FINAL / PRESUMPTIVE TAX REGIME (FTR or PTR)

Module F ICAP

SALIENT FEATURES OF PTR S 8 and !" a) Tax deducted or collected at source related to the items of FTR shall become full and final discharge of tax liability subject to correct deduction of tax. Any incorrect tax deduction shall be adjusted accordingly. b) No expense, deduction or allowance against presumed income is allowed c) osses cannot be adjusted against presumed income d) Tax liability under FTR shall not be reduced by any tax credit ! rebate e) Return of income is not re"uired to be filed where the only source of income is FTR. #owe$er, statement u!s %%&'() is re"uired to be filed on or before )* +eptember ')% ,ecember for a company ha$ing income year end between % -anuary to )* -une) f) .n case where a person has no income other than FTR and he files statement u!s %%&'() an assessment order shall be deemed to ha$e been made g) /here a person has normal taxable income and income under FTR, he is re"uired to file return of income as well as statement u!s %%&'() 0 Rule )1 ITEMS UN#ER FTR AN# TAX T$EREON %. #%&%dend %n'o(e 2 + & and %&* Tax rate on di$idend income is as under3 Re'%)%en* o+ d%&%dend Non0resident company on di$idend declared by a company in$ol$ed exclusi$ely in mining operations other than petroleum 45lause %6 70.. 8nd +chedule9 +hareholders of a power project pri$ati<ed by /A7,A or a company set up for power generation 45lauses %: and 8* 70.. 8nd +chedule9 =ther company Non0corporate shareholders Ta, ra*e :.&;

:.&; %*; %*;

The abo$e tax is the full and final tax liability for a non0corporate shareholder whereas di$idend income of a corporate shareholder is taxable under normal tax structure. 8. Pr%-e. and /%nn%n0. 2 + %&6 a) Tax shall be deducted of the gross amount of the following3 i. %*; on 7ri<e on pri<e bond

ii.

8*; on Raffle, ottery, 5ross0word pu<<le, 7ri<e on winning a "ui< or 7ri<e offered by companies for promotion of sales

b) .f the said pri<e or winning is not in cash then the payer is re"uired to collect tax > 8*; of F?@ of the pri<e from the recipient of pri<e. ). E,)or*. 2 + %&( a) Tax shall be deducted > %; from export proceeds in respect of direct exporters, indirect exporters 'i.e. inland bacA to bacA 5) and undertaAings located in B7C. b) 5ommission recei$ed by export indenting agents or export buying house shall also be taxable > %; 2 5lause & 7art0.. 8 nd +chedule. c) +upply of goods against international tenders are considered as export and therefore taxable under FTR. '5ircular letter dated (.:.%118) d) An exporter maAing payment on ser$ices of stitching, dying, printing, embroidery, washing, si<ing and wea$ing shall deduct tax > *.&; of gross ser$ice charges and the same shall be final tax under FTR 2 + %&)'%A) e) Bxport of certain goods are subject to *.:&; tax e.g. rice under brand name up to &* Ags pacAs, canned and bottled sea food and other food items, precious stones etc. 2 clauses %( and %& 70.. 8 nd +chedule f) ocal sales of goods 'manufactured for export) as well as waste material not constituting more than 8*; of such production may also be treated as export sales at the option of the taxpayer. '5ircular 8* of %118)

g) ,uty draw0bacAs 'i.e. custom rebate etc.) in respect of exports already co$ered under 7TR shall not be considered as additional receipts. The amount of such draw0bacAs etc. shall be deemed to ha$e been co$ered, for tax purpose, under FTR '5ircular %( of %11)). h) 5lause &6'i$) 7art .@ 8nd +chedule 2 Tax at import stage shall not be paid by direct and indirect exporters if they are co$ered under3 o ?anufacturing in Dond Rules o 5ommon Donded /arehouse Rules o ,uty and Tax Remission for Bxport Rules i) .ncome from export of computer software or .T ser$ices or .T enabled ser$ices is exempt up to )*.6.8*%6 2 5lause %)) 7art . 8 nd +chedule Eminimum tax pro$isions are not applicable as well 2 clause %%'x) 70.@ 8nd +cheduleF IT services include +oftware de$elopment, +oftware maintenance, +ystem integration, web design, web de$elopment, web hosting and networA design

1IT ena2led .er&%'e.3 include .nbound and outbound call centres, ?edical transcription, Remote monitoring, Graphics design, Accounting and #R ser$ices, Telemedicine centres, ,ata entry operations and .nsurance claim processing and locally produced T@ programmes.

(. I()or*. 2 + %(H':) a) Tax shall be paid on import stage at the following rates on $alue as increased by custom duty, sales tax and federal excise duty3 i. %; on import of capital goods and raw materials imported exclusi$ely for its own use by a manufacturer registered with sales tax department 2 clause %) 70.. 8nd +chedule. %; on fiber, yarn and fabric and goods co$ered by the Cero Rating Regime of +ales Tax 2 clause 1 70.. 8nd +chedule %; on certain items e.g. capital goods, cement, gold, mobile phones, sugar, li$e stocA, computers 2 clause %)G 70.. 8 nd +chedule. 8; on certain items e.g. stationery items, raw materials for steel industry and poultry feed 2 clause %)# 70.. 8 nd schedule &; on other imports *; on items specified in clause &6 70.@ 8nd +chedule such as3 o o o o agricultural tractors in 5DI condition tomatoes, potatoes etc halal meat of goat, sheep and beef capital goods and raw materials imported by manufacturer exporter registered with the sales tax department.

ii. iii. i$. $. $i.

b) Tax > ).&; shall not be deducted at source at the time of supply of such items where3 i. The sale is made by the importer of the goodsJ ii. The importer has paid tax u!s %(H in respect of such goodsJ and iii. The goods are sold in the same condition they were in when imported. c) Bxcept in the case of3 .mport of fertili<er by manufacturer of fertili<erJ .mport of $ehicles in 5DI condition by manufacturer of $ehiclesJ arge import houseJ and Indu.*r%al under*a4%n0 importing goods as raw materials, plant, machinery and e"uipment for its own use tax paid u!s %(H shall become full and final tax on the income of importer arising from such imports. .t means that commercial imports are generally taxable on FTR basis.
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Note for students: For the definition of industrial undertaAing refer section 8'815). The courts ha$e held that an importer importing goods for toll manufacturing can not be considered as a commercial importer. Toll manufacturing contracts are as good as self manufacturing ! self consumption. d) A large import house is an entity who3 i. ii. iii. i$. $. $i. $ii. $iii. ix. has paid up capital exceeding Rs.%** millionJ has imports exceeding Rs.&** million during the tax yearJ owns total assets exceeding Rs.%** million at the close of the tax yearJ is single object companyJ maintains computeri<ed records of imports and sale of goodsJ maintains a system for issuance of %**; cash receipts on salesJ presents accounts for tax audit e$ery yearJ is registered with sales tax departmentJ and maAes sale of industrial raw material to manufacturer registered for sales tax purpose. 4 arge import houses are generally termed as bulA importers of industrial raw materials9

e) Co()an%e. o)era*%n0 *rad%n0 5ou.e. 'lau.e 67 P8IV 9 nd S'5edule: +ection %(H (for imports) and section %&) (for supply of goods) are not applicable for companies operating trading houses. .t means that their income shall be taxable under normal tax structure. Trading houses which 2 i. ii. iii. i$. $. $i. ha$e paid up capital exceeding Rs.8&* millionJ own fixed assets exceeding Rs.)** million at the close of the tax yearJ maintain computeri<ed records of imports and sales of goodsJ maintain a system for issuance of %**; cash receipts on salesJ present accounts for tax audit e$ery yearJ and is registered with the sales tax department.

&. Su))l; o+ 0ood.< e,e'u*%on o+ 'on*ra'*. and .er&%'e. 2 + %&) a) .n respect of3 .u))l; o+ 0ood. ').&; of the gross amount including sales tax) .er&%'e. '8; for transport ser$ices, 6; for other ser$ices) e,e'u*%on o+ 'on*ra'*. '6;) tax shall be deducted by the following payers3 Go$ernment and local authority 5ompany other than small company or a large import house A=7 constituted under law Foreign contractor or consultant 5onsortium or joint $enture
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b) Mone*ar; l%(%*= Tax shall not be deducted if payment in a financial year does not exceed Rs.8&,*** in case of supply of goods and Rs.%*,*** in case of ser$ices and execution of contracts 2 +R= H86 dated 8(.H.%11% c) .mportant e,e()*%on. from tax deduction are3 ease payments or purchase of an asset under lease and buy0bacA agreement +ale of goods by a large import house 7ayments to Go$ernment or local authority 7ayment to an indirect exporter in respect of inland bacA to bacA 5. Pur'5a.e. 2; a (anu+a'*urer8'u(8e,)or*er= #owe$er, tax shall be paid by the purchaser on purchases in respect of goods sold in 7aAistan if local sales are in excess of &; of export sales. '(& 7art0.@ 8nd +chedule)
d) FTR or normal tax structure: Supply of goods (other than exports and supply out of commercial imports), execution of contract or services are taxable under FT in certain cases only !here tax is deducted"

FTR or Nor( al Supply of goods: Dy an indi$idual or A=7 thru manufacturing or wholesale trading Dy a listed company thru manufacturing or trading Dy an unlisted company thru manufacturing Dy an unlisted company thru wholesale or retail trading Contracts: Dy a company listed in 7aAistan Dy a non0resident contractor including ad$ertisement ser$ices pro$ided by a non0resident T@ +atellite 5hannel 4#owe$er, Receipts of a non0resident contractor shall fall under 7TR only if he opts for 7TR. This option is re"uired to be filed in writing within ) months of the commencement of tax year and irre$ocable for ) years9 =ther cases Services: Dy a company 2 listed or unlisted Dy an indi$idual or A=7 Ad$ertisement ser$ices by owners of newspapers and maga<ines FTR Normal Normal FTR Normal Normal

FTR Normal FTR Normal

6. Re*a%ler. S >A: An indi$idual or an A=7 in$ol$ed in retail business ha$ing turno$er up to Rs.& million in a tax year (a; o)* to pay tax > *.&; of his turno$er as final tax instead of normal tax structure. Inder this section, a retailer can not claim adjustment of any withholding tax.

:. Re*a%ler. S >?: An indi$idual or A=7 'registered for sales tax purpose) in$ol$ed in retail business ha$ing turno$er exceeding Rs.& million for any tax year %. re@u%red to pay final tax on his turno$er as under3 A(oun* o+ *urno&er Turno$er exceeds Rs.& million but does not exceed Rs.%* million Turno$er exceeds Rs.%* million Ra*e o+ *a, Rs.8&,*** K *.&; of turno$er exceeding Rs.& million Rs.&*,*** K *.:&; of turno$er exceeding Rs.%* million

Inder this section, a retailer can not claim adjustment of any withholding tax. H. Pe*rol Pu() O)era*or. 2 + %&6A3 Full and final tax > %*; is applicable on the amount of commission or discount allowed to a petrol pump operator. 1. CNG .*a*%on. 2 + 8)(A3 Full and final tax > (; is applicable on the amount of gas consumption charges. 5NG stations shall not be allowed to claim any other withholding tax. %*. Co((%..%on or 2ro4era0e 2 + 8))3 Tax shall be deducted > %*; from commission or broAerage paid by go$ernment, local authority, company or A=7 constituted under the law which shall be considered as full and final tax liability. Tax rate shall be &; in case of ad$ertising agents 2 clause 86 70.. 8 nd +chedule = Colle'*%on o+ *a, 2; a .*o'4 e,'5an0e re0%.*ered %n Pa4%.*an S 9>>A A +tocA Bxchange registered in 7aAistan shall collect ad$ance tax > *.*%; from its members on purchase and sale of shares in lieu of tax on commission earned by such members which shall be considered as full and final tax liability. 9= F%,ed *a, on %n'o(e +ro( )ro)er*; S 6(!) .ncome from property is subject to fixed tax > &; on gross amount of rent chargeable to tax u!s %& read with section %6. #owe$er, income from property shall not be taxable where a person who3 i. ii. iii. is an indi$idual or A=7 deri$es income u!s %& not exceeding Rs.%&*,*** in a tax yearJ and does not deri$e taxable income under any other head.

>= In*ere.* %n'o(e S 6 .nterest income on or after % -uly 8**6 by a person other than a company shall be subject to %*; tax deduction as FTR in the following cases3

a) 7rofit on certificates under National +a$ing +chemes including ,efence +a$ing 5ertificates and 7ost =ffice +a$ing Account b) DanA profit c) 7rofit on certificates, debentures etc. including TF5s, 5ertificates of .n$estment issued by a company or a financial institution #owe$er, interest income on securities issued by the Federal or 7ro$incial Go$ernment or local authority shall be subject to %*; tax deduction under normal tax regime. Aeal*5 .*a*e(en*= .f a taxpayer has no income other than 7TR he is not re"uired to file his wealth statement u!s %%6 as in this case he will not file return of income with which wealth statement is re"uired. '5ircular letter dated %(.).%118) Aor4er.3 Ael+are Fund: //F is payable > 8; of taxable income. The courts ha$e held that //F is not payable on income under 7TR and income which is exempt from income tax. #owe$er, the Finance Act 8**6 made the following changes in respect of //F with effect from the tax year 8**:3 Ltotal incomeM means3 i. /here return of income is re"uired to be filed, accounting profit before tax or declared income as per return of income whiche$er is higher ii. /here return of income is not re"uired to be filed, accounting profit before tax or (; of the receipts as per statement u!s %%& 'i.e. statement for 7TR) of the .ncome Tax =rdinance whiche$er is higher.

After the abo$e changes, //F shall be payable on business income under 7TR as well. Pra'*%'al B. rela*ed *o PTR C .u00e.*ed .olu*%on. (,ata has been changed in the "uestions, where$er re"uired ) B=8A (B=! No& ""6): Nou are re"uested to calculate tax liability by your client who is a manufacturing company. The pertinent information is as follows3 Rs. a) +upplies made with tax deduction u!s %&) 8&,***,*** b) .mports of raw materials 2 tax paid u!s %(H )*,***,*** c) Bxports made with tax deduction u!s %&( &*,***,*** d) 5ash sales 6*,***,*** e) Gross profit &,***,*** f) 7rofit and loss expenses &**,*** Tax at source has already been deducted whene$er re"uired. 5orporate tax rate is )&;.

ANSAER:
AORDING Sale. GP E,) Ta,a2le %n'o(e FTR or nor( al

Taxable income under normal assessment .ncome Tax > )&; Tax under 7TR on exports Total tax liability B=8? (%nd%&%dual (anu+a'*urer) Nou are re"uested to calculate tax liability by your client who is an individual manufacturer. The pertinent information is as follows3 Rs. a) +upplies made with tax deduction u!s %&) 8&,***,*** b) .mports of raw materials 2 tax paid u!s %(H )*,***,*** c) Bxports made with tax deduction u!s %&( &*,***,*** d) ocal sales without tax deduction 6*,***,*** e) Gross profit &,***,*** f) 7rofit and loss expenses &**,*** Solu*%on:
Sale. GP E,) Ta,a2le %n'o(e FTR or nor( al

Taxable income under normal assessment .ncome Tax > 8&; Tax under 7TR Total tax liability
Q.8C (Q.7 MAY 1998 ICAP PE !: Follo!ing is the & ' ( a)c of * company, a listed company, for the year+

+ales 2 ocal sales +ale thru exports +ale of imported goods ess3 5ost of goods sold
,

%),*** &,*** 8,***

(R.= %n EEE)

(R.= In EEE)

8*,***

5ost of goods 'own manufactured) 5ost of imported goods Gross profit +elling and admn expenses Net profit before tax

%*,*** %,H** %%,H** H,8** %,*** :,8**

All sales are subject to tax deduction ! collection at source. Following taxes ha$e been deducted ! collected3 %&) on supply of goods 2 local sales(&&,*** %&) on sale of commercial imports :*,*** %(H on imports %8*,*** %&( on exports > %; &*,*** Tax with electric and telephone bills 1,)8* There were no opening and closing stocAs. 5ompute its tax liability with return, if any. ANSAER: AORDING:
Sale. GP E,) Ta,a2le %n'o(e FTR or nor(al

Taxable income under normal tax structure Tax > )&; Tax under 7TR u!s %(H 2 on commercial imports Tax under 7TR u!s %&( 2 on exports Total tax liability B=8# (B=6 A%n*er """ ICAP F): +tated below is the profit and loss account of AD5 '7$t) td engaged in contracting, trading, indenting and ser$icing and repairs of engineering e"uipment3 A?C (P&*) L*d Pro+%* and Lo.. A''oun* +ales 5ost of sales Gross profit .ndenting commission 'from tax deducting agencies) 7rofit on completed contracts 7rofit from ser$icing and repairing Administration and selling expenses Financial charges =ther income 7rofit before taxation
-

&*,*** )6,*** %(,*** H,*** &,*** (,*** )%,*** 8&,*** :,*** '6,***) 86,*** &,***

.n addition to the abo$e, the following additional information is a$ailable3 i) The breaA0up of sales is3 +ales out of imports (*,*** +ales out of local purchases 'tax deducted by customers) H,*** =ther sales 8,*** &*,*** ii) Financial charges include exchange gain on foreign currency deposit account Rs.%,*** iii) Tax depreciation was Rs.6,*** while accounting depreciation was Rs.H,***. i$) The company operates an unfunded gratuity scheme for its employees. Gratuity paid during the year was Rs.:** while the pro$ision of gratuity was Rs.%,***. $) =ther income includes di$idend from a public "uoted company Rs.&,***. $i) Taxes related to sales and contracts are as under3 o I!s %(H on imports o I!s %&) on supplies out of imports o u!s %&) on supplies out of local purchases o I!s %&) on contract $alue $ii) Ad$ance tax paid on "uarterly basis u!s %(: %,H** &** %** 6** 8,***

Re@u%red: /orA out the income of the company to discharge its tax liability. 7ro$ide all related worAings to support the manner in which the tax liability is shown as discharged. ANSAER: AORDINGS: %) EXPENSES A#MISSI?LE FOR TAX PURPOSES

.t is assumed that common expenses do not relate to di$idend income ii)

Sale. GP E,) Ta,a2l e %n'o( e FTR or nor( al

+ale of imports +ale out of local with tax

(*,*** H,***
./

deduction =ther sales .ndenting commission 7rofit on completed contracts 7rofit from ser$icing =ther income excluding di$idend Solu*%on: Taxable income under normal tax structure3

8,*** &*,*** H,*** &,*** (,*** %,*** 6H,***

Tax > )&; Add3 Tax under 7TR

Total tax liability ess3 Tax paid ! deducted

Dalance tax payable ! refundable B=8E (B=6 Fune 9EE6 ICPA F): A public company 'listed) incorporated in 7aAistan carried on business in 7aAistan and also abroad through a branch office in a foreign country. The expenditure incurred relating to business acti$ity outside 7aAistan is identified. +ome of the business expenditure incurred in 7aAistan relates to both acti$ities and are in line with the re$enue earned from respecti$e acti$ities. +ome other data is gi$en below3 (R.=) +ales from business acti$ity 0 inside 7aAistan %*&,***,*** 0 outside 7aAistan )&,***,*** Dusiness expenditure allowable for tax purposes3 0 incurred inside 7aAistan 0 common 8*,***,*** 0 incurred outside 7aAistan )8,***,*** 0 incurred inside 7aAistan 2 relating to 7aAistan based acti$ity :H,***,*** Dusiness loss b!f from tax year 8**) 'related to business acti$ity abroad) Foreign withholding tax
..

&,***,*** 8,***,***

Dusiness acti$ity in 7aAistan comprises of the following3 Toll manufacturing The company imports certain raw materials and under a toll manufacturing arrangement with another company, raw materials are processed into finished form. The company pays toll manufacturing charges as a consideration for processing raw materials. At import stage, tax is paid u!s %(H > %; on the import of raw materials. =nce goods are manufactured thru another company, these are sold to persons who are authori<ed to deduct tax u!s %&). The data relating to toll manufacturing acti$ity is gi$en below3 (R.=) +ales &*,***,*** Raw material imports O8*,***,*** Toll manufacturing charges O&,***,*** =ther expenses O),***,*** O included in Rs.:H,***,*** Trading business The company imports certain goods and sells them in their original shape. The company also purchases certain goods locally and sells them as a trader from which tax at supply stage is deductible u!s %&). The data relating to trading business is gi$en below3 (R.=) +ales out of imports (&,***,*** Tax paid u!s %(H 8,8&*,*** +ales out of local purchases3 0 locally produced goods&,***,*** 0 imported goods &,***,*** Re@u%red: 5ompute taxable income and the tax payable thereon. (Mar4. 8) Solu*%on: No*e. +or .*uden*.: %) The courts ha$e held that an importer importing goods for toll manufacturing can not be considered as a commercial importer. Toll manufacturing contracts are as good as self manufacturing ! self consumption. 8) The company in this "uestion is an industrial undertaAing 'being a toll manufacturer) and therefore tax u!s %(H and tax u!s %&) > ).&; on sale of items under toll manufacturing are ad$ance tax and not co$ered under FTR. )) As per section %*(, foreign source income of a particular head of income shall be considered a separate source of income and deductible expenditure in deri$ing taxable foreign source income shall be deducted
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only against that income. Therefore, common expenditures are re"uired to be apportioned. () Foreign source loss shall be c!f only against that foreign source income 2 + %*(. &) /e assume that there is no tax treaty in respect of foreign source income and therefore foreign source income, if any, is taxable in 7aAistan with the concept of foreign tax credit u!s %*). Aor4%n0 o+ a))or*%on(en* o+ e,)en.e. and *a,a2le %n'o(e (R.=EEE):
To*al +ales Dusiness exp incurred3 Toll (anu+= Lo'al *rad%n 0 Co((er'% al I()or*. Fore%0 n .our'e %n'o( e

.ncome ! 'loss) Taxable under FTR or Normal

Taxable income under normal tax structure Tax > )&; ess3 Taxes paid Tax payable with return of income Tax under FTR as full and final tax liability3 Tax paid on

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