Advanced Taxation - Session-4-09092016

Institute of Business Administration, Karachi
Advanced taxation
Fall Semester 2016 Session -4 | Main Campus | Friday, 9th September, 2016
With: M. Hanif Idrees: mhidrees@iba.edu.pk
Agenda
1. Recap and questions if any on slides of previous session

2. Association of persons (AOP) taxation: Definition and principles of
taxation
3. Calculation of tax liability of a member of AOP
4. AOP taxation: Exceptions to principles of taxation
5. Illustrations for AOP taxation
6. Quiz no. 1 and suggested solution
Advanced taxation Session -4 | IBA Main Campus | Friday, 9th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk
Page
Association of persons (AOP) taxation: Definition and principles of taxation

AOP definition: Section 2(6) and Section 80(2) (a): includes:
a firm;
a Hindu Undivided Family (HUF);
any artificial judicial person; and
any body of persons formed under a foreign law.
But does not include a company.
Section 2 (32): member in relation to an association of persons, includes a partner in
a firm.
Common examples of AOP: Partnership firm and Joint venture.
Section 84: An association of persons shall be a resident association of persons for a
tax year if the control and management of the affairs of the association is situated
wholly or partly in Pakistan at any time in the year.
Section 92 (1) : AOP is distinct and separate from its members. Hence it is liable to tax
separately from its members.
Section 92 (1): Based on the principle that an income can not be taxed twice, the share
of member (after tax income as clarified by FBR) received from AOP is exempt in the
hands of member.
Page
Calculation of tax liability of a member of an AOP and exceptions

An individual as a member of an AOP (Section 88): However such share of member is
included in income of the member for determination of tax rate i.e. for rate purposes.
Calculation of tax liability of members:
[Tax liability (including share from AOP) Taxable income (including share from AOP)]
X
Taxable income (Without share from AOP)
EXCEPTIONS:
Company as a member of AOP [Proviso to Section 92 (1)]: If a company or companies is /
are member(s) of AOP then the share of such company(ies) shall be excluded from AOPs
total income. Share of company or companies shall be taxed separately at the rate applicable
to respective companies according to their share.
FTR income of AOP: If an AOP has any income that falls under Final Tax Regime (FTR) then
members share from such income shall not be added in the taxable income of the member.
Section 4(4) read with Section 169(2) clearly states that income falling under FTR is not to be
included in any taxable income. Hence FTR income of AOP shall not be included in divisible
income.
Income of joint owners (Section 66): Where any property is owned by two or more persons
and their respective shares are definite and ascertainable then such persons shall not be
assessed as an association of persons in respect of the property. The share of each person in
the income from the property for a tax year shall be taken into account in the computation of
the persons taxable income for that year. Hence AOP cannot generate rental income
except when share of members not identifiable and its covered under income from business.
Page
Illustration no. 1: Members share of AOP

Clause 1 of First Schedule will apply for computation of tax liability. In the case of
an AOP that is a professional firm prohibited from incorporating by any law or the
rules of the body regulating their profession, the highest slab rate of tax shall be
32% (and not 35%) for tax year 2016 and onwards.
Mr. A and Mr. B are running a business as AOP with share of 75% and 25%. AOPs
income from business for the TY 2016 is Rs.3,000,000/- What will be the tax liability
of AOP?
PKR
On first Rs.2,500,000/- =
344,500/-
On remaining Rs.500,000/-=
125,000/-
Total =
469,500/-
After tax income of AOP=
2,530,500/-
Mr. As share = Rs.1,897,875/- [75% of (3,000,000 469,500)]

Mr. Bs share = Rs.632,625/ Mr. Bs other details are as follows;
Income from other sources Rs.500,000/ Capital gain from disposal of private limited company shares Rs.210,000/ Zakat deducted by bank Rs.10,000/ Tax deducted / paid at source Rs.45,000/Advanced taxation Session -4 | IBA Main Campus | Friday, 9th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk
Page
Solution to illustration no. 1: Members share of AOP

TAX YEAR: 2016
NAME OF THE TAXPAYER: Mr. B
STATUS: Individual
NATIONAL TAX NUMBER: XXXX

ADDRESS: Karachi
WHETHER RESIDENT / NON RESIDENT: Resident
Total
Exempt
Taxable
Income from business

Share of profit from AOP exempt under section 92(1)
Capital gains from sale of shares
Income from other sources
632,625
210,000
500,000
1,342,625
632,625
632,625
Less: Deductible allowance: Zakat under section 60

Taxable income
Add: Share of profit from AOP for rate purposes under section 88
Taxable income for rate purposes
Income tax imposed on taxable income
Calculation of rate to be applied on the basis of rates in clause 1 of Division I of
Part I of First Schedule for non-salaried individual
On first
On remaining
750,000
582,625
1,332,625
700,000
Tax credits
Taxes deducted / paid at sources: section 4(3) (c )
Tax payable with return
15%
8.959%
8.959%
32,000
87,394
119,394
62,715
210,000
500,000
710,000
(10,000)
700,000
632,625
1,332,625
62,715
(45,000)
17,715
Page

Had share of AOP not been added for rate purposes there would be tax refundable as follows:
On first
On remaining
500,000
200,000
700,000
10%
3.857%
7,000
20,000
27,000
Tax credits
Tax refundable
27,000
(45,000)
(18,000)
Had there been double taxation tax payable would have been as follows:
700,000
17.06%
Tax credits
119,394
(45,000)
74,394
Actual tax liability on taxable income is somewhere in between of double taxation and no
double taxation
Tax imposed on taxable income

Tax (refundable)/ payable
No double
As per
taxation
section 88
27,000
62,715
(18,000)
17,715
Double
taxation
119,394
74,394
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Illustration no. 2: Members share of AOP

Mr. X has disclosed following information:
Taxable salary Rs.900,000/ Capital gain on sale of private companies shares Rs.300,000/ Foreign source income taxable in Pakistan Rs.360,000/-
Tax paid in foreign country equivalent to Rs.27,000/ Share of profit from AOP Rs.320,000/ Zakat deducted at source Rs.17,000/ Donation to an approved charitable institution through cheque Rs.50,000/-
Taxes deducted / paid at source Rs.56,000/REQUIRED: Calculate following for Mr. B:

a. Taxable income
b. Tax imposed
c. Tax credits
d. Tax payable
e. Tax imposed and tax payable assuming share of AOP is not included for rate
purposes
f. Tax payable assuming that there is double taxation and share of AOP is fully taxable
Page
TAX YEAR: 2016

NAME OF THE TAXPAYER: Mr. B
STATUS: Individual
NATIONAL TAX NUMBER: XXXX

ADDRESS: Karachi
WHETHER RESIDENT / NON RESIDENT:
Total
Exempt
900,000
-
Income from salary

Income from business
Share of profit from AOP exempt under section 92(1)
Foreign source income
Capital gain on sale of private companies shares
320,000
360,000
300,000
1,880,000
Less: Deductible allowance: Zakat under section 60

Taxable income
Add: Share of profit from AOP for rate purposes under section 88
Taxable income for rate purposes
Resident
Taxable
900,000
320,000
360,000
300,000
320,000 1,560,000
(17,000)
1,543,000
320,000
1,863,000
Page

How to determine salaried / non salaried case?
Taxable salary Taxable income without AOP share
POSSIBLE INTEPRPRETATIONS FOR DETERMINING APPLICABLE RATES OF TAX
A Taxable inome from salary

B %age of salary income [A (C or E)]
C Total income excluding exempt income
OPTION NO.2
OPTION NO.1
Taxable income Taxable income
without AOP share with AOP share
900,000
900,000
57.69%
47.87%
1,560,000
D Share of AOP
E Taxable income with share of AOP
1,560,000
320,000
1,880,000
Page
10

OPTION NO.1: With AOP Share
Calculation on the basis of rates in clause 1 of Division I of Part I of First Schedule for
non-salaried individual i.e. Option no. 1
On first
1,500,000
144,500
On remaining
363,000
20%
72,600
1,863,000
11.653% 217,100
'C' as per section
88
a
b
a
b
'B' as per section

88
1,543,000
'A' as per
section 88
11.653% 179,810
Tax credits
Foreign tax credit under sections 4(3)(a)and 103
Lower of the following:
Tax paid
Tax on foreign source income at 11.653% or 217,100/1,863,000*360,000
Eligible amount for credit of donation under section 61 is lesser of the
following: sections 4(3)(b) and 61
Actual donation
30% of taxable income excluding share of profit from AOP for individual:
1,543,000*30%
Tax credit at 11.653% or 217,100 ['A' as per section 65
(1)(a)]/ 1,863,000 ['B' as per section 65 (1)(b)]*50,000 ['C' as
per section 61 (2)]
179,810
(27,000)
27,000
41,952
50,000
50,000
462,900
(5,827)
(56,000)
90,983
Page
11

OPTION NO.2: Without AOP Share
Calculation on the basis of rates in clause 1 of Division I of Part I of First Schedule for
salaried individual i.e. Option no. 2
On first
On remaining
1,800,000
63,000
1,863,000
'C' as per section
88
a
b
'B' as per section

88
1,543,000
17.5%
7.946%
'A' as per
section 88
7.946%
122,599
Tax credits
Tax paid
Tax on foreign source income at 7.946% or 148,025/1,863,000*360,000
Actual donation
30% of taxable income excluding share of profit from AOP
b for individual
Tax credit at 7.946% or 148,025 ['A' as per section 65
(1)(a)]/ 1,863,000 ['B' as per section 65 (1)(b)]*50,000 ['C' as
per section 61 (2)]
137,000
11,025
148,025
122,599
(27,000)
27,000
28,604
50,000
50,000
462,900
(3,973)
(56,000)
35,627
Option no. 2 is more beneficial for the taxpayer. Therefore Option no. 2 will be applied
Page
12

Had share of AOP not been added for rate purposes tax payable would have been as follows:
On first
On remaining
1,500,000
43,000
1,543,000
15%
6.380%
Tax credits
Tax paid
Tax on foreign source income at 6.380% or (98,4501,543,000)*360,000
Actual donation
Tax credit at 6.380% or (98,4501,543,000)*50,000
92,000
6,450
98,450
98,450
(22,970)
27,000
22,970
50,000
50,000
462,900
(3,190)
(56,000)
16,290
Had there been double taxation under option no.2 tax payable would have been as follows:
1,543,000
9.593%
148,025
Tax credits
(27,000)
Tax paid
27,000
34,536
50,000
Actual donation
50,000
462,900
Tax credit at 9.593% or (148,0251,543,000)*50,000
(4,797)
(56,000)
60,228
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13

Tax payable
Tax credits
Foreign tax credit
Section 61 credit
Taxes deducted
No double
As per section
taxation
88 (Option no. 2)
98,450
122,599
16,290
35,627
82,160
86,973
(22,970)
(27,000)
(3,190)
(3,973)
(56,000)
(56,000)
(82,160)
(86,973)
Double
taxation
148,025
60,228
87,797
(27,000)
(4,797)
(56,000)
(87,797)
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14

Had there been double taxation under option no.1 tax payable would have been as follows:
1,543,000
14.070%
Tax credits
Tax paid
27,000
42,210
50,000
Actual donation
50,000
96,000
Tax credit at 14.070% or (217,1001,543,000)*50,000

Tax payable
Tax credits
Foreign tax credit
Section 61 credit
Taxes deducted
No double
As per section
taxation
88 (Option no.1)
98,450
179,810
16,290
90,983
82,160
88,827
(22,970)
(27,000)
(3,190)
(5,827)
(56,000)
(56,000)
(82,160)
(88,827)
217,100
(27,000)
(7,035)
(56,000)
127,065
Double
taxation
217,100
127,065
90,035
(27,000)
(7,035)
(56,000)
(90,035)
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15
Quiz no. 1
SUBJECT: Advanced Taxation CLASS NO: 5620 TERM: FALL 2016 SECTION: MM4
DATE: FRIDAY, 09th SEPTEMBER, 2016 Allocated Time: 10 minutes TOTAL MARKS: 10
NAME: ______________________ REGISTRATION NO.:_____________________
Mr. Zahid joined XYZ Limited, a listed company on 1st July, 2013. As per terms of
employment he had option to acquire 5,000 shares of XYZ limited at Rs. 20 per share after
one year of his employment. He exercised the option on 1st July, 2014. As per the terms of
the scheme he was not eligible to dispose the shares till six months from the date of issue
of shares. His income from salary before accounting for perquisite on account of employee
share scheme for the tax year 2014 was Rs. 6 m and for tax year 2015 was Rs.8m.
All the shares were disposed of by Zahid on 5th February, 2015.
Fair market value per shares have been as follows:
On 1st July, 2014: Rs. 30/On 1st January, 2015: Rs.15/- per share
On 5th February, 2015: Rs. 20/- per share.
Required:
Work out income from salary of Mr. Zahid for the tax year in which he acquired
the shares
Work out total income of Mr. Zahid for the tax year in which he acquired the
shares
Page
16
Suggested solution to Quiz no. 1

TAX YEAR: 2015
NAME OF THE TAXPAYER: Zahid
STATUS: Individual
Income from salary
Salary
NATIONAL TAX NUMBER: xxxxx

ADDRESS: xxxxx
WHETHER RESIDENT / NON RESIDENT:
Resident
8,000,000
Rs. per
share
Number
of shares
Amount
Employee share scheme

Market value of shares on the date of end of
resriction to dispose
Less: Paid at the time of exercising the option
15.00
5,000
75,000
20.00
5,000
100,000
Un realized loss on acquiring shares for which

there is no admissible deduction
(5.00)
5,000
(25,000)
8,000,000
Capital gain
Disposal of shares on 5th February, 2015
Proceeds on sale of shares
Less: Cost of shares
Exercise price paid
Unrealised gain offered for tax under the
head 'salary' [section 14(4)]
Taxable as Capital Gain
Total income
Reconciliation for cross check
Total sale proceeds of shares
Total cost paid for shares
20.00
5,000
100,000
20.00
5,000
100,000
5,000
20.00
-
5,000
5,000
100,000
-
20.00
5,000
100,000
20.00
-
5,000
5,000
100,000
-
8,000,000
Page
17
THANK YOU
Page
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Institute of Business Administration, Karachi

Institute of Business Administration, Karachi

1. Recap and questions if any on slides of previous session

Institute of Business Administration, Karachi

Association of persons (AOP) taxation: Definition and principles of taxation

Institute of Business Administration, Karachi

Calculation of tax liability of a member of an AOP and exceptions

Institute of Business Administration, Karachi

Illustration no. 1: Members share of AOP

After tax income of AOP=

Mr. As share = Rs.1,897,875/- [75% of (3,000,000 469,500)]

Institute of Business Administration, Karachi

Solution to illustration no. 1: Members share of AOP

NATIONAL TAX NUMBER: XXXX

Income from business

Less: Deductible allowance: Zakat under section 60

Institute of Business Administration, Karachi

Solution to illustration no. 1: Members share of AOP

Tax imposed on taxable income

Institute of Business Administration, Karachi

Illustration no. 2: Members share of AOP

Taxes deducted / paid at source Rs.56,000/REQUIRED: Calculate following for Mr. B:

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

TAX YEAR: 2016

NATIONAL TAX NUMBER: XXXX

Income from salary

Less: Deductible allowance: Zakat under section 60

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

POSSIBLE INTEPRPRETATIONS FOR DETERMINING APPLICABLE RATES OF TAX

A Taxable inome from salary

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

'B' as per section

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

'B' as per section

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

Tax imposed on taxable income

Institute of Business Administration, Karachi

Solution to illustration no. 2: Members share of AOP

Tax imposed on taxable income

Institute of Business Administration, Karachi

Institute of Business Administration, Karachi

Suggested solution to Quiz no. 1

NATIONAL TAX NUMBER: xxxxx

Employee share scheme

Un realized loss on acquiring shares for which

Institute of Business Administration, Karachi

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