A Guide to Income Tax Ordinance 2001

Understanding the Income Tax Ordinance (ITO 2001) is crucial for any taxpayer in Pakistan; it’s a key to financial empowerment. This comprehensive legislation, administered by the Federal Board of Revenue (FBR), lays the foundation for income tax collection in the country. It outlines the types of income tax, tax rates, deductions, and filing procedures. 

Whether you’re a salaried individual, a business owner, or an investor, familiarising yourself with the ITO 2001 can help you ensure tax compliance and take control of your financial responsibilities. So, let Graana.com reduce your tax burden with this compact guide. 

 

What is the Income Tax Ordinance 2001?

 

Promulgated in 2001, the ITO 2001 is Pakistan’s primary legal document governing income tax. It’s administered by the Federal Board of Revenue (FBR), the national tax authority. The ITO 2001 is subject to amendments through Finance Acts passed annually, making it essential to stay updated on the latest regulations.

 

Key Features of the Income Tax Ordinance 2001

The ITO 2001 covers various aspects of income taxation in Pakistan, including:

 

Taxable Income

The ordinance defines taxable income as the total income of an individual or entity after accounting for allowable deductions. In simpler terms, it’s the income you earn that is subject to tax, after you’ve subtracted certain expenses that the law allows you to deduct.

 

Heads of Income and Tax Rate

Income is categorised under various heads, such as salary, income from property, business income, capital gains, and other sources. Each head has specific rules for calculating taxable income.

The ITO 2001 categorises income into five primary heads:

 

Salary

 

This includes income from employment, pensions, gratuities, and benefits received from an employer. The tax treatment for salaried individuals depends on their annual income. Here’s a breakdown of the current tax rates for salaried income in Pakistan (as of May 2024):

• Income up to PKR 600,000: Exempt from tax
• Income exceeding PKR 600,000 up to PKR 1,200,000: 7.5%
• Income exceeding PKR 1,200,000 up to PKR 2,400,000: 15%
• Income exceeding PKR 2,400,000 up to PKR 3,600,000: 22.5%
• Income exceeding PKR 3,600,000 up to PKR 6,000,000: 27.5%
• Income exceeding PKR 6,000,000: 35%

The employer typically deducts tax at source (TDS) based on an employee’s tax slab.

 

Income from Property

This refers to income from renting out immovable property such as buildings, houses, or commercial spaces. The taxable income from property is calculated by subtracting allowable deductions from the gross rent received by doing property valuation. 

Allowable deductions may include property taxes, ground rent, repairs and maintenance expenses, and a portion of the loan markup for acquiring the property. 

 

The ITO 2001 also introduced a concept of ‘deemed income’ for resident taxpayers owning immovable property in Pakistan. This deemed income is computed as 5% of the fair market value of the property and is subject to a tax rate of 20%, translating to an effective tax of 1%. However, there are exemptions for one self-occupied property.

 

Income from Business

This encompasses profits earned from any trade, profession, or business activity. The ITO 2001 prescribes a progressive tax rate structure for business income, meaning the tax rate increases as the taxable income rises. Here’s a breakdown of the current tax rates for business income in Pakistan (as of May 2024):

• Income up to PKR 400,000: Exempt from tax
• Income exceeding PKR 400,000 up to PKR 500,000: 10%
• Income exceeding PKR 500,000: 35%

 

Capital Gains

 

This refers to profits from selling capital assets such as stocks, property, or investments. The ITO 2001 prescribes specific tax rates for different types of capital gains:

• Short-term capital gains (held for less than one year): Taxed at the marginal tax rate applicable to your income slab.
• Long-term capital gains on listed securities (held for more than one year): Taxed at a concessional rate of 10%.
• Long-term capital gains on immovable property (held for more than two years) are exempt from tax, subject to certain conditions.

 

Income from Other Sources

• Interest on bank deposits: Taxed at a fixed rate, typically deducted at source by the bank. The current rate for individuals and AOPs (Association of Persons) is 15%, while for companies, it’s 30%.
• Royalties: Tax at a rate of 10% to 20%, depending on the nature of the royalty and residency status of the recipient.
• Dividends: Companies must withhold tax at source on dividends paid to shareholders. The current rate is 15% for resident individuals and AOPs and 10% for companies. However, certain exemptions and reduced rates may apply.
• Agricultural Income is generally exempt from tax. However, some exceptions exist, such as income from large farms or income earned through certain agricultural activities.

For each head of income, the ITO 2001 outlines specific rules for calculating taxable income. Understanding these rules is crucial for accurate tax filing. The FBR website provides comprehensive tax calculators and guides to assist taxpayers in calculating their income under each head, ensuring you have the support you need to comply with the ordinance.

 

Tax Rate Structure

 

The ITO 2001 prescribes a progressive tax rate structure, meaning higher income earners pay a larger percentage of their income as tax.

 

Deductions and Allowances

The ordinance allows taxpayers to deduct certain expenses from their gross income to arrive at taxable income. These deductions can be for business expenses, medical bills, charitable contributions, etc.

• Business expenses: Rent, utilities, employee salaries, and office supplies.
• Depreciation: The gradual decrease in the value of assets over time.
• Interest on loans taken for business purposes.
• Medical expenses for yourself, your spouse, and dependent children are subject to certain limits.
• Charitable donations to approved institutions.

The ITO 2001 also offers tax allowances, which are flat-rate deductions that reduce taxable income. These allowances may vary depending on your income level, profession, and disability status.

 

Tax Filing and Payment

 

Individuals and businesses in Pakistan must file income tax returns with the FBR by specific deadlines. The filing deadline for tax filers typically falls in September or December of each year.

The ITO 2001 outlines different filing requirements for various taxpayer categories. Individuals can file returns electronically or on paper forms, while businesses may have additional filing obligations. Non-compliance with filing deadlines can result in penalties.

 

Tax Planning Strategies under the ITO 2001

While aiming for tax compliance, the ITO 2001 allows for legal tax planning strategies that can potentially benefit you. Here are some considerations:

 

Maximising Deductions

Keeping proper records of all allowable expenses allows you to claim the maximum deductions you’re entitled to under the ITO 2001.

 

Investing in Tax-Saving Schemes

The government may offer tax benefits for investments in specific sectors or retirement savings plans. Explore these options to reduce your tax burden.

 

Maintaining Separate Accounts

For businesses, maintaining separate accounts for business and personal expenses can simplify tax filing and potentially reduce taxable income.

 

Benefits of Understanding the Income Tax Ordinance 2001

 

Knowing the ITO 2001 empowers taxpayers in several ways:

• Ensures Compliance: By understanding your tax obligations, you can avoid penalties and legal issues.
• Reduces Tax Burden: Knowing available deductions and exemptions lets you minimise your tax liability within legal boundaries.
• Informed Financial Decisions: Understanding tax implications helps you make informed financial decisions about investments, business ventures, and financial planning.

 

Conclusion

The Income Tax Ordinance 2001 is complex, but understanding its core principles is essential for responsible taxpaying in Pakistan. By familiarising yourself with the ITO 2001, you can ensure compliance, reduce tax liability, and make informed financial decisions. Remember, for any specific questions or clarifications regarding your tax situation, it’s always advisable to consult with a qualified tax advisor.

 

Frequently Asked Questions

Look into the following FAQs for further inquiries.

 

What is the Income Tax Ordinance 2001?

The Income Tax Ordinance 2001 is a law in Pakistan that outlines the different types of income subject to taxation and payment guidelines. It categorises all income into five broad categories: salary, income from property, income from business, capital gains, and income from other sources.

 

What is Section 21 of the Income Tax Ordinance 2001?

Section 21 restricts claiming certain business expenses as tax deductions if you have yet to withhold and deposit the required taxes. This applies to expenses like salary, rent, commission, payments to non-residents, and service fees.

 

What is Section 147 of the Income Tax Ordinance 2001?

Section 147 deals with advance tax.  It’s like a prepayment towards your final tax bill. This helps spread out tax payments throughout the year instead of one lump sum at the end. The advance tax you pay is then adjusted against your final tax liability.

 

What is Section 62 of the Income Tax Ordinance 2001?

Section 62 offers a tax break for residents of Pakistan who invest in new shares from publicly listed companies. If you’re not a company yourself, this section lets you claim a tax credit for a portion of the money you invest in new shares offered to the public by a company listed on a Pakistani stock exchange.

 

What is Section 75A of the Income Tax Ordinance 2021?

Introduced in 2019, Section 75A requires certain transactions to be done using traceable banking methods to fight tax evasion.  If you’re buying property worth more than Rs. 5,000,000 or other assets exceeding Rs. 1,000,000, you need to use a crossed cheque, crossed demand draft, crossed pay order, or another approved banking instrument that shows the transfer of funds between accounts. This helps ensure the source of the funds is documented.  While the Income Tax Ordinance is for 2001, Section 75A is a specific amendment introduced in 2019.

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