned by

multiple individuals may be referred to as a company.

The etymology of "business" stems from the idea of being busy, and implies

socially valuable and rewarding work. Business can refer to a particular

organization or, more generally, to an entire market sector, e.g. "the music

business". Compound forms such as agribusiness represent subsets of the word's

broader meaning, which encompasses all activity by suppliers of goods and

services


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BUSINESS: [section 2(9)]

According to Income Tax Ordinance 2001, the term business includes:

Trade:

Trade means selling of goods for the purpose of making profit which a trader has

purchased or manufactured.

Manufacturing:

It means to work upon something by hand or machine as to convert it into a form

which has greater value to consumers.

Example: convention of wooden piece into a chair etc.

Commerce:

It includes all the institutions and activities which are helpful in transferring goods

from the place of production to the ultimate consumer.

Example: Transportation, banking, insurance and advertising etc.


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Profession or Vocation:

Services rendered on the basis of manual skill or specialized knowledge and

experience in a particular field is known as profession or vocation.

Example: Doctors, engineer, accountant and carpenters etc.

Concern:

Any regulated system of the management of an organization which has an

adequate degree of trade, commerce and manufacturing

Adventure:

Any transaction is termed as an adventure in the nature of trade if some elements

of trade are present therein.

NOTE: The business does not include employment.

Types of Business:

1) Speculation Business

2) Non-Speculation Business

Speculation Business: Sec 2 (61)

Speculation is a method of short-term investing whereby traders essentially bet on

the direction an asset's price will move. It means a business in which a contract for

the purchase of any commodity (including stock and share) is periodically or


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ultimately settled otherwise that by actual delivery or transfer of the commodity.

Income from Speculation businesses is treated as separate block of income.

Investment decisions based on the hope and expectation there will be a profit, but

no firm evidence that this will be the case. As a general rule, the more speculative

the venture, the greater the reward should be, commensurate with the risk taken.

But does not include

A) A contract in respect of raw material or merchandise is entered into by a

person in the course of a manufacturing or mercantile business to guard

against loss through future price fluctuations for the purpose of fulfilling the

person’s other contract for the actual delivery of the goods to be

manufactured or merchandise to be sold;

B) A contract in respect of stocks and share is entered into by a dealer or

investor therein to guard against loss in the person’s holding of stocks and

shares through price fluctuation; or

C) A contact is entered into by a member of forward or stock exchange in the

course of any transaction in the nature of jobbing or arbitrage to guard

against any loss which may arise ordinary course of the person’s business as

such member.

Explanation:

Jobbing:

Jobbing is a function of a jobber who works at a stock exchange for the buying

and selling of securities, bonds and shares

Arbitrage:

Arbitrage is the practice in which a person buys goods, securities, bonds,

shares or foreign money, etc. from a place at low price for the purpose of selling

them at another place where the price is higher.


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How it works/Example:

Technically, anyone who buys or shorts a security with the expectation of a

favorable price change is a speculator. For example, if a speculator believes XYZ

Company stock is overpriced, they may short the stock, wait for the price to fall,

and make a profit. It's possible to speculate on virtually every security, though

speculation is especially concentrated in the commodities, futures, and derivatives

markets.

Taxability of Speculation Business [Section 19]

The provision regarding the taxability of speculation Business is as under:

A) Speculation Business shall be treated as distinct and separate from any other

business carried on by the person ;

B) Profits or gains from the speculation business and other business of the

person are computed separately;

C) The principles of apportionment of expenditures ( Section 67) shall be

applied as the profit and gains arising from a speculation business are

considered as separate head of income;

D) Any profit and gains arising from the speculation business for a tax year

shall “income from business” for the year; and

E) Any loss of the person, arising from the speculation business, for a tax year

shall be dealt with under Section 58. It means that the loss from speculation

business can only be set off against the income of any other of speculation

business carried on by person.

Income from Business

Taxable Business Income

Exempt Business Income

Admissible Deduction for Business Income

Inadmissible Deduction for Business Income


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Taxable Business Income

1) Rent received on furniture and fittings

2) Rent on any movable property

3) Income from fish catching business

4) Income from poultry farm

5) Income from stud farm

6) Income from timber business

7) Royalties on professional books

8) Income from photo state machine

9) Profit and gain of ordinary business

10) Income from Trade association

11) Income from tangible movable assets

12) Benefits received from business relationship

13) Management fee received

14) Profit on debts received by financial institution

15) Income from leasing business

16) Income from distribution by manual funds

17) Income from any other business

18) Income from Yarn Business

19) Income from fruit processing business

20) Income from lending out agriculture machinery


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Exempt Income from Business

1) Income of any university

2) Income of any other educational institution

3) Income from computer training institution

4) Income of export of computer software and related services

5) Agriculture Income

6) Income of any non profit making institution

7) Profit on debts of hub power company

Admissible Deduction for Business Income

A) General Principle for Deductions

B) Special Provisions for deductions

A) General Principle for Deductions

For computation of income under the head “Income from Business”

certain expenses and allowances are allowed as deduction. Four

specially mentioned major categories are:

I. Expenses incurred for the purpose of business;

II. Loss on Animal used for business ( other than stocks)

III. Depreciation and amortization of assets, etc; and

IV. Amalgamation expenses incurred by an amalgamated company.

Expenses incurred for the purpose of business;

a) Any expenditure incurred by a person during the tax year is

allowable as deduction if it relate to the business.

b) If the expenditure is not incurred wholly for the business, then

only fairly related proportion shall be allowed for deduction.

Example:

a) Salaries given to employees

b) Loss of animals in the business due to death of animals

c) Financial expense e.g. interest

d) Rent for premises used for business


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e) Any tax, cess, charge or rate ( other than the income tax)

paid in connection with the business or any of its assets

f) Expenditures incurred on training of employees

g) Repair charges of any asset used for business

h) Insurance premium paid for insuring the asset

i) Actual amount of bad debts

j) Any other expenditure incurred wholly and partly for

business

Animals used for business [20(1A)]

If animals which have been used for the purposes of business of profession

otherwise than as stock-in-trade and have died or become permanently useless for

such purposes, the difference between the actual cost to the taxpayer of the animals

and less the amount, if any, realized in respect of the carcasses or animals, will be

allowed as deduction.

Example

Actual cost of the animals to the taxpayer 1,00,000

Less: amount realized in respect of carcasses or animals 4,000

Amount allowed as deduction 96,000

Depreciation and Amortization on assets [20(2)]

As per Income Tax Ordinance Depreciation and Amortization is allowed regarding


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a) Depreciable assets;

b) Intangible with useful life of more than one year; and

c) Pre-commencement expenditure.

Amalgamation Expenses [20(3)]

Any expenditure made by amalgamated company is allowed as a deduction.

These expenses may be;

a) Legal expenses;

b) Financial advisory services; and

c) Other administrative costs relating to planning and implementation.

B) Special Provisions for deductions [ sec 25]

Pre-commencement expenditure:

A person shall be allowed a deduction cost for any pre commencement

expenditure in accordance with the rules.

Pre-commencement expenditure shall be amortized on a straight-line basis

at the rate of 20% as specified Part –ΙΙΙ of the Third Schedule.


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The total deduction allowed under this section in the current tax year and

all previous tax years shall not exceed the amount of expenditure in the tax

year in which it is incurred.

Scientific research expenditure:

1) A person shall be allowed a deduction for commencement expenditure

incurred in Pakistan in tax year wholly and exclusively for the purpose of

deriving income from business chargeable to tax.

2) “ Scientific research expenditure” means any expenditure incurred by a

person on scientific research, including any contribution to a Scientific

research institution to undertake Scientific research for the purpose of

developing the person’s business, other than the expenditure incurred:

a) in the acquisition of any depreciable asset intangible;

b) in the acquisition of moveable property; or

c) For the purpose of ascertaining the existence, location, extent of quality

of a natural deposit

Employees Training and facilities:

A person shall be allowed a deduction for any expenditure (other than any capital

expenditure) incurred in tax year in respect of:

a) Any educational institution or hospital in Pakistan established for the benefits

of employees and their dependents.


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b) Any institute in Pakistan established for the training of industrial worker

recognized, aided, run by the Government.

c) The training oh any person, being a citizen of Pakistan, in connection with a

scheme approved by the Board.

Profit on debts, financial costs and Lease payment:

1) According to income tax ordinance the following deduction are allowed for a

tax year:

a) Any profits on debt paid by a person in the tax year to the extent that

proceed of the debt have the used by the person for the purpose of the

business.

b) Any amount paid by a person in the tax year to a Modaraba or a

Participation Term Certificate holder for any fund borrowed and used by

the person for the purpose of business

c) Any amount paid by a scheduled bank in the tax year to a person

maintaining a profit or loss sharing account or a deposit with the bank as

the distribution of profit by the bank in respect of the account or deposit

d) Any amount paid in the tax year to the State Bank of Pakistan as the

share of the bank in the profits derived by the corporation on investment

made in the small business.

e) Any amount given by a person in the tax year to a banking company

under a scheme of Musharika representing the bank’s share in the profit

of the Musharika.

2) Where any asset is transferred by an originator as a consequence of

securitization to a special purpose vehicle, it shall be treated as financing

transaction irrespective of the method of accounting adopted by the originator

3) Bad Debts

1. A person shell be allowed a deduction for a bad debt in a tax year if the

following conditions are satisfied

a) The amount of debt was previously included in the persons income from

business chargeable to tax

b) The debt or part of the debt is written off in the accounts of the person in

the tax year

c) There are reasonable grounds for believing that the debt is irrecoverable.


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2. The amount of the deduction allowed to a person under this section for a tax

year shall not exceed the amount of the debt written off in the accounts of

the person in the tax year.

Provision regarding consumer loan:

a) Non-banking finance company or the house building the finance corporation

shall be allowed a deduction, not exceeding 3% of income for the tax year,

arising out of consumer loan for the creation of a reserve to off-set bad debt

arising out of such loans.

Transfer to Participatory reserve:

1) A company shall be allowed a deduction in a tax year for any amount

transferred by the company to a participatory reserve created under

section 120 of the Companies Ordinance 1984, in accordance with an

agreement relating to participatory redeemable capital between the

company and a banking company.

2) The deduction allowed for a tax year shall be limited to 5% of the value

of the companies’ participatory redeemable capital.

3) No deduction shall be allowed if the amount of tax exempted

accumulation in the participatory reserve exceeds 10% of the amount of

the participatory redeemable capital.


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Solved problem:

Mr. Zahid has a taxable salary of Rs. 3, 60,000/- during the year.

Business concern:

He was also running a Manufacturing concern of which the annual sales were

Rs.80, 00,000/-. The Gross profit was 25% of the annual sales. Following are

further details regarding expenses of this business:

Sr.# EXPENSES TOTAL TRANSACTION MODE OF

PAYMENT

1. Utility bills 80,000 5,000 Cash

40,000 Cross cheque

5,000 Cross cheque

30,000 Cash

2. Donation to unapproved

institution

20,000 8,000 Cross cheque

12,000 Cross cheque

3. Building repair 60,000 5,000 Cross cheque

5,000 Cash

20,000 Cross cheque

30,000 Cash

4. Machinery repair 40,000 15,000 Cash

5,000 Cash

5,000 Cross cheque

15,000 Cross cheque

5. Rent paid of house used for personal

purpose

20,000 12,000 Cash

8,000 Cash


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Find out tax liability of Mr.Zahid

SOLUTION:

Income from salary 3, 60,000

Income from Business:

Sales 80, 00,000

Gross Profit 80,000@ 25% 20, 00,000

LESS: Admissible Deductions

Utility Bills 80,000

Building Repair 30,000

Machinery Repair 40,0001,50,00018,50,000

TOTAL INCOME

22,10,000

Tax Calculation

Initial tax 1, 47,500

Add

(22, 10,000-15, 00,000)@20% 1, 42,000

2, 89,500

Notes:

1. Utility bills can be paid in cash or cheque as are exempt from being paid

through cross cheque.

2. Donations to unapproved institution are not admissible.

3. Rent paid of house used for personal purpose is not admissible.


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Deductions Not Allowed [Section 21]

According to Income Tax Ordinance the following deductions shall not be allowed

in computing the income of a person chargeable to tax under the head “Income

from Business”

Tax Levied on Profits or Gains: [Section 21(a)]

Any cess, rate or tax paid or payable by the person in Pakistan or a foreign country

that is levied on the profits or gains of the business or assessed as a percentage on

the basis of such profits or gains.

Tax Deducted at Source [Section 21(b)]

Any amount of tax deducted from an amount derived by the person as salary or

dividend or profit on debt, is not allowed as deduction.

Payment Subject to Deduction of Tax [section 21(c)]

Any salary, rent, brokerage or commission and profit on debt paid to non-resident

for his services rendered from which the person, making the payment, is required

to deduct tax under the provisions of the Ordinance and has made the payment

without the deduction of tax, is not allowed as deduction.

Entertainment Expenditures [Section 21(e)]

Any entertainment and expenditure in excess of prescribed limit or in violation of

such condition, is not allowed as deduction.

Contribution to any Unapproved Fund [21(e)]

Any contribution made by the person to a provident fund or a pension fund or

superannuation fund or gratuity fund, which is not recognized or approved, is a not

allowed deduction.

Payment from Fund Chargeable to Tax:[Section 21(f)]

Any contribution made by the person to any provident or other fund established for

the benefit of employees of the person, unless the person has made effective

arrangements to deduct tax from any payment made from the fund in respect of

which the recipient is chargeable to tax under the head “Salary”.


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Fine or Penalty [Section 21(g)]

Any fine or penalty paid or payable by the person for the violation any law, rule or

regulation, is not considered as business expense.

Personal Expenditure [21(h)]

Any expenditure incurred by the person for the private purpose is not considered as

deduction allowed.

Transfer to Reserve Fund [21(i)]

Any amount while distributing the profit of a company, carried to a reserve fund

capitalized in any way is not allowed as deduction.

Reward of Members of AOP [21(j)]

Any profit on debt, brokerage, commission, salary or other remuneration paid by

an association of person to the member of the association is not deductible for the

computation of taxable profit.

Any Expenditure Exceeding Prescribed Limit [21(l)]

Any expenditure under a single account had exceeding Rs.50000 in aggregate shall

be inadmissible if the payment ids not made through a crossed cheque or a bank

draft. However, this provision shall not be applicable to:


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Utility bills.

Postage.

Single transactions not exceeding Rs.10000

Payments on account freight charges

Travel Fair

Any account credited by direct transfer to an employee’s bank account for

reimbursement of expenses incurred on behalf of the tax payer

Salary exceeding prescribed [sec 21(m)]

Any salary paid or payable exceeding Rs.15000 per month other than by a crossed

cheque or direct transferred of funds to the employee’s bank account.

Capital expenditure:

Any expenditure of capital nature paid or payable except depreciation allowance,

amortization of intangibles and pre-commencement expenditure etc

Any provision against the profits of the business e.g. provision for bad debts

Any donation to an unapproved institution

Any expenditure of a capital nature.


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Tax required to be deduct but not

Salary

Rent

Brokerage or commission

Profit on debt

Payment to non-resident

Payment for services or fee paid by the person

Solved Example:

The profit and loss account of Mr. Jaffar for the tax year is as under:

Rent of office building 6,00,000 Gross profit 30,00,000

Reserves for doubtful

debts

20,000 Bad debts recovered 8,000

Salary to staff 8,80,000 Income from property

3,00,000

Personal expenses of MR.

Jaffar

28,000

Legal consultant fee 40,000

Bad debts 7,000

Repair of building 68,500

Contribution to

unrecognized provident fund

40,000

Depreciation on building 12,000

Net profit 16,12,500

Total 33,08,000 Total 33,08,000

Salary of Rs. 2, 00,000 is of such nature upon which tax was required to be

deducted but not deducted.

Building repair include a payment of Rs. 20,000 which was required to be made by

cross cheque but paid by cash.


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Solution:

Income from Business

16, 12,500

Add: Inadmissible Expenses

Reserves for doubtful debts 20,000

Salary upon which due deduction was not done 2, 00,000

Personal expenses 28,000

Building repair transaction required to be done

By cross cheque but made by cash 20,000

Contribution to un recognized provident fund 40,0003, 08,000

TAXABLE INCOME

19, 20,500

Tax on NTR:

Initial 1, 47,500

Add:

(19, 20,500-15, 00,000) @ 20% 84,100

Tax payable 2, 31,500

Minimum tax on the income of certain persons (section 113):

This section shall apply upon:

1. A resident company.

2. An individual having turnover of fifty millions rupees or above.

3. An association of persons having turnover of fifty million rupees.


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• The above mentioned persons shall pay minimum tax @ 1% of the turnover.

• Minimum tax is to be paid if it exceeds the actual tax.

Note: For the said purpose the turnover exclude any amount which is taxed under

the FTR.

PROBLEM

XYZ private limited has a taxable income of Rs. 6, 00,000/- for the tax year 2014.

Its turnover during the year was Rs 5, 00, 00,000/-. Find its tax liability.

SOLUTION:

Income tax = 6, 00,000 @ 34% = 2, 04,000

Minimum tax liability = 5, 00, 00,000 @ 1% = 5, 00,000

Income tax liability is whichever of above two is higher. Hence tax liability is Rs.

5, 00,000/-.

Minimum Tax on Builders (Section 113-A):

Minimum tax is levied on income of builders arising from construction and sale of

residential, commercial or other buildings. Builders are required to pay minimum

tax @ of Rs. 25/- per Square foot actually sold or booked for sale during a year.


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Problem

M/S ABC Enterprises is an Association of Persons it is doing the business of

constructing and selling building. During the year the income from the business is

Rs. 8, 00,000/-. During the year actually M/S ABC Enterprises sold and booked

24,000 square feet of area.

Find out the tax liability of M/S ABC Enterprise:

SOLUTION:

Income from business of construction is equal to 8, 00,000

Tax on 8, 00,000

Initial........................................................... 35,000

(8, 00,000-7, 50,000) @ 15% ..................... 7,500

Total Tax 42,500

Minimum Tax Liability on Builders (Rs. 25 per square feet booked or sold)

= Square feet booked or sold x 25

= 24,000 x 25 = 6, 00,000

Minimum Tax liability of Rs. 6, 00,000 calculated being a builder is higher than of

the Normal Tax Rs. 42,500 hence tax payable is Rs. 6, 00,000.


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Collection of Advance Tax by Educational Institutions:

An Advance tax @ 5% on the amount of fee paid shall be collected by the

educational institution. Dee means tuition fees and all charges. The tax is required

to be collected in the same manner as the fee is charged, The advanced tax under

this provision shall not be charged if the annual fee does not exceed Rs. 2, 00,000/-

Minimum Tax on Land Developers:

Minimum Tax has been levied in income of land developers arising from

development and sale of residential, commercial or other plots. The said

developers shall pay tax @ of Rs.50/- per square yard actually sold or booked for

sale during the year.


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Problem

M/S XYZ Enterprise is an individual which is doing the business of developing

and selling of land. During the year the income from business is Rs. 10, 00,000/-.

During the year actually M/S XYZ Enterprise sold and booked 40,000 square yards

of area.

Find out the Tax liability of M/S XYZ Enterprise.

SOLUTION:

Income from business = 10, 00,000

Tax on 10, 00,000

Initial................................................................. 35,000

(10, 00,000-7, 50,000) @ 15% ..........................37,500

Total Tax 72,500

Minimum Tax liability on land developers (Rs. 50 per square yard booked or sold):

= Square yard booked or sold x 50

= 40,000 x50 = 20, 00,000.

Minimum Tax liability of Rs. 20, 00,000 calculated being land developers is higher

than of the normal Tax Rs. 72,500 .Hence payable is Rs. 20, 00,000.


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Sales tax

Sales tax Act:

By virtue of Finance Ordinance, 1990. Sales Tax Act 1951 has been completely

substituted by a new Act known as Sales Tax (amendment act1990). This complete

change has been made in order to update the Act so that it should be able to meet

countries economy. Moreover, Government has tried to simplify the rules

regarding Sales Tax for the benefit of the tax payer or collection authorities. The

new Act became effective on 1st November 1990.

What is Sales Tax?

It means:

The tax , additional tax, or default surcharge levied under this Act

A fine, penalty, or fee imposed or charged

Any other sum payable under the provision of this Act or the rules made

there under

What is output tax?

In relation to a registered person, means---

a) Tax levied under this act on supply of goods, made by the persons;

b) Tax levied under the Federal Excise Act, 2005, in sales tax made as a duty of

exercise on manufacture or production of goods;

c) Provincial sales tax levied on services rendered or provided by the person.

Output includes three types of supplies:

1. Taxable Supplies

2. Zero-Rated Supplies

3. Exempt Supplies.


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1) Taxable Supplies

It means supply of taxable goods made by an importer, manufacturer,

wholesaler and distributer.

2) Zero-Rated

It means a taxable supply which is charged to tax at rate of 0% under Section 4.

3) Exempt Supplies

It means the supply, which is exempted from the levy of the Sales Tax by the

Federal Government. However, it is necessary that such changes should be

notified in the official gazette.

What is input tax?

Purchases made by a registered person for business purpose such as supply of

goods, import of goods by the person tax levied under this act.

Rules for Output Tax:

Taxable Supplies: Local taxable supplies to registered person 17%

Local taxable to non-registered person 18% Supplies to registered persons (including the amount of sales tax) 17/117% Supplies to non-registered persons( including the amount of sales tax) 18/118%

Supplies made for personal used 17% Sales to wholesaler 17%

Supplies to Government hospital less than 50 bed 17% Supplies to teaching hospital less than 200 bed 17%

Zero-Rated: Export Sales 0%

Supplies to DTRE registered person 0% Supplies to associated located in Export Processing Zone 0%

Exempted Supplies:

Supplies to Government hospital more than 50 bed Exempt


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Supplies to teaching hospital more than 200 bed Exempt Supplies to charitable institutions Exempt

Exempted Supplies Exempt Free sample Exempt Sales tax debit Add full

amount

Note: less adjustment for Credit Note Issued for taxable supplies from output tax.

(Total Output Tax as per above rules-Amount of Credit Note Issued × 17%)

Rules for Input Tax

Purchases from registered person (purchases against tax invoices) 17% Purchases from non-registered person (purchases against commercial invoices)

Nil

Purchases from wholesaler 17%

Acquisition of fixed assets from non-registered person Nil Goods imported 17%

Sales tax on electricity bill (in case of manufacturer only) allowed Sales tax on telephone bill (in case of manufacturer only) allowed

Sales tax of sui gas bill (in case of manufacturer only) allowed Sales tax of sui gas bill (residential colonies) Not allowed

Water charges paid Not allowed Sales tax credit Totally allowed

Carry forward of input tax from previous month Totally allowed Purchased of exempted goods Nil Purchased of milk and vegetables with or without brand name Nil

Purchased of syrups / ice cream flavor imported 17% Acquisition of fixed assets from registered person(add into input tax after adjustment of input tax)

17% of cost

Note:

Tax paid at import stage

In case of commercial importer importing Taxable Goods, an additional 3% tax

would be added to input tax.


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Less: Adjustment for Debit Note Issued for taxable supplies from input tax. (Total

Input Tax as per above rules-Amount of Debit Note issued× 17 %)

As per section 8b (1) input tax is registered up-to 90% of output tax. This

section applied only to Registered Manufacturer. It does not apply to

importer.

In case of person engaged in any Exempt Supply (Mentioned in Output Tax)

Input Tax shall be adjusted as per following formula.

Total Input Tax × Taxable Supply ÷ Total Supplies

Total Supplies= Sales to Registered/Non-Registered Person + Supplies to

DTRE Registered person + Export Sales + Zero Rated Supplies + Supplies to

Wholesaler/Retailer + (Any Sales or Supplies Made for Personal use

including the Amount of Sales Tax-17/117 of such supplies) + Donation +

Free Samples + Exempt Sales + Supplies to All Hospitals

Taxable Supplies= Total Supplies – Donation – Free Samples – Exempt Sales

– Supplies to those Hospitals which are exempt from Tax – Zero Rated

PROBLEM

Compute the sales tax liability of Mr. Falak Shan, a registered manufacturer,

for the month of August 2013 with the help of following information:

1 Sales to registered person Rs. 8,00,000

2 Sales to consumers (exclusive of sales tax) 10,00,000

3 Sales to wholesalers 2,00,000

4 Advance received from customers for taxable supplies 1,00,000

5 Exempted supplies 4,00,000

6 Sales to employees (exclusive of sales tax) 1,50,000

7 Goods imported 5,00,000

8 Custom duty paid on goods imported @20% _


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9 Federal Excise Duty on imported goods 80,000

10 Advance paid to supplier for the purchase of taxable goods 1,20,000

11 Fixed assets imported 7,00,000

12 Local purchases against tax invoices 1,80,000

13 Sales tax paid on electricity bills used in factory (NTN is printed on bill)

30,000

14 Sales tax paid on electricity bills used in residential colony for employees

Solution Mr. Falak Shan

CNIC:

National Tax No:

For the Month of August 2013

Computation of Sales Tax Payable

Output

Taxable Supplies Rs. Rs.

Sales to registered person 8,00,000

Sales to consumers (exclusive of sales tax) 10,00,000

Sales to wholesalers 2,00,000

Advance against sales 1,00,000

Sales to employees (exclusive of sales tax) 1,50,000

Total Taxable Supplies 22,50,000

Exempted supplies 4,00,000

Total turnover 26,50,000


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Input Tax

Goods imported 5,00,000

Add: Customs duty paid Rs.5,00,000 @ 20% 1,00,000

Federal Excise Duty 80,000

Total 6,80,000

Rs.6,80,000 @17% 1,15,600

Advance against purchases Rs.1,20,000 @17%

20,400

Local purchases against tax invoices Rs. 1,80,000 @17%

30,600

Sales tax paid on electricity bills 30,000

Total Input Tax 1,96,00

Sales tax on import of fixed assets Rs. 7,00,000 @17%

1,19,000

Apportionment of Input Tax

Turnover Input Tax Input Tax on

Fixed Assets

Total Taxable supplies Rs. 8,00,000 + 10,00,000 + 1,00,000 + 1,50,000 +2,00,000

22,50,000

1,66,925 1,01,038

Exempt Supply 4,00,000 29,675 17,962

Total 26,50,000 1,96,600 1,19,000


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Sales Tax Liability

Output Tax (Rs. 22, 50,000 @ 17%) Less: Input tax adjustment

Rs.3,82,500 (1,66,925)

2,15,575

(Restricted up to 90% of output tax Rs. 3,82,500 @ 90% = Rs. 3,44,250 Input tax is well within limits, so allowed)

Less input tax on fixed assets 1,01,038

Sales Tax Liability payable 1,14,537

Notes: 1. According to Finance Act, 2013 advance against sales and purchases

is subject to sales tax in the month in which advance was received.

2. Adjustment of input tax on assets imported is allowed without any

restriction.

3. Section 8B (1) shall apply in this case.

4. Sales tax paid on electricity bills for residential colony is not allowed

5. Further tax is not applicable on supplies to end consumer and,

therefore, no further sales tax is charged on supplies to employees.


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Bibliography:

Our group made an honorable work for this project. We

have got return of Income from Business from Income

Tax Office Jhang Sadar. Business related to Gabrail Kahi

Khupa Zangir Farosh. We also got the return of Sales Tax

– Monthly Sales Tax Declaration. Sales Tax payer’s name

is Ghous Cotton Company.

We have also got some material about our topic Income

from Business from B.com syllabus referred by Muazzam

Mughal , Zulfiqar Bowra Ahmad M.com syllabus book,

Wikipedia site and from Income Tax Ordinance 2001.

Our group has done very good efforts for performance of

this report. All the members are very co-operative


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Income from Business

Business

Transcript of Income from Business