Tax Practices: Income Tax Ordinance 2001 and Sales Tax Act 1990
The framework
Tax Practices in Pakistan means the Income Tax Ordinance 2001 and the Sales Tax Act 1990. For income tax you must be able to determine the residential status of an individual, company and association of persons; classify receipts under the five heads (salary, property, business, capital gains, other sources); apply admissible and inadmissible deductions; compute depreciation and initial allowance; apply rates and credits; and explain withholding, return filing, assessment and appeal machinery.
Residential status
An individual is resident for a tax year if present in Pakistan for 183 days or more, or for 120 days or more where also present for 365 days in the preceding four tax years. Residency drives scope: a resident is taxed on worldwide income, a non-resident only on Pakistan-source income.
Traps
- Exempt income and zero-rated supplies are not the same: zero-rated supplies keep input tax adjustable, exemptions generally do not.
- Advance or withholding tax is normally adjustable, not final, unless the Ordinance specifically says otherwise.
- Personal expenses and capital expenditure are inadmissible; depreciation is claimed under the prescribed method.
- Each item is taxed under the correct head first; the same amount cannot be taxed twice.
- Day counting for residency and the tax-year definition are frequent numerical traps.
Rule of thumb
Work every computation in a fixed order: gross receipts, less admissible deductions, equals taxable income; apply rates; less credits and adjustable taxes; equals tax payable or refundable. Sales tax is separate: output tax less input tax, restricted to tax on taxable supplies used in the business.