Introduction

Presumptive tax and normal tax regimes have been introduced  by Federal Board of Revenue (FBR)   through  Income Tax Ordinance, 2001,  for collection of income tax in Pakistan.

Normal Tax Regime

According to Section 9 of the Income Tax Ordinance, 2001, “the taxable income of a person for a tax year shall be the total income of the person for the year reduced (but not below zero) by the total of any deductible allowances……”. The income tax is paid at the applicable rates at the time of filing the return of income after allowing  deductions and credits as per law. The salient features of the normal tax regime under Income Tax Ordinance 2001, are given below:

• The deduction for expenditure is allowed;
• The amount of income will be reduced by any deductible allowance;
• Set off of losses is allowed;
• Tax credit is allowed;
• Adjustment of advance tax and deducted at source is allowed as per law;
• Refund of advance tax and deducted at source is allowed if it is more than the assessed tax liability as per law.

Presumptive Tax Regime

This is mode of collection of income tax when an income is generated i.e. payment is received (tax deducted at source) or a transaction is made (advance tax). There are three types of taxes under presumptive tax regime in Income Tax Ordinance, 2001:

• Adjustable
• Final
• Minimum

Adjustable Tax

This is the tax deductible at source or paid in advance which is adjustable against the tax payable while filing the return of income. The refund of such tax can be claimed or it can be carried forward to the following year if there is no tax is payable while filing the return of income. Following are examples of adjustable tax under Income Tax Ordinance, 2001:

• Tax deducted at source on salary income (Section 149)
• Tax deducted at source on property income (Section 155)
• Advance Tax on motor vehicle registration (Section 231B)
• Advance Tax on motor vehicle-Token (Section 234)
• Advance tax on sale or transfer of immovable property (Section 236C)
• Advance tax on purchase or transfer of immovable property (Section 236K)
• Advance tax on payment abroad through credit or debit or prepaid cards (Section 236Y)

Final Tax

According to Section 8 of the Income Tax Ordinance, 2001 tax deducted and paid at source will be final on the following sources of income:-

• Tax on Dividend (Section 5)
• Tax on undistributed Profits (Section 5A)
• Tax on return on investment in Sukuks (Section 5AA)
• Tax on certain payments to Non-residents (Section 6) as given below:
•          Royalty
•          Fee for off-shore digital services
•          Fee for money transfer operations, card network services, payment gateway services, interbank                 financial telecommunication services
•          Fee for technical services
• Tax on shipping and air transport income of a non-resident person (Section 7)
• Tax on shipping business of a resident person (Section 7A)
• Tax on profit on debt (Section 7B)
• Tax on deemed income (Section 7E)                                                       Deemed income means an amount equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of tax year.

According to Section 169 of the Income Tax Ordinance, 2001, tax deducted and paid at source will be final on the following sources of income:-

• Income mentioned in Section 152 (1D, 1DA, 1DB, 1DC, 1DD) of Income Tax Ordinance, 2001
• Export of goods (Section 154)
• Export of Services (Section 154A)
• Prize on prize bonds, winning of royalty, raffle, cross-word puzzle (Section 156)
• Commission or discount allowed to petroleum dealers (Section 156A)

The following conditions will apply to income chargeable to final tax:

• Income shall not be chargeable to tax under any head of income in computing the taxable income of the person;
• Deduction expenditures is not allowed;
• No deduction of any allowance;
• Set off of losses against income is not allowed;
• No tax credit is allowed against taxable income;
• No adjustment or refund is allowed except for excess paid or wrongly paid tax.

Minimum Tax  

Minimum tax has been introduced in Income Tax Ordinance, 2001 as a mode of collection of income tax at source as middle way viz-a-viz Adjustable and Final tax.

The logic behind the minimum tax is that the tax deducted at source is adjustable if the tax payable at the time of filing of return is more than the tax deducted at source.  However, if the tax payable at the time of filing of return is less than the tax deducted at source or there is no tax payable. The the tax deducted at source becomes a final tax and all the conditions of final tax will apply to the tax deducted at source.

The following categories of tax deducted at source are classified as minimum tax under Income Tax Ordinance 2001:

• Payment for contracts to non-resident (Section 152-1A)
• Payment of insurance premium to non-resident (Section 152-1AA)
• Payment for advertisement services to a non-resident (Section 152-1AAA)
• Payment for supply of goods, services and execution of contract by a non-resident having permanent establishment in Pakistan (Section 152-2A)
• Payment for supply of goods, services and execution of contract by a resident person (Section 153(1))

 

Conclusion

It is commonly assumed that the implications of normal and presumptive tax regimes are different with respect to incidence of income tax. This is just a misnomer.

As a matter of fact there is no difference between normal and presumptive tax regimes as far as incidence of tax is concerned. These are just different methods of collection of income tax and are charged on the income of a person.

There is only difference of time of payment. The normal tax is paid while filing return of income and presumptive is paid when income is received or even in advance.

FAQ

Q. What is adjustable tax in Pakistan?

Ans. This type of tax is paid when the source of income is received. This tax is adjustable against the tax                   payable at the time of filing of return of income. This tax can also be carried forward or refund can                   be claimed if there is no taxable income at the time of filing of return of income.

Q.  What is final tax in Pakistan?

Ans.  This type of tax is paid when the source of income is received. Such type of tax can neither be adjusted against any other tax nor be carried forward or refunded.

Q.  Is minimum tax adjustable?

Ans.  Minimum tax deducted and paid at source is adjustable against the tax payable at the time of filing of return of income. If the tax payable at the time of filing of return of income is less than tax deducted at source or no tax is payable at the time of filing of return of income, such tax becomes final.

Q. What is FTR and NTR?

Ans. FTR stands for Final Tax Regime and NTR stands for Normal Tax Regime.

Q. What is presumptive tax regime in Pakistan?

Ans. Presumptive tax regime is mode of payment and collection of income tax when a source of income is generated i.e. payment is received (tax deducted at source) or a transaction is made (advance tax).