Income from business
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Transcript of Income from business
BUSINESS [SECTION 2(9)]
According to Income Tax Ordinance 2001, the
term business includes: Trade Manufacturing Commerce Profession or Vocation Concern Adventure
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 Conversion of wooden piece into a chair.
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 Advertising
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 Carpenters
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.
INCOME CHARGEABLE UNDER BUSINESS [SECTION 18]
It includes: Profit and gain in tax year Any income derived by trade,
professional, AOP from sale of good or services
Income from hire or lease of tangible movable property
INCOME CHARGE…
Profit on debt Management fee derived by management
company Fair market value of any benefit or perquisite
derived in the course of business relationship
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.
CATEGORIES OF INCOME
The income from business are to be shown separately under the following sub-heads:
Income from speculation business Income from non-speculation
business
TAXABILITY OF SPECULATION BUSINESS [SECTION 19]
Treated as separate block of income Profits or gains are computed separately The principles of apportionment of expenditures
shall be applied (Section 67). Any profit and gains arising from the speculation
business for a tax year shall “income from business”
loss from speculation business can only be set off against the income of any other speculation business carried on by person (Section 58).
.
WHAT IS DEDUCTION?
Any item or expenditure subtracted from grossincome to reduce the amount of income subject to tax.
ADMISSIBLE DEDUCTIONS
Expenses incurred for the purposes of business
Loss on animal used for business Depreciation & amortization of assets Amalgamation expenses incurred by an
amalgamated company
EXPENSES INCURRED FOR PURPOSES OF BUSINESS [SEC20 (1)]
Expenses fully related to business Expenses partially related to businessExample
- Salary - Loss of animals
- Interest - Rent for premises
- Training expenses - Bad debts
- Insurance premium - Repair charges
ANIMALS USED FOR BUSINESS [SEC20(1A)]
Animals used for purpose of business have died or become permanent useless ,the differences b\w the actual and the damage cost will be allowed.
EXAMPLE
Detail Amount
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 Depreciable assets Intangible assets with useful life of more than one year Pre-commencement expenditure
AMALGAMATION EXPENSES [20(3)]
Any expenditure made by amalgamated company is allowed as a deduction. These expenses may be;
Legal expenses; Financial advisory services Other administrative costs relating to planning and implementation
EXAMPLE
Mr. Zahid has a taxable salary of Rs. 3, 60,000/- during the year.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
regardingexpenses of this business:Requirement: Find out tax liability of Mr.Zahid
Sr.# EXPENSES TOTAL TRANSACTION
MODE OF PAYMENT
1. Utility bills 80,000 5,00040,0005,000
30,000
CashCross ChequeCross Cheque
Cash
2. Donation to unapproved institution 20,000 8,00012,000
Cross ChequeCross Cheque
3. Building repair 60,000 5,0005,000
20,00030,000
Cross chequeCash
Cross ChequeCash
4. Machinery repair 40,000 15,0005,0005,000
15,000
CashCash
Cross ChequeCross Cheque
5. Rent paid of house used for personal purpose 20,000 12,000 Cash
8,000 Cash
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 40,000 1, 50,000
18,50,000 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
Utility bills can be paid in cash or cheque as are exempt from being paid through cross cheque.
Donations to unapproved institution are not admissible.
Rent paid of house used for personal purpose is not admissible.
DEDUCTIONS NOT ALLOWED [SECTION 21]
Tax Levied on Profits or Gains: [Section 21(a)]
Tax Deducted at Source [Section 21(b)]
Entertainment Expenditures [Section 21(c)]
Contribution to any Unapproved Fund [21(e)]
DEDUCTIONS NOT ALLO…
Fine or Penalty [Section 21(g)]
Personal Expenditure [21(h)]
Salary exceeding prescribed [sec 21(m)]
Capital expenditure
DEDUCTIONS NOT ALLO…
Transfer to Reserve Fund [21(i)]
Reward of Members of AOP [21(j)] Any Expenditure
Exceeding Prescribed Limit [21(l)]
MINIMUM TAX APPLIED:
In case of Certain persons In case of Builders In case of Educational Institutions In case of Land Developers
MINIMUM TAX ON THE INCOME OF CERTAIN PERSONS (SECTION 113):
This section shall apply upon: A resident company. An individual having turnover of fifty millions rupees
or above. An association of persons having turnover of fifty
million rupees. The above mentioned persons shall pay minimum tax @
1% of the turnover. Minimum tax is to be paid if it exceeds the actual tax.
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 (SEC 113A):
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.
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.
COLLECTION OF ADVANCE TAX BY EDUCATIONAL INSTITUTIONS:
An Advance tax @ 5% on the amount of fee paid shall be collected by the educational institution. This 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.
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.
SALES TAX ACT:
Sales Tax Act 1951 has been substituted by a new Act
known as Sales Tax (amendment) act,1990.To meet countries economy.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
levie 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: Tax levied under this act on supply of goods, made by thepersons; Tax levied under the Federal Excise Act, 2005, in sales tax made as a duty
of exercise on manufacture or production of goods; Provincial sales tax levied on services rendered or provided by the person.
Output includes three types of supplies: Taxable Supplies Zero-Rated Supplies Exempt Supplies
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 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
NOTES:
Tax paid at import stage additional tax is 3%. 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
WHAT IS RETURN?
It means any return required to be furnish under the Sales Tax Act 1990.
There are following types of return: Monthly return Annual return Special return