Tax Credits Chapter-15

Chapter

15 TAX CREDITS

Topic covered Topic covered

Section Rule (Part – 1 For CAF-6 & ICMAP Section
students)
Miscellaneous provisions relating to tax
65 (Part – II For CA mod F & ICMAP students)
credits
103 16 Foreign tax credit 65C Tax credit for enlistment
Tax credit for newly established industrial
61 Credit for charitable donations 65D
undertakings
Tax credit for industrial undertakings Established
62 Investment in shares & Insurance 65E
before July 01, 2011
63 Contribution to approved pension fund Table of tax credits under section 65B to 65E
Tax reductions for flying and submarine
Tax credit for employment generation by allowance, total allowance to pilot of Pakistani
64B
manufacturers airlines, senior citizen, full time teacher &
researcher & profit on Behbood certificates etc.
Tax credit for exempt share from Tax credit for tax already paid or deducted at
88 168
association of persons source
100C Tax credit for certain persons
Tax credit for a person registered under
65A MCQ’s with solutions
Sales Tax Act
ICMAP & CA Mod C past papers theoretical
65B Tax credit for investment
questions

(Part – I For CAF-6 & ICMAP students)

1. Tax credits and rebates
There are different types of tax credit available under the Income Tax Ordinance, 2001. If a taxpayer is allowed more
than one tax credit then credits shall be applied in the following order: The following order may also be examined from
the FBR Income tax return format available on E-portal.
Tax credit Relevant clause / section
(1) Foreign tax credit Section 103
(2) Tax credits [Covered as under from (a) to (j)] Section 61 to 65E
a. Tax credit on charitable donations Section 61
b. Tax credit on investment in shares and insurance Section 62
c. Tax credit on Contribution to approved pension fund Section 63
d. Deductible allowance for profit on debt Section 64A
e. Tax credit for employment generation by manufacturers Section 64B
f. Tax credit for exempt share from AOP Section 88
g. Tax credit to a person registered under the Sales Tax Act, 1990 Section 65A
h. Tax credit for investment Section 65B
i. Tax credit for enlistment Section 65C
j. Tax credit for newly established industrial undertakings Section 65D
k. Tax credit for industrial undertakings established before the first day Section 65E
of July, 2011

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(3) Reduction in tax liability in case of flying and submarine allowance Clause (1) Part-III 2nd Schedule
(4) Reduction in tax liability in case of total allowances received by pilots of Clause (1AA) Part-III 2nd
Pakistani airlines Schedule
(5) Reduction in tax liability in case of senior citizens Clause 1A Part-III 2nd Schedule
(6) Reduction in tax liability in case of full time teacher or researcher Clause 2 Part-III 2nd Schedule
(7) Reduction in tax liability on Yield or profit on Behbood and Pensioners Clause (5) Part III 2nd Schedule
Certificates / Accounts
(8) Tax credit for tax already paid or deducted at source Under various sections

(See master example at the end of this chapter.)

2. Miscellaneous provisions relating to tax credits (Section – 65)
(a) Where a person is member of an AOP and then Tax credit shall be calculated including share of profit from
AOP (See master example at the end of this chapter)
(b) Where a person is earning income from property then tax credit shall be calculated including the property
income with effect from tax year 2011 (See master example at the end of this chapter)
(c) Tax credit in excess of tax liability shall not be refunded, carried forward or carried back to a preceding tax
year. [Section 65(3)]
(d) If the person is member of AOP then tax credit in excess of tax liability can be claimed by the AOP by
agreement in writing and such agreement must be furnished with the return of AOP. [Section 65(4) and (5)]
3. Foreign tax credit (Section 103)
Tax credit on net foreign source income (after admissible deductions allowed under this Ordinance) other than the
salary income shall be lesser of foreign income tax paid or the Pakistani tax payable on average rate on total
income including foreign source income.
If foreign income is under more than one head including speculation business, the provisions of this section will apply
separately to each head.
The foreign tax credit will be allowed before any other credit but if the credit cannot be wholly allowed, the remainder
will neither be refunded, carried back nor carried forward to the following tax year.
A tax credit shall be allowed under this section only if the foreign income tax is paid within 2 years after the end of
the tax year in which the foreign income was derived by the resident taxpayer.
Foreign tax credit [Rule 16]
A resident taxpayer claiming a foreign tax credit for a tax year shall submit an application in the form as specified in
Part I of the First Schedule to IT Rules, 2002 for the credit with the taxpayer's return of income for that year.
An application for a foreign tax credit shall be accompanied by declaration from the payer along-with certified copy of
evidence of tax deducted at source from the foreign tax authority.
Where a resident taxpayer cannot obtain evidence of the deduction of tax from the payer of income as above, the
Commissioner Inland Revenue may accept such secondary evidence of the deduction as is determined by him.

Example: Miss Samina has provided you following information for computation of taxable income and tax liability:
Pakistan source income:
(a) Income from business Rs. 537,500,
(b) Income from other sources Rs. 100,000
Foreign source income:
Income from business 212,500
Note: Income tax paid on foreign source income is Rs. 10,000.
Solution:
Miss Samina
Computation of taxable income and tax thereon Rs. Rs.
Income from business (Pakistan source) 537,500
Income from other sources 100,000
Income from business (Foreign source) 212,500
Taxable income 850,000

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Computation of tax liability

Tax on Rs. 850,000 [32,000 + 15% x (850,000 – 750,000)] 47,000
Less: Foreign tax credit
Lower of:
- Pakistan tax in respect of foreign source income
(47,000 x 212,500 / 850,000) 11,750
OR
- Foreign income tax paid 10,000 10,000
Balance tax payable 37,000
4. Charitable donations (Section 61)
The Income tax Ordinance, 2001 lays down two classifications of donations made to the approved institutions.
(i) Tax credit u/s 61.
(ii) Straight deduction from total income u/c 61 of Part I of Second Schedule.
However, the amount of donation should not be more than 30% or 20% of taxable income for individual / AOP or
company respectively.
A tax credit shall be allowed on fulfilment of following conditions.
1. They are made in kind / cash to an educational institution, hospital or a relief fund established or run by
Federal Government, Provincial Government or Local Government or any non-profit organization during the
tax year and taxpayer possesses the evidences in respect of the same.
2. Donation must be made through banking channel, however, if donation is made to the institutions
specified in Clause 61 Part I Second Schedule, the condition of payment through banking channel is
not applicable.
3. The name of few institutions mentioned under clause 61 are as under:
1. Shaukat Khanum Memorial Trust, Lahore 2. Fatimid Foundation, Karachi
3. National Museums, National Libraries 4. Iqbal Memorial Fund

Example: Mr Qaiser’s business income for the tax year 2014 is Rs. 450,000 and he made donation of Rs.10,000.
Compute tax liability of Mr Qaiser if donation was made to:
(a) An unapproved institution
(b) Approved institution that falls in section 61
(c) Institution specified u/c 61 Part I Second Schedule.

Solution:
(a) Mr. Qaiser
Computation of taxable income and tax liability: Rs.
Income 450,000
Computation of tax liability:
Tax on Rs. 450,000 [7% x (450,000 – 400,000)] 3,500
No tax credit shall be allowed as donation was made to unapproved institution.
(b) Mr. Qaiser
Computation of taxable income and tax liability: Rs.
Income 450,000
Computation of tax liability:
Tax on Rs. 450,000 [7% x (450,000 – 400,000)] 3,500
Less: Tax credit on donation:
Tax credit shall be allowed on lower of:
- Actual amount of donation i.e. Rs. 10,000
- 30% of taxable income i.e. Rs. 135,000
Tax credit (10,000 x 3,500 / 450,000) 77
Tax liability 3,423

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(c) Mr. Qaiser

Computation of taxable income and tax liability: Rs.
Income 450,000
Less: Donation as straight deduction (see note 1 attached) 10,000
Taxable income 440,000
Computation of tax liability:
Tax on Rs. 440,000 [7% x (440,000 – 400,000)] 2,800
(Note 1): In this case the amount of donation shall be deducted from total income to compute taxable income
provided that donation should not exceed 30% of taxable income in case of individual.
5. Tax credit for investment in shares and insurance (Section 62)
A resident person (other than a Company) shall be entitled to a tax credit for a tax year either;
(A) Investment in shares
(a) new shares of listed company on a stock exchange in Pakistan provided the resident person is the
original allottee of the shares or the shares are acquired from the Privatization Commission of Pakistan
(b) The Ordinance is silent hence higher of the above two shall be considered for tax credit purposes.
Provided shares are required to be held for at least 24 months from the date of purchase but if a person
disposes of shares within 24 months then the amount of tax credit allowed shall be added in the tax
payable of the tax year in which shares were disposed of.
OR
(B) Life insurance premium
Any life insurance premium paid on a policy to a life insurance company registered by the SECP under the
Insurance Ordinance, 2000, provided the resident person is deriving income chargeable to tax under the
head “salary” or “income from business.”
Tax credit is allowed which is lesser of
(a) total cost of acquiring the shares or the total contribution or premium paid by the person (Higher from
three amounts as Ordinance is silent on this issue) or
(b) 20% of taxable income or
(c) Rs. 1,500,000.

Example: Following information is related to Mr. Iqbal.

a. Income from business Rs. 450,000,
b. Investment made in shares of a listed company Rs. 10,000
c. Life insurance premium paid Rs. 8,000
Required: Compute tax liability of Mr. Iqbal for tax year 2016.
Solution:
Note: Law is silent about a situation where a person has made investment in shares and also paid insurance
premium. Hence in this case, tax credit shall be calculated at higher of these two amounts.
Mr. Iqbal
Computation of taxable income and tax liability: Rs.
Income 450,000
Computation of tax liability:
Tax on Rs. 450,000 [7% x (450,000 – 400,000)] 3,500
Less: Tax credit on investment in shares and insurance:
Tax credit shall be allowed on lower of (A) or (B) as under:
(A)
Higher of investment in share or premium paid i.e. Rs. 10,000 or
(B)
- 20% of taxable income i.e. Rs. 90,000 or
- Rs. 1,500,000
Hence tax credit shall be on lower of (A) or (B) (10,000 x 3,500 / 450,000) 77
Tax liability 3,423

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6. Tax credit for Contribution to an approved pension fund (Section 63)

An eligible person deriving salary income or business income shall be allowed a tax credit in respect of
contribution to a pension fund approved by Voluntary Pension System Rules, 2005 shall be lesser of the following at
average rate of tax:
(a) Contribution or premium paid, or
(b) 20% of taxable income,
Provided if an eligible person joining the pension fund at the age of 41 years or above, during the first 10 years
starting from July 01, 2006 shall be allowed additional contribution of 2% p.a. for each year of age exceeding 40
years. Provided further that the total contribution allowed to such person shall not exceed 50% of the total taxable
income of the preceding year.
In this section "Eligible Person" , means an individual Pakistani who holds a valid NTN or CNIC or NIC for Overseas
Pakistanis issued by the National Database and Registration Authority:
Example: Mr Bilal Idrees’ business income for the tax year 2016 is Rs. 450,000 and he made contribution of
Rs.10,000 to a pension fund approved by Voluntary Pension System Rules, 2005. The taxable income of tax year
2014 was Rs. 430,000. Mr. Bilal Idrees age was 45 years when he joined the pension fund.
Required: Compute tax liability of Mr. Bilal Idrees for the tax year 2016.
Solution:
Mr. Bilal Idrees
Computation of taxable income and tax liability: Rs.
Income 450,000
Computation of tax liability:
Tax on Rs. 450,000 [7% x (450,000 – 400,000)] 3,500
Less: Tax credit on contribution to approved pension fund:
Tax credit shall be allowed on lower of:
(a) Actual amount of contribution i.e. Rs. 10,000 or
(b) 30% (instead of 20% with each year above 40 years there is 2%
increase in percentage) of taxable income i.e. Rs. 135,000 with cap of
50% of preceding year taxable income 215,000 (i.e. Rs. 430,000 x 50%)
Hence the lower is Rs.10,000 entitled for tax credit under this section:
Tax credit (10,000 x 3,500 / 450,000) 77
Tax liability 3,423
7. Deductible allowance for profit on debt (Section 64A)
 Every individual shall be entitled to a deductible allowance for the amount of any profit or share in rent and
share in appreciation for value of house paid by the individual in a tax year on a loan by a scheduled bank or
non-banking finance institution regulated by the SECP or advanced by Government or the Local Government,
Provincial Government or a statutory body or a public company listed on a registered stock exchange in
Pakistan where the individual utilizes the loan for the construction of a new house or the acquisition of a
house.
 The amount of an individual’s deductible allowance allowed above for a tax year shall not exceed 50% of
taxable income or Rs. 1,000,000, whichever is lower.
 Any allowance or part of an allowance under this section for a tax year that is not able to be deducted for the
year shall not be carried forward to a subsequent tax year.
8. Tax credit for employment generation by manufacturers (Section 64B)
For encouragement of establishing new manufacturing units, a tax credit for ten years has been provided through
Finance Act, 2015 by inserting a new section 64B. According to the provisions of this section, where a
company is formed for establishing and operating new manufacturing unit set up between tax year 2016 to tax
year 2018 (1st July 2015 to 30th June, 2018), it shall be given a tax credit of 1% of tax payable for every fifty (50)
employees from the date on which the manufacturing unit is ready to go into production (trial or commercial)
subject to the fulfillment of the following conditions;

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a) The employees shall be registered with the Employees Old Age Benefits Institution (EOBI) or Employees
Social Security Institutions (ESSI) of the Provincial Governments during the tax year.
b) The said tax credit is allowed up to maximum of 10% of the tax payable.
c) The manufacturing unit shall be managed by a company formed for operating the said manufacturing unit
and should be registered under the Companies Ordinance, 1984 and have registered office in Pakistan.
d) The manufacturing unit is not established by the splitting up or reconstruction or reconstitution of an
existing undertaking or transfer of plant and machinery of an existing undertaking before 1st July 2015.
Where at any subsequent stage it is discovered that the tax credit allowed under this section was availed
without fulfillment of any one of the above conditions, the Commissioner shall re-compute the tax payable by
the taxpayer on the basis of tax credit wrongly allowed under this section and shall be recovered under the relevant
provisions of the Ordinance.
Example: ABC (Pvt.) Ltd. a newly formed Company on July 01, 2015 has taxable business income for the tax year
2016 is Rs. 1,000,000. If the tax payable by the Company is Rs. 320,000 then compute tax credit under section 64B
by assuming that the Company has met all the preconditions as required under the said section and having 160
employees.
Solution:
ABC (Pvt.) Ltd.
Computation of taxable income and tax liability: Rs.
Tax payable 320,000
Less: Tax credit:
3% of tax payable (For 150 employees) 9,600
Balance tax payable 310,400
9. Tax credit for exempt share from association of persons:
For individuals (Section 88)
Share of profit from an AOP derived by an individual is exempt from tax and does not form part of total / taxable
income. However, where the individual has any income chargeable to tax as total / taxable income, other than the
share from an AOP, then such share of profit is included in the total / taxable income for rate purposes, i.e.
First, the income tax payable in calculated on taxable income inclusive of exempt share from AOP. Thereafter,
proportionate income tax payable in calculated on the income chargeable to tax, other than the share of profit from
AOP.
Technically this is not a tax credit (rebate in income tax payable) but for the sake of simplicity this is termed as a tax
credit. Accordingly exempt share of profits from the AOP is not treated as exempt income and included in the taxable
income; and
A tax credit is allowed on such exempt share of profits from the AOP calculated like other tax credits by applying the
average rate of income tax.
Example: Mr. Asim has income from other sources Rs. 300,000 and share from AOP Rs. 230,000 and paid zakat
Rs.8,000. Compute tax payable by him if tax credits and reductions other than AOP share are Rs. 9,000.
Solution:
Mr. Asim
Computation of taxable income and tax liability: Rs.

Income from other sources 300,000

Add: share of income from AOP (included for rate purposes) 230,000
Total income 530,000
Less Zakat paid 8,000
Taxable income 522,000

Gross tax [7000 +10% (522,000 –500,000)] 9,200

Less tax reductions and credits as given in question 9,000
Balance income tax 200
Less income tax credit on share income from AOP (included for rate purposes)
(200 / 522,000 x 230,000) 88
Balance tax payable 112

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10. Tax credit to a person registered under the Sales Tax Act (Section 65A)
With effect from Tax year 2010 every manufacturer registered under the Sales Tax Act is entitled to tax credit of
2.5% of tax payable for Tax Year if 90% of the sales are made to persons who are registered under the Sales Tax
Act. for claiming credit, the person shall provide complete detail of the persons to whom the sales were made during
the tax year. The facility however is not allowed to a person whose income is covered under final tax regime or
minimum tax regime and further unadjusted balance carry forward facility is not available under this section.
Example: Mr. Amir is a registered manufacturer under the Sales Tax Act, 1990. His taxable income from business is
Rs.850,000. Compute tax payable by him if 95% of his sales are made to persons registered under the Sales Tax
Act, 1990.
Solution:
Mr. Amir
Computation of taxable income and tax liability: Rs.
Income from business 850,000
Computation of tax liability:
Tax on Rs. 850,000 [32,000 + 15% (850,000 – 750,000)] 47,000
Less: Tax credit (47,000 x 2.5%) 1,175
Tax liability 45,825
11. Tax credit for investment (Section 65B)
(a) Where a taxpayer being a Company invests any amount in the purchase of a plant and machinery for the
purposes of extension, expansion or balancing, modernization and replacement of plant and machinery already
installed there in, in an industrial undertaking set up in Pakistan and owned by it, credit equal to 10% of the
amount so invested shall be allowed against the tax payable (including on account of minimum tax and final
taxes payable) by it. Plant and Machinery should be purchased between 01-07-2010 and 30-06-2016,
In this case, tax credit in excess of tax liability shall be carried forward to adjust in following 2 tax years.
(b) A company setup in Pakistan before 01-07- 2011, which makes investment through 100% new equity during 01-
07-2011 and 30-06-2016, for the purposes of Balancing, Modernization or Replacement (BMR) of the plant and
machinery already installed in an industrial undertaking owned by the company. However, credit equal to 20% of
the amount so invested shall be allowed against the tax payable, including on account of minimum tax and
final taxes payable. The credit shall be allowed in the year in which the plant and machinery in the purchase of
which the investment as aforesaid is made, is installed therein.
In this case, tax credit in excess of tax liability shall be carried forward to adjust in following 5 tax years, however the
tax credit under this section shall not exceed from the aggregate limit defined ‘a’ and ‘b’.
In this section the term “new equity” shall have the same meaning as defined in section 65E(7).
If it is subsequently discovered by the Commissioner Inland Revenue that any condition was not fulfilled, the credit
originally allowed shall be reversed.
An industrial undertaking shall be treated to have been setup on the date on which the industrial undertaking is ready
to go into production, whether trial production or commercial production.

Example: Following information is related to ABC (Pvt.) Ltd. for tax year 2015:
(a) Income from business Rs. 200,500
(b) Plant purchased for the purpose of balancing, modernisation and replacement Rs. 1,500,000
Required: Compute tax liability under section 65BA and 65B.
Solution under section 65A:
ABC (Pvt.) Ltd.
Computation of taxable income and tax liability: Rs.
Income from business 200,500
Computation of tax liability:
Tax on Rs. 200,500 @ 32% 64,160
Less: Tax credit for investment in fixed assets
(1,500,000 x 10%) 150,000
Tax liability Nil

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As the amount of tax credit is in excess of tax liability the taxpayer is not liable to pay any tax and the amount of
unadjusted tax credit in this case (only in this case) shall be carried forward for 2 succeeding tax years.
Solution under section 65B:
The amount of tax credit (Rs. 1,500,000 x 20%) Rs. 300,000 shall be allowed and no tax liability is to be paid by the
taxpayer and the unadjusted tax credit Rs. 235,840 shall be carried forward for 5 succeeding tax years.

(Part – II For CA module F & ICMAP students)

12. Tax credit for enlistment (Section 65C)
With effect from tax year 2011 where a taxpayer being a Company opts for enlistment in any registered stock
exchange in Pakistan, a tax credit equal to 20% of the tax payable shall be allowed for the tax year in which the said
company is enlisted.
Example: Tax liability of Shalimar Ltd for tax year is Rs. 145,400 for tax year 2016 before tax credit for enlistment.
Compute the amount of tax credit if the company was enlisted in tax year 2016.
Solution:
Tax credit (145,400 x 20%) 29,080
This amount shall be deducted from 145,400 – 29,080 = 116,320 and this amount shall be paid by the company.
13. Tax credit for equity investment for newly established industrial undertakings [Section 65D]
Tax credit is admissible to a company formed for establishing and operating a new industrial undertaking for
manufacturing including corporate dairy farming in Pakistan, subject to the following conditions;
The company;
is incorporated under the Companies Ordinance, 1984 between 01-07-2011 and 30-06-2016 and has its registered
office in Pakistan;
The industrial undertaking:
- is set up between July 01, 2011 and June 30, 2016 and is managed by a company formed for operating the
said industrial undertaking;
- is not established by the splitting up or reconstruction or reconstitution of an undertaking already in existence
or by transfer of machinery or plant from an industrial undertaking established in Pakistan at any time before
01-07-2011; and
- The industrial undertaking is set up with 100% equity raised through issuance of new shares for cash
consideration
Provided that short term loans and finances obtained from banking companies or non-banking financial institutions for
the purposes of meeting working capital requirements shall not disqualify the taxpayer from claiming tax credit.
This tax credit is admissible in the tax year in which said industrial undertaking is set up or commercial production is
commenced, whichever is later, and the following 4 years.
The amount of tax credit is equal to 100% of the income tax payable including on account of minimum tax and final
taxes payable on the income arising from such industrial undertaking.
Where any credit is allowed and subsequently it is discovered, on the basis of documents or otherwise, by the
Commissioner Inland Revenue that any of the conditions specified above were not fulfilled, the credit originally
allowed shall be deemed to have been wrongly allowed and the Commissioner Inland Revenue may re-compute the
tax payable for the relevant year.
In this section and for sections 65B and 65E an industrial undertaking shall be treated to have been setup on the date
on which the industrial undertaking is ready to go into production, whether trial production or commercial production.
Example: Salman Limited was incorporated on July 10, 2011 for operating a new industrial undertaking established
by the company on August 1, 2011 with 100% equity owned by the Company. Taxable income of the company from
industrial undertaking during tax year 2015 was Rs.4,000,000. The Company is engaged in the manufacture of
motorcycles. Compute tax liability of the company for the tax year 2016.
Solution:
Salman Limited
Computation of taxable income and tax liability Rs.
Income from business
Income from manufacture of motorcycles 4,000,000

Taxable income 4,000,000

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Computation of tax liability:

Tax on Rs. 4,000,000 @ 32% 1,280,000
Less: Tax credit for newly established undertaking
Tax credit shall be allowed @ 100% of tax payable (1,280,000)
Balance tax - -
14. Tax credit for equity investment in the Balancing, Modernizations and Replacements (BMR) in and industrial
undertakings established before the first day of July, 2011 [Section 65E]
1. Where a taxpayer being a company, setup in Pakistan before the 01-07-2011, invests any amount, with 100%
new equity raised through issuance of new shares, in the purchase and installation of plant and machinery for
an industrial undertaking, including corporate dairy farming, for the purposes of-
(i) expansion of the plant and machinery already installed therein; or
(ii) undertaking a new project,
a tax credit shall be allowed against the tax payable in the manner (a) or (b) as under for a period of 5 years
beginning from the date of setting up or commencement of commercial production from the new plant or
expansion project, whichever is later.
(a) Where a taxpayer maintains separate accounts of an expansion project or a new project, as the case
may be, the taxpayer shall be allowed a tax credit equal to 100% of the tax payable, including minimum
tax and final taxes payable, attributable to such expansion project or new project.
(b) In all other cases, the credit shall be such proportion of the tax payable, including minimum tax and final
taxes payable, as is the proportion between the new equity and the total equity including new equity.
2. The plant and machinery should be installed at any time between the 01-07-2011 and 30-06-2016.
3. The amount of credit admissible shall be deducted from the tax payable, including minimum tax and final taxes
payable, by the taxpayer in respect of the tax year in which the plant or machinery is installed and for the
subsequent 5 years.
4. Where any credit is allowed and subsequently it is discovered, on the basis of documents or otherwise, by the
Commissioner Inland Revenue that any of the above condition specified was not fulfilled, the credit originally
allowed shall be deemed to have been wrongly allowed and the Commissioner Inland Revenue may re-
compute tax payable for the relevant year. and
5. In this section, new equity means equity raised through fresh issue of shares against cash by the company
and shall not include loans obtained from shareholders or directors:
Provided that short term loans and finances obtained from banking companies or non-banking financial institutions for
the purposes of meeting working capital requirements shall not disqualify the taxpayer from claiming tax credit.
An industrial undertaking shall be treated to have been setup on the date on which the industrial undertaking is ready
to go into production, whether trial production or commercial production.
Example: On July 01, 2015, AQ Limited made an investment of Rs. 500,000 in an industrial undertaking in Pakistan
for expansion of the plant and machinery already installed in the undertaking. Taxable income of the company during
tax year 2016 was Rs. 4,000,000. Compute tax liability of the company if total investment (equity and bank loan) in
industrial undertaking is Rs. 2,000,000.
Solution:
AQ Limited
Computation of taxable income and tax liability
Rs.
Income from business
Taxable business income 4,000,000
Taxable income 4,000,000
Computation of tax liability:
Tax on Rs. 4,000,000 @ 32% 1,280,000
Less: Tax credit for investment in industrial undertaking
Tax credit (1,280,000 x 500,000 / 2,000,000) (160,000)
Tax liability 1,120,000

15. Reduction in tax liability in case of flying and submarine allowances

Any amount received as
 Flying allowance by flight engineers, navigators of Pakistan Armed Forces, Pakistani Airlines or Civil
aviation Authority, Junior Commissioned Officers or other ranks of Pakistan Armed Forces; and
 Submarine allowance by the offices of the Pakistan Navy, shall be taxed @ 2.5% as a separate block of
income.

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Provided that the reduction under this clause shall be available to so much of the flying allowance or the submarine
allowance as does not exceed an amount equal to the basic salary.
16. Reduction in tax liability in case of total allowances received by pilots of Pakistani airlines
Total allowances received by pilots of any Pakistani airlines shall be taxed at a rate of 7.5%, provided that the
reduction under this clause shall be available to so much of the allowances as exceeds an amount equal to the basic
pay.
17. Reduction in tax liability in case of Senior citizens
Where the taxable income (excluding income covered under final tax regime) in tax year of a taxpayer (an
individual) aged 60 years or more on the first day of that tax year does not exceed Rs. 1,000,000, then his tax
liability shall be reduced by 50%.

Example: 62 years old Mr. Rizwan earned following incomes during the tax year 2016. Compute taxable income
and tax liability for tax year 2016.
(a) Taxable salary Rs. 150,000,
(b) Income from business 440,000,
(c) Examination fee 30,000
Solution:
Mr. Rizwan
Tax year 2016
Computation of taxable income and tax liability: Rs.
Income from salary:
Taxable salary 150,000

Income from business:

Income from business 440,000

Income from other sources:

Examination fee 30,000
Taxable income 620,000

As salary income is less than 50% of taxable income, hence taxpayer is non-salaried person.

Computation of tax liability:

Tax on Rs. 620,000 [7,000 + 10% (620,000 – 500,000)] 19,000
Less: Senior citizen allowance @ 50% of tax liability 9,500
Tax liability 9,500

18. Reduction in tax liability in case of full time teacher or a researcher

A full time teacher or a researcher of a recognized non-profit educational or research institution including government
training and research institutions shall be allowed a reduction of 40% of tax payable.
The institution, a university or a board of education must be recognized by Higher Education Commission.
This additional tax reduction would be allowed on tax liability on taxable salary. Other income, if any, would be
excluded for this purpose.
Example: Arif Ahmed is 69 years old and has earned following incomes during the tax year:
 Taxable salary as a full time teacher from Punjab University Rs.340,000
 Income from other sources Rs. 200,000
You are required to compute the tax liability of Mr. Arif for the tax year 2016.
Solution:
Rs.
Taxable salary 340,000
Income from other sources 200,000
Taxable income 540,000

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COMPUTATION OF TAX LIABILITY:

Tax on Rs. 540,000 [2,000 + 5%(540,000 – 500,000)] 4,000

Less: senior citizen allowance @ 50% 2,000
2,000
Less: Tax credit to Full time teacher
(2,000 x 340,000 / 540,000 ) x 40% 504
Balance tax payable 1,496
19. Yield or profit on Behbood and Pensioners Certificates / Accounts - Reduction in tax liability (Clause (6) of
Part III of 2nd Schedule to the Income tax Ordinance, 2001)
Profit on debt (yield or profit) on Behbood and Pensioners certificates or accounts under the National Savings
Scheme are not subject to deduction of tax at source and are chargeable to tax as total / taxable income. This is
contrary to all other profit on debts which are subject to deduction of tax at source at the rate of 10% and the tax so
deducted is the final tax, except for a company.
As a result thereof, in certain cases, where the taxable income falls into a higher tax brackets, the rate of tax on the
yield or profit on Behbood and Pensioners certificates or accounts is more than 10% as applicable on other profit on
debts.
Accordingly, if the proportionate income tax payable on profit on debt (yield or profit) from accounts exceeds 10%,
a reduction in income tax liability is allowed to the extent of such excess. As a result the tax on such profit on debt
(yield or profit) is restricted to 10%.

Example: Mr. Nasir has provided you following information for computation of taxable income and tax liability:
(a) Income from salary Rs. 300,000,
(b) Income from other sources Rs. 1,500,000
(c) Profit on Bahbood Saving certificates Rs.80,000
Solution:
Mr. Nasir
Computation of taxable income and tax thereon Rs.
Income from salary 300,000
Income from other sources 1,500,000
Profit on Bahbood Saving certificates 80,000
Taxable income 1,880,000
Taxpayer is a non-salaried person (salary income is less than 50% of taxable income).
Computation of tax liability
Tax on Rs. 1,880,000 [144,500 + 20% x (1,880,000 – 1,500,000)] 220,500
Less: tax credit (if any for senior citizen and full time teacher) 0
223,500
Reduction in respect of Behbood Saving Certificate (Note – 1) 1,383
222,117
(Note – 1) : Reduction in respect of Behbood Saving Certificate:
Proportionate tax on behbood saving certificate
Tax after tax reductions / taxable income x profit on Bahbood Saving certificates
(220,500 / 1,880,000 x 80,000) 9,383
Tax @ 10% [80,000 x 10%] 8,000
Excess tax (to be allowed as reduction in tax) 1,383
Important note: It in worthwhile to mention here that where the proportionate tax liability under NTR on Bahbood
Saving certificates is less than the amount computed on such profit at 10% then no tax reduction shall be computed
and the same reduced tax is to be paid by the taxpayer.

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20. Tax credit for tax already paid or deducted at source [Section 168(5)]
A person shall be allowed a tax credit for advance tax already paid or collected or deducted at source. If amount of
this tax credit is more than the tax liability, then excess shall be refunded to the taxpayer in accordance with section
170.
Master example covering all the tax credits:
Calculate tax liability of Mr. Hamid Sarfraz (66 years old, resident person) from following data available.

Rs.
Salary from Punjab University as full time teacher 600,000
Income from other sources (Taxable) 100,000
Taxable income from business in foreign country 100,000
Tax paid in foreign country in respect of above business income 20,000
Property income (after admissible deductions) 200,000
Zakat deducted at source 6,000
Zakat paid to relatives 40,000
Donation paid to approved charitable institution 12,000
Furniture donated to a Government Hospital with FMV 90,000
Shares acquired from privatization commission of Pakistan. 60,000
Share from AOP 150,000

Solution:
Pakistan source income: Rs. Rs.

Salary income 600,000

Income from other sources 100,000
Property income (after admissible deductions) 200,000

Income from business 100,000

Less: zakat deducted at source (6,000)
Taxable income 994,000
Share from AOP 150,000
Taxable income for rate purpose 1,144,000
As total salary income exceeds 50% of the total income, therefore the taxpayer is a salaried person for computation
of tax liability as under.

Computation of tax liability:

Tax on Rs. 1,144,000 [14,500 + 10% x (1,144,000 - 750,000)] 53,900

Total taxable income under NTR 1,144,000

Total tax liability under NTR as above 53,900

Less: foreign tax credit:

Lower of:
- Foreign tax paid 20,000
- Pakistan tax computed at average rate of tax
(53,900 / 1,144,000 x 100,000 ) 4,712
4,712
49,188
Less:
Rebate on donation
[(49,188 / 1,144,000 x (12,000 + 90,000)] 4,386
Rebate on shares and insurance
(49,188 / 1,144,000 x 60,000 ) 2,580

6,966
42,222
Tax payable on income excluding share from AOP (Rs.994,000 / 1,144,000 x 42,222) 36,686
Less: Senior Citizen Allowance @ 50% 18,343
Less: full time teacher allowance [(18,343 x 600,000 / 994,000) x 40%] 4,429
13,914

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21. Tax credit for certain persons [Section 100C]

“(1) NPO’s, trusts or welfare institutions as mentioned in sub section (2) shall be allowed a tax credit equal to
100% of the tax payable, including minimum tax and final taxes payable under any of the provisions of this
Ordinance, subject to the following conditions, namely;-
(a) Return has been filed
(b) Tax required to be deducted or collected has been deducted or collected and paid; and
(c) Withholding tax statements for the immediately preceding tax year have been filed.
(2) Persons eligible for tax credit under this section are same as were specified u/c (58), (58A), (59) and (60) of
Part I of 2nd Schedule to the Income tax Ordinance, 2001.

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MULTIPLE CHOICE QUESTIONS

Q.1. Foreign source income of a resident tax payer shall be chargeable to tax except.
(a) Salary income
(b) Property income
(c) Business income
(d) Capital gain
Q.2. Foreign tax credit is allowed for an amount equal to .
(a) Foreign income tax paid.
(b) Pakistan income tax payable.
(c) Lesser of ‘a’ and ‘b’
(d) Higher of ‘a’ and ‘b’.
Q.3. Foreign tax credit is allowed maximum up to _______ of income tax liability.
(a) 25%
(b) 50%
(c) 100%
(d) None of these
Q.4. Excess amount of foreign tax credit is only________________.
(a) Refunded.
(b) Carried Back.
(c) Carried forward.
(d) None of these.
Q.5. In order to avail the foreign tax credit the foreign income tax must be paid within _____ years after the year in which
income is earned.
(a) One year.
(b) Two years.
(c) Three years.
(d) Five years.
Q.6. Tax credit is allowed on__________ .
(a) Net foreign source income.
(b) Gross foreign source income.
(c) None of these.
Q.7. A person sustaining foreign source loss is allowed to ____ of such loss.
(a) set off against Pakistan source income
(b) set off against foreign source of income
(c) Both of these
Q.8. ________________tax credit is allowed before any other tax credit.
(a) Foreign tax credit.
(b) Tax credit for donations.
(c) Tax credit for tax already deposited.
Q.9. An individual making donation to a specified institution under clause 61is allowed a deduction on account of credit up
to ______ of taxable income.
(a) 15%
(b) 30%

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(c) 25%
(d) 0%
Q.10. Where any property is donated, then _______ of property is taken as value of donation.
(a) Cost
(b) Fair market value
(c) Any of these
(d) Higher of value recorded for capital value tax or Fair market value
Q.11. Donation to the Liaqat National Hospital Association, may be made up to______________.
(a) 50% of taxable income
(b) 95% of taxable income
(c) Total taxable income
(d) none of (a) to (c)
Q.12. A Tax Credit equal to _________ for donation made to unapproved institutions.
(a) Full amount of donations is allowed
(b) Half amount of donations is allowed
(c) Calculated at average rate of tax is allowed
(d) Not allowed
Q.13. A tax credit________ is allowed to a person making investment in the shares of a listed company (not being as first
allottee).
(a) Whole amount of donation
(b) At the average rate of tax
(c) Proportionate basis
(d) Not allowed
Q.14. A tax credit for investment in shares is made allowed for an investment which is,_____________.
(a) Total cost of shares
(b) 20% of taxable income
(c) Rs.1,000,000
(d) Lesser of ‘a’, ‘b’ and ‘c’.
Q.15. Where a taxpayer disposes of the shares within ______ of the purchase, the tax liability of the person shall increase
by an amount equal to tax credit allowed to him in the year of disposal.
(a) 24 months
(b) 6 months
(c) 12 months
(d) None of these
Q.16. A tax credit at the average rate of tax shall be allowed to a person for contribution to approved pension fund if he
derives income from _________.
(a) Salary
(b) Business
(c) Both ‘a’ and ‘b’
(d) None of these
Q.17. The total allowed contribution made to approved pension fund on the basis of age above 40 years on July 01, 2006
should not be more than _______ taxable income of the year.
(a) 10%
(b) 20%
(c) 30%
(d) 50%
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Q.18. Tax credit for enlistment of a company in any stock exchange in Pakistan shall be _____________of the tax payable
for the tax year in which the said Company is enlisted.
(a) 10%
(b) 15%
(c) 20%
(d) 25%
Q.19. Where tax liability is less than the tax credit of a person, who is also a member of an AOP and AOP having tax
payable then the excess amount would be_____________.
(a) Carried back
(b) Carried forward
(c) Claimed by the AOP as tax credit
(d) Claimed by the person as tax credit

ANSWERS
1 (a) 2 (c) 3 (c) 4 (d) 5 (b)
6 (a) 7 (b) 8 (a) 9 (b) 10 (b)
11 (d) 12 (d) 13 (d) 14 (d) 15 (a)
16 (c) 17 (d) 18 (c) 19 (c)

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ICMAP PAST PAPERS THEORECTICAL QUESTIONS

Q.NO.3 (a) August 2014 Discuss any two types of tax credits available under section 61, 62, 63 and 64 of the Income Tax
Ordinance, 2001.
Q.NO.3 (b) August 2014 Ms. Saleha has an investment of Rs. 600,000 in the Mutual Funds. Her employer assessed her
annual tax liability amounting Rs. 250,000 before allowance of any tax credit. However, her total taxable income is Rs.
2,500,000.
Required:
(i) What is the formula for calculation of tax credit for investment in shares?
(ii) Calculate the benefit of tax credit that can be availed by Ms. Saleha under the provision of the Income Tax
Ordinance, 2001.
(iii) Describe the condition where amount of tax payable, by the person for the tax year in which the
shares were disposed of, shall be increased by the amount of the credit allowed.

Q. No. 2 (b) Spring 2013 A company formed for establishing and operating a new industrial undertaking for
Manufacturing in Pakistan is allowed a tax credit equal to 100% of the tax payable on the taxable income arising from
such industrial undertaking for a period of five years from the date of setting up or commencement of commercial
production, whichever is later.
Required:
Specify the conditions which must be satisfied for availing the above tax credit.

Q. NO. 3 (d) SUMMER 2008 Define the types of tax credits available u/s 61 to Section 64 of the Income tax Ordinance,
2001.
Q. NO. 4 (b) SUMMER 2004 What are the requirements to avail Tax Credit on investment in shares by a person other than
a company u/s 62 of Income tax Ordinance, 2001? Also explain how tax credit is computed on acquisition and its treatment
on disposal of shares.

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CA MOD C PAST PAPERS THEORECTICAL QUESTIONS

Q. NO. 3 Spring 2014 Best Foods Private Limited (BFPL) is an industrial undertaking. It is considering to increase
its production capacity by installing a plant alongside its existing plant. The CFO of the company has informed the
Board that BFPL can claim tax credit equal to 100% of the tax payable on profits attributable to the new plant.
Required
Under the provisions of the Income Tax Ordinance, 2001 narrate the conditions that BFPL would need to comply with,
in order to be eligible to claim the above tax credit.
Q. 3 (c) Autumn 2012 Explain the provisions of the Income Tax Ordinance, 2001 pertaining to foreign tax credit available to
a resident taxpayer.
Q.3 (b) Spring 2012 A company formed for establishing and operating a new industrial undertaking for manufacturing in
Pakistan is allowed a tax credit equal to 100% of the tax payable on the taxable income arising from such industrial
undertaking for a period of five years.
Required: Narrate the conditions which must be satisfied for availing the above tax credit.
Q.NO. 2 Spring 2010 Mr. Qamar intends to donate an amount of Rs. 10 million to certain educational and welfare
institutions. In your capacity as his tax consultant, explain the tax relief which may be available in respect of such donation
and the conditions he must fulfill to avail such relief.
Q.NO. 5 (a) Spring 2008 Mr. Zulqarnain intends to make donations to certain charitable institutions. You are required to
advise him on the following:
(i) The types of institutions to whom the donation(s) would entitle him for tax credit.
(ii) The method of calculation of tax credit.
Q.NO. 4 (a) Spring 2007 Mr. Hamza intends to donate Rs. 5 million in cash to the following institutions:
An institution whose name is listed in the 2nd Schedule to the Income Tax Ordinance, 2001; and A non profit organization
working for the promotion of education in rural areas of Pakistan.
Explain the impact of the above donations on the tax liability of Mr. Hamza.
Q.NO. 6 Autumn 2005 Mr. Irfan intends to make a donation of Rs. 5 million in cash to certain institutions. Advise Mr. Irfan,
what tax benefits may be available to him and the conditions applicable thereon.
Q.NO.6 Autumn 2003 Under what circumstances a resident individual is entitled to claim exemption from tax on his foreign
source salary, and when is the foreign tax treated as having been paid?
Q.NO.6 (b)Autumn 2003 Explain the basis on which a foreign tax credit would be allowed to a resident taxpayer in respect
of foreign tax paid on foreign source income.
Q.NO.4 Summer 2002 Mr. Ashraf made the following donation during the income year:
a) Rs. 200,000 in cash to a relief fund sponsored by the Government.
b) personal car to an institution (approved). This car was purchased by Mr. Ashraf four year ago at the cost of the Rs.
80,000. The fair market value is Rs. 60,000.
c) Medicines to a private hospital (unapproved) purchased at the total cost of Rs. 10,000.
Advice Mr. Ashraf regarding the allowance for donation which may be claimed by him if his salary income is Rs. 800,000
after considering all admissible deductions.
Q.3 Spring 2002 Briefly explain the provisions of Income Tax Ordinance regarding the claim of:
a) Rebate for legal and educational expenditure incurred during the income year by an assessee.
b) Allowance for sum expended by an assessee on the purchase of books.
Q.4 Spring 2002 Mr. Ashraf made the following donations during the income year 2000-2001:
a) Rs. 200,000 in cash to a relief fund sponsored by the Government.
b) Personal car to an institution referred to in Clause (91) of the Second Schedule. This car was purchased by Mr.
Ashraf four years ago at the cost of Rs. 80,000. The fair market value is Rs.60,000
c) Medicines to a private hospital purchased at the total cost of Rs. 10,000.
Please advice Mr. Ashraf regarding the allowance for donation which may be claimed by him keeping in view the
requirement of Section 47 of the Income tax Ordinance, 1979 if his income for the relevant income year has been assessed
at Rs.800,000.

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