TOPICINCOME FROM

BUSINESS

TOPICINCOME FROM

BUSINESS

ADEEL KHAN

BUSINESS [SECTION 2(9)]

According to Income Tax Ordinance 2001, theterm 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.

NOTE

The business does not include employment.

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

TYPES OF BUSINESS:

There are two types of business. Speculation Business 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.

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).

.

ADMISSIBLE & NON- ADMISSIBLE DEDUCTION

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

EXAMPLEMr. 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.ZahidSr.# EXPENSES TOTAL TRANSACTI

ONMODE 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 ON THE INCOME OF CERTAIN

PERSONS (SEC 113)

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 @ 32% ==1,92,000

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, 00,000Tax on 8, 00,000Initial........................................................... 35,000(8, 00,000-7, 50,000) @ 15% ..................... 7,500 Total Tax 42,500Minimum Tax Liability on Builders (Rs. 25 per square feet booked or sold)= Square feet booked or sold x 25= 24,000 x 25 = 6, 00,000Minimum 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.