Head of Income

Income Tax Ordinance, 2001, Pakistan describes five heads of income in section 11 as detailed below:

1. Salary – Section 12
2. Income from property – Section 15
3. Income from business – Section 18
4. Capital gains – Section 37
5. Income from Other Sources – Section 39

Kindly view my blog on Salary u/s 12 and Income from property u/s 15 here: https://accountingblogger.com/how-to-file-tax-return-fbr-pakistan/

In this blog we will discuss income sources of Income from business – Section 18, Capital gains – Section 37 & Income from Other Sources – Section 39.

Income from business – Section 18

1. The following incomes of a person, other than income exempt from tax under this Ordinance, shall be chargeable to tax under the head ‘Income from Business’.

• the profits and gains of any business carried on by a person at any time in the year;
• any income derived by any trade, professional or similar association from the sale of goods or provision of services to its members;
• any income from the hire or lease of tangible movable property;
• the fair market value of any benefit or perquisite, whether convertible into money or not, derived by a person in the course of, or by virtue of, a past, present, or prospective business relationship;
• any management fee derived by a management company, including a modaraba;

2. Any profit on debt derived by a person where the person’s business is to derive such income shall be chargeable to tax under the head “Income from Business” and not under the head “Income from Other Sources”.
3. Where a lessor, being a scheduled bank or an investment bank or a development finance institution or a modaraba or a leasing company has leased out any asset, whether owned by it or not, to another person, any amount paid or payable by the said person in connection with the lease of said asset shall be treated as the income of the said lessor and shall be chargeable to tax under the head ‘Income from Business’.
4. Any amount received by a banking company or a non-banking finance company, where such amount represents distribution by a mutual fund or a Private Equity and Venture Capital Fund out of its income from profit on debt, shall be chargeable to tax under the head ‘Income from Business’.

Capital gains – Section 37

Capital gain arising on disposal of immovable property situated in Pakistan, to a person in a tax year shall be chargeable to tax under the head ‘capital gains’.

Capital gain calculated as per below:

A – B, where

A = consideration received by the person on disposal of the asset

B = the cost of the asset.

For example, if a plot was purchased for Rs. 10m and sold at Rs.12m then Rs 2m is capital gain and on Rs 2m tax will be charged at prescribed rates.

Section 37 A deals with Capital gain on disposal of securities and states that capital gain arising from disposal of securities, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax at the specified rates.

Security means share of a public company, voucher of Pakistan Telecommunication Corporation, Modaraba Certificate, an instrument of redeemable capital, unit of exchange traded fund and derivative products.

Section 38 delas with deduction of losses in computing the amount chargeable under the head “Capital Gains” and deduction shall be allowed for any loss on the disposal of a capital asset by the person in the year but no loss shall be deducted under this section on the disposal of a capital asset where a gain on the disposal of such asset would not be chargeable to tax.

No loss shall be recognized under this Ordinance on the disposal of the following capital assets:

• a painting, sculpture, drawing or other work of art;
• jewellery;
• a rare manuscript, folio or book;
• a postage stamp or first day cover;
• a coin or medallion; or
• an antique.

The government of Pakistan has introduced in 2022 a new kind of tax on property called ‘Tax on deemed income’ under section 7E of the Income Tax ordinance 2001. Kindly review my detailed blog on deemed income here:https://accountingblogger.com/tax-on-deemed-income-fbr-pakistan/

Income from Other Sources – Section 39

Income of every kind received by a person if it is not included in any other head, other than income exempt from tax under this Ordinance, shall be chargeable under the head ‘Income from Other Sources’ and include following:

• Dividend;
• royalty;
• profit on debt;
• additional payment on delayed refund under any tax law;
• ground rent;
• rent from the sub-lease of land or a building;
• income from the lease of any building together with plant or machinery;
• income from provision of amenities, utilities or any other service connected with renting of building;
• any annuity or pension;
• any prize bond, or winnings from a raffle, lottery, prize on winning a quiz, prize offered by companies for promotion of sale or cross-word puzzle;
• any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources;
• the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property;
• any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof;
• any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules;
• any amount or fair market value of any property received without consideration or received as gift, other than gift received from relative as defined in sub-section (5) of section 85.

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com