Institute of Business Administration, Karachi

Advanced taxation
Fall Semester 2016 Session -3 | Main Campus | Tuesday, 6th September, 2016
With: M. Hanif Idrees: mhidrees@iba.edu.pk

Institute of Business Administration, Karachi

Agenda

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

2. Illustration to explain difference between admissible deductions,
exemptions, deductible allowances and tax payable.
3. Assignment submissions
4. Employee share scheme (ESS)

5. Principles of income underlying ESS

6. Rules of admissible and inadmissible expenses

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Illustration to explain difference between admissible deductions, exemptions,

deductible allowances, tax credits and tax payable
Mr. Zaid, a resident of Karachi bearing NTN no. 60231 attains age of 60 years on 25thJune,
2015. On 1st July, 2015 he joins as a full time researcher in a non-profit research institution duly
recognized by HEC at annual basic salary of Rs.770,000/-, medical allowance of 10% of basic
and other perquisites of Rs.30,000/- per annum. Further details of his earnings and expenses
during the year beginning from 1st July, 2015 are as follows:
a. He runs a business and earns profit of Rs.500,000/- after accounting for depreciation of
Rs.100,000/-. Tax depreciation for the year works out to be Rs.400,000/b. He has an agricultural land and his earnings from sale of crops is Rs.300,000/c. He donated Rs.20,000/- to the Citizens Foundation.
d. He paid Zakat of Rs.20,000/e. He paid Rs.50,000/- as profit on debt obtained for construction of house
f. He donated Rs.200,000/- to an educational institution run in Pakistan by Federal Government
g. He acquired new shares in an Initial Public Offering (IPO) of a public company listed on
Karachi Stock Exchange for Rs.150,000/h. His employer deducted Rs.5,000/- income tax from his salary under section 149.
i. He donated Rs.15,000/- in cash to a hospital operated by a provincial government.
REQUIRED: Compute the following for Mr. Zaid:
1. Income from salary and income from business
2. Total income
3. Taxable income
4. Tax liability
5. Tax payable
Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Employee share scheme: section 14

Illustration to explain difference between admissible deductions, exemptions,
deductible allowances, tax credits and tax payable .xlsx
The grant to an employee of the mere right or option to acquire share is not
chargeable to tax. Section 14(1)
If the right or option is disposed then consideration received for such disposal less the
employees cost in respect of the right or option = Income of the employee under the head
salary. Section 14(2)

FMV of shares at the date of issue of shares (if there is no restriction on the transfer of
shares) less consideration given by the employee for acquiring the shares = Income
of the employee under the head salary. Section 14(3)
FMV at the date of free right to transfer of shares or time of disposal of shares
(whichever is earlier) less consideration given by the employee = Income of the employee
under the head salary. Section 14(3)

Example 1: At the beginning of TY 2012 Mr. X was offered an option of 50,000 shares of
his employer company at a cost of Rs1/- per share to exercise the option. Vesting period
was 2 years. Market value of the shares at the time of granting the option was Rs.10 per
share.
Mr. X was issued shares of the employer company against the payment of Rs.2/- per
share. Market value of the shares at the time of issuance of shares was Rs.12/- per share.
Under the contract Mr. X can sell the same shares if he so opts, at any time.
Mr. X sells the shares at Rs.20 in TY 2015. Compute amounts which will be included in
income of Mr. X for tax years 2012, 2014 and 2015 and under which head of income?
Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Employee share schemes: section 14

TAX YEAR: 2012
NAME OF THE TAXPAYER: Mr. X
STATUS: Individual

NATIONAL TAX NUMBER: xxxxx

ADDRESS: xxxxx
WHETHER RESIDENT / NON RESIDENT:
Resident
Rs. per
Number
Amount
share
of shares
Amount paid for acquiring the option
1.00
50,000
50,000
Market value
10.00
50,000
500,000
Section 14(1): Mere right or option to acquire share is not chargeable to tax. Therefore no
income on account of payment for option.
Vesting period is 2 years. Therefore
TAX YEAR: 2014
NAME OF THE TAXPAYER: Mr. X
STATUS: Individual
Income from salary

shares issued in TY 2014

NATIONAL TAX NUMBER: xxxxx
ADDRESS: xxxxx
WHETHER RESIDENT / NON RESIDENT:
Rs. per
share

Exercise of option
Market value of shares on the date of
exercising the option
Less: Exercise price of the option
Already paid
Paid at the time of exercising the option
Un realized gain on acquiring shares taxable as
income under the head 'salary'

Number
of shares

Resident

Amount

12.00

50,000

600,000

1.00
2.00
3.00

50,000
50,000
50,000

50,000
100,000
150,000

9.00

50,000

450,000

Total income
Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

450,000
450,000
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Institute of Business Administration, Karachi

Employee share schemes: section 14

TAX YEAR: 2015
NATIONAL TAX NUMBER: xxxxx
NAME OF THE TAXPAYER: Mr. X
ADDRESS: xxxxx
STATUS: Individual
WHETHER RESIDENT / NON RESIDENT:
Capital gain
Disposal of shares
Proceeds on sale of shares
20.00
50,000
1,000,000
Less: Cost of shares
Exercise price paid
3.00
50,000
150,000
Unrealised gain offered for tax under the
9.00
50,000
450,000
head 'salary': Section 14 (4)
12.00
50,000
600,000
Taxable as Capital Gain
8.00
50,000
400,000
Total income
Reconciliation for cross check
Total sale proceeds of:
Shares
Total cost paid for:
Shares

20.00

50,000

1,000,000

3.00

50,000

150,000
850,000

Resident

400,000
400,000

Example 2: Suppose Mr. X sells the option to another employee in TY 2012 at Rs.6/per share. Calculate the amount which will be included in his income and under what
head?
Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Employee share schemes: section 14

TAX YEAR: 2012

NAME OF THE TAXPAYER: Mr. X
STATUS: Individual
Income from salary
Disposal of option
Proceeds on sale of option
Less: Cost of option

NATIONAL TAX NUMBER: xxxxx

ADDRESS: xxxxx
WHETHER RESIDENT / NON RESIDENT: Resident

6.00
1.00

50,000
50,000

Gain made on disposal of options to be offered

under salary. Section 14(3)

300,000
50,000
250,000

Example 3: An employee of an unlisted public company is provided an

option to purchase 20,000 shares of the company on 1st May, 2015 at
Rs.25 per share. The break up value of the company on that date was
Rs.85 per share. What is the amount to be added while computing
income from salary?
Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Principles of income underlying ESS

Following are the principles of income underlying in the computations of income related to
ESS:
Salary is taxable on cash basis. Therefore mere grant of option is not taxable as nothing
is received in hands of employee.
Income can not be taxed twice. Provisions of section 14(4) are based on this principle
Benefit made available is treated as receipt. For computing income under the head
salary, FMV of shares on the date of allotment of shares is considered based on this
principle. Section 69 is relevant in this regards:
69.Receipt of income. For the purposes of this Ordinance, a person shall be treated
as having received an amount, benefit, or perquisite if it is
(a) actually received by the person;
(b) applied on behalf of the person, at the instruction of the person or under any law; or
(c) made available to the person.
Other examples of benefit made available are as follows:
Vehicle provided but not being used by employee
Salary foregone by the employee
FMV of shares at the time of allotment if there is no restriction on disposal otherwise
FMV on the date when restriction is removed.
Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Income from business: Rules of admissible and inadmissible expenses

Admissible or allowable or deductible expenses are:
Added to expenses
Deducted from accounting profit. Reduce taxable profit
Inadmissible or not allowable or not deductible expenses are:
Deducted from expenses
Added to accounting profit. Increase taxable profit
Admissible or allowable or deductible expenses are:
Added to expenses
Added to accounting loss. Increase taxable loss
Inadmissible or not allowable or not deductible expenses are:

Deducted from expenses

Deducted from accounting loss. Decrease taxable loss

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Income from business: Treatment of admissible and inadmissible expenses

WHEN THERE IS ACCOUNTING PROFIT
Column references

Turnover
Expenses
Salaries
Depreciation
Bad debts (provision for doubtful debt)
Fines
Advertising and sales promotion
Rent
Utilities
Accounting / Tax profit / (loss)

3 4=1-2+3

Accounting profit

Account Inadmi Admissi

Tax Add: Inadmissible expenses
ing
ssible
ble
Accounting depreciation
100.00
100.00
Bad debts other than actual write offs
(i.e. Provision for doubtful debts)
20.00
20.00
40.00 40.00 70.00
70.00 Fines
4.00
4.00
2.00
2.00
Less: Admissible expenses
0.50
0.50
1.00
1.00 Tax depreciation
2.00
2.00 Actual write offs against the provision
1.50
1.50 Taxable profit
69.00 44.50 72.00
96.50
31.00 44.50 72.00
3.50

31.00

40
4
0.5

70
2

44.50

72.00
3.50

Note: 70 m is tax depreciation

Actual write off against provision for doubtful debts were Rs.2m
Fine is an inadmissible expense

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Income from business: Treatment of admissible and inadmissible expenses

WHEN THERE IS ACCOUNTING PROFIT
Column references

Turnover
Expenses
Salaries
Depreciation
Bad debts (provision for doubtful debt)
Fines
Advertising and sales promotion
Rent
Utilities
Accounting / Tax profit / (loss)

3 4=1+2+3

Accounting profit

Account Inadmis Admissi

Tax Add: Inadmissible expenses
ing
sible
ble
Accounting depreciation
100.00
100.00
Bad debts other than actual write offs
(i.e. Provision for doubtful debts)
20.00
20.00
40.00 (40.00) 70.00 70.00 Fines
4.00 (4.00)
2.00
2.00
Less: Admissible expenses
0.50 (0.50)
1.00
1.00 Tax depreciation
2.00
2.00 Actual write offs against the provision
1.50
1.50 Taxable profit
69.00 (44.50) 72.00 96.50
31.00 44.50 (72.00)
3.50

31.00

40
4
0.5

70
2

44.50

72.00
3.50

Note: 70 m is tax depreciation

Actual write off against provision for doubtful debts were Rs.2m
Fine is an inadmissible expense

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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Institute of Business Administration, Karachi

Income from business: Treatment of admissible and inadmissible expenses

WORKING WITHOUT SIGN CONVENTION
Accounting loss

9.00

WHEN THERE IS ACCOUNTING LOSS

Column references

Turnover
Expenses
Salaries
Depreciation
Bad debts (provision for doubtful debt)
Fines
Advertising and sales promotion
Rent
Utilities
Accounting / Tax profit / (loss)

Note: 70 m is tax depreciation

Actual write off against provision for doubtful debts were Rs.2m
Fine is an inadmissible expense

1
2
3 4=1-2+3 Less: Inadmissible expenses
Account Inadmis Admissi
Tax Accounting depreciation
ing
sible
ble
Bad debts other than actual write offs
60.00
60.00
(i.e. Provision for doubtful debts)
20.00
40.00
4.00
0.50
1.00
2.00
1.50
69.00
(9.00)

40.00
4.00
0.50
44.50
44.50

70.00
2.00
72.00
72.00

20.00
70.00
2.00
1.00
2.00
1.50
96.50
(36.50)

Fines
Add: Admissible expenses
Tax depreciation
Actual write offs against the provision
Taxable loss

40
4
0.5

44.50

70
2

72.00
36.50

WORKING WITH SIGN CONVENTION

Accounting loss

(9.00)

Add: Inadmissible expenses

Accounting depreciation
Bad debts other than actual write offs
Fines

44.50

Less: Admissible expenses

Tax depreciation
Actual write offs against the provision
Taxable loss

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

40
4
0.5

70
2

72.00
(36.50)

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Institute of Business Administration, Karachi

Income from business: Treatment of admissible and inadmissible expenses

WORKING WITHOUT SIGN CONVENTION
Accounting loss

WHEN THERE IS ACCOUNTING LOSS

Column references

Turnover
Expenses
Salaries
Depreciation
Bad debts (provision for doubtful debt)
Fines
Advertising and sales promotion
Rent
Utilities
Accounting / Tax profit / (loss)

Note: 70 m is tax depreciation

Actual write off against provision for doubtful debts were Rs.2m
Fine is an inadmissible expense

1
2
3 4=1+2+3
Less: Inadmissible expenses
Account Inadmis Admissi
Tax Accounting depreciation
ble
sible
ing
Bad debts other than actual write offs
60.00
60.00
(i.e. Provision for doubtful debts)

20.00
40.00 (40.00)
4.00 (4.00)
0.50 (0.50)
1.00
2.00
1.50
69.00 (44.50)
(9.00) 44.50

40
4
0.5

20.00 Fines
70.00
70.00
2.00
2.00 Add: Admissible expenses
Tax depreciation
70
Actual
write
offs
against
the
provision
2
1.00
2.00 Taxable loss
1.50
72.00
96.50
WORKING WITH SIGN CONVENTION
(72.00) (36.50) Accounting loss

Add: Inadmissible expenses

Accounting depreciation
Bad debts other than actual write offs
Fines
Less: Admissible expenses
Tax depreciation
Actual write offs against the provision
Taxable loss

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

9.00

44.50

72.00
36.50

(9.00)

40
4
0.5

44.50

70
2

72.00
(36.50)

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Institute of Business Administration, Karachi

THANK YOU

Advanced taxation Session -3 | IBA Main Campus | Tuesday, 6th September, 2016 : M. Hanif Idrees: mhidrees@iba.edu.pk

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