The Federal Board of Revenue (FBR) has announced new rules for filing deemed income for immovable properties in Pakistan, in accordance with Section 7E of the Income Tax Ordinance 2001. According to the new rules, taxpayers must determine the fair market value of their immovable properties to file their deemed income. This is in line with the government’s efforts to ensure transparency and fairness in taxation.

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There are several common mistakes that can occur when you file your tax return

Tanweer Habib

December 27, 2022

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1. Failing to provide complete and accurate documentation: It is important to provide all of the necessary documentation and information to support your tax return. If you are unable to provide complete and accurate documentation, the auditor may disallow certain deductions or credits, which could result in additional taxes being owed.

Few examples of documentation that may be required to support your tax return:

• Receipts and invoices: If you are claiming deductions for business expenses or charitable donations, you should keep receipts and invoices to support these claims.
• Bank and credit card statements: Bank and credit card statements may be required to support claims for business expenses or charitable donations.
• Pay stubs: You should provide pay stubs to support any wage or salary income that you report on your tax return.
• Other Source Income: If you receive income from sources other than wages or salaries, such as investment income or self-employment income, you should provide that you receive to support these claims.

2. Claiming inappropriate deductions or credits: Claiming deductions or credits that you are not entitled to can be a red flag for the auditor and may result in additional taxes being owed. Here are few examples of claiming inappropriate deductions or credits:

• Claiming a home office deduction for a space that is not used exclusively for business purposes.
• Claiming a deduction for business expenses that are not directly related to your business or are not ordinary and necessary expenses.
• Claiming a charitable donation deduction for a donation that does not meet the necessary requirements or for which you do not have proper documentation.
• Claiming deductions for personal expenses, such as clothing or personal travel, as business expenses.

It is important to carefully review the rules for claiming deductions and credits to ensure that you are only claiming those for which you are eligible. If you are unsure about whether a deduction or credit is appropriate, it is a good idea to consult with a tax professional.

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3. Failing to report all income: It is important to report all income, whether it is from wages, self-employment, or other sources. Failing to report all income could result in additional taxes being owed.

Here are few examples of sources of income that you may be required to report on your tax return:

• Wages and salaries: You must report all wages, salaries, and other compensation you receive from your employer as income. This includes tips and bonuses, as well as any compensation, such as severance pay.
• Self-employment income: If you are self-employed, you must report all of your business income and expenses on your tax return. This includes income from freelance work, consulting, or any other type of self-employment activity.
• Investment income: You must report any income you receive from investments, such as interest, dividends, and capital gains.
• Rent: If you receive rental income from a property you own, you must report this income on your tax return.
• Pension and annuity income: You must report any income you receive from a pension or annuity on your tax return.

If you are unsure about whether a particular source of income should be reported on your tax return, it is a good idea to consult with a tax professional.

4. Misclassifying employees as independent contractors: Misclassifying employees as independent contractors can result in penalties for failing to withhold and pay employment taxes.

Here are a few examples of how employees may be misclassified as independent contractors:

• Hiring workers as independent contractors when they should be classified as employees: If you control how and when a worker performs their duties, they are likely an employee rather than an independent contractor.
• Using independent contractor agreements to classify workers as independent contractors: Simply having a worker sign an independent contractor agreement does not necessarily make them an independent contractor. The worker’s actual duties and the level of control you have over their work must be considered.
• Failing to withhold and pay employment taxes for workers classified as independent contractors: If you classify a worker as an independent contractor, you are not responsible for withholding and paying employment taxes for them. However, if the worker is later determined to be an employee, you may be liable for these taxes.

4. Not disclosing offshore accounts: If you have financial interests in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, you may be required to report this information on your tax return. Failing to disclose offshore accounts can result in significant penalties.

Foreign financial accounts that you may be required to disclose:

• Foreign bank accounts: If you have a bank account in a foreign country, you may be required to disclose this account on your tax return. This includes checking and savings accounts, as well as certificates of deposit.
• Foreign brokerage accounts: If you have a brokerage account with a foreign financial institution, you may be required to disclose this account on your tax return.
• Foreign mutual funds: If you have investments in foreign mutual funds, you may be required to disclose this investment on your tax return.
• Foreign trusts: If you have an interest in a foreign trust, you may be required to disclose this interest on your tax return.

It is important for taxpayers to understand their rights and obligations when it comes to filing taxes and participating in a tax audit. To ensure that you are in compliance with all applicable tax laws, it is recommended that you contact a qualified tax professional for assistance. A qualified tax professional can help you navigate the complexities of the tax code and ensure that you are taking advantage of all available deductions and credits, while minimizing any potential tax liability.

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Section 7E of the Income Tax Ordinance 2001 specifies that deemed income from immovable property will be subject to taxation.

The section 7E (Tax on deemed income)  was added through Finance Act of 2022,to the Income Tax Ordinance 2001 and will be in effect beginning with the tax year 2022.

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What is Deemed income from Immovable Property?

            Deemed income from immovable property refers to the amount of rental income that is assumed to have been earned by an individual or a business from a property that they own, even if the property is not actually being rented out. This concept is used to calculate the tax liability of the property owner, based on the assumption that they are earning a certain amount of rental income from the property.

The deemed income from immovable property is calculated by applying a certain percentage to the value of the property. This percentage is determined by the government and may vary depending on the location and type of property. The deemed income is then added to the individual’s or business’s total income for tax purposes, and the tax liability is calculated based on the total income and the applicable tax rate.

Individuals and businesses are required to pay taxes on their deemed income from immovable property, just as they are required to pay taxes on any other form of income. If the property is actually being rented out, the owner must report the actual rental income and pay taxes on that amount, rather than the deemed income.

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Sindh High Court Upholds Imposition of Deemed Income on Immovable Property from Tax Year 2022.
Despite the fact that numerous taxpayers challenged the deemed income’s imposition in higher court. However, the petitions were rejected by the Sindh High Court (SHC) in an order issued in late October 2022, and the FBR was given permission to levy and collect tax according to under section 7E of the Income Tax Ordinance 2001.

This section doesn’t apply on the following

• One Capital Assets
• Self-owned business premises
• Self-owned agricultural land
• Capital assets allotted to shaheed, war wounder persons, ex- government officials and there dependent
• Any property from which property income is chargeable

• Capital assets in the first tax year of acquisition
• Where the fair market value of capital assets in aggregate excluding assets as aforesaid does not exceed Rupees twenty-five million
• Capital assets owned local, provincial or federal authorities

– The Federal Government may include or exclude any person or property for the purpose of this section.

Tanweer Habib

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Section 7 of Income Tax Ordinance, 2001

            2 [7E. Tax on deemed income.- (1) For tax year 2022 and onwards, a tax shall be imposed at the rates specified in Division VIIIC of Part-I of the First Schedule on the income specified in this section.

(2) A resident person shall be treated to have derived, as income chargeable to tax under this section, an amount equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of tax year excluding the following, namely:–

(a) one capital asset owned by the resident person;

(b) self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers’ list at any time during the year;

(c) self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse and land annexed thereto;

(d) capital asset allotted to –

(i) a Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces;

(ii)  a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government;

(iii) a war wounded person while in service of Pakistan armed forces or Federal or provincial government; and

(iv) an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority;

(e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon;

(f) capital asset in the first tax year of acquisition where tax under section 236K has been paid;

(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million;

(h) capital assets owned by a provincial government or a local government; or

(i) capital assets owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non[1]Financial Businesses and Professions.

(3) The Federal Government may include or exclude any person or property for the purpose of this section.

(4) In this section–

(a) “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include –

(i) any stock-in-trade, consumable stores or raw materials held for the purpose of business;

(ii) any shares, stocks or securities;

(iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or

(iv) any movable asset not mentioned in clauses (i), (ii) or (iii);

(b) “farmhouse” means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an annex:

Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse

It is generally a good idea for individuals to seek the help of a tax expert when filing their returns, rather than relying solely on online tax apps. Here are some reasons why:

• Expert knowledge and experience: Tax experts have extensive knowledge and experience in tax law and can provide accurate and personalized advice based on your specific situation.

• Reliability and accuracy: Tax experts can help ensure that your tax returns are accurate and complete, which can help avoid errors and penalties.
• Personalized advice: A tax expert can provide personalized advice based on your unique financial circumstances, and can help you identify tax-saving strategies and opportunities.
• Customer support: Tax experts generally offer customer support and are available to answer questions and provide assistance.
• Security: Tax experts generally use secure servers and encrypt sensitive data to protect your personal and financial information.

• While online tax apps may be appealing due to their low cost or free pricing, they may not always provide the same level of accuracy and reliability as a tax expert. It is important for individuals to carefully consider their options and choose the option that best meets their needs and provides the most value.

Tanweer Ahmed

19-Dec-2022

Get the Facts on Free and Cheap Tax Filing and Consultation Apps

1. Lack of Expertise: Many of the free and cheap tax filing and consultancy apps lack the expertise of a qualified tax professional. This can lead to mistakes when filing your taxes or giving advice that may have unintended consequences.

2. Lack of Support: If you have any questions or issues with using the app, you may not have support from a qualified tax professional. The support offered may be minimal or non-existent.

3. Security Concerns: With the sensitive data that is used in tax filing and consultation, security is a major concern. Free and cheap apps may not have the same security measures in place as more expensive services, leaving your data vulnerable to cyber theft or fraud.

4. Accuracy: Even the best tax filing and consultation apps may not be 100% accurate. This means that a mistake could cost you time and money in the long run.

Tanweer Ahmed 

December 19, 2022

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There are several steps you can take to maximize your tax savings through proper planning and strategy:

1. Contributions to certain types of retirement accounts, which can reduce your tax bill.
2. Defer income: If you are able to defer receiving income until the following year, you may be able to reduce your current year’s tax bill. For example, if you are self-employed, you may be able to delay billing your clients until after the end of the year.
3. Take advantage of tax credits: Tax credits can reduce your tax bill Rupee for Rupee. There are various credits available, including credits for education expenses, energy-efficient home improvements, and child and dependent care expenses.
4. Make charitable donations: Charitable donations may be tax-deductible, depending on the type of organization and the amount of the donation. Donating appreciated assets, such as stocks, can be especially beneficial, as you may be able to claim a deduction for the full market value of the asset and avoid paying capital gains tax on the appreciation.
5. Plan for business expenses: If you own a business, you may be able to claim deductions for business expenses, such as office supplies, marketing costs, and travel expenses. Planning ahead can help you identify which expenses may be deductible and ensure that you have the necessary documentation to support your deductions.

It’s important to note that tax laws are complex and can change from year to year, so it’s a good idea to consult with a tax professional to determine the best strategies for maximizing your tax savings.

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In Pakistan, the income of a nonresident is subject to tax only to the extent that it is derived from a source in Pakistan. This means that foreign-sourced income is generally not subject to tax in Pakistan. The income of a resident, however, is subject to tax regardless of the source of the income. This includes income derived from foreign sources, such as interest and dividends. For Pakistani companies, corporate taxes are applicable on all income generated within Pakistan, as well as income derived from foreign sources. The applicable rate of corporate tax depends on the type of business and the total taxable income. In addition to corporate taxes, Pakistan also imposes taxes on capital gains and indirect taxes, such as sales tax and value added tax. In order to avoid double taxation on foreign-sourced income, Pakistan has entered into numerous tax treaties with various countries. These treaties provide for the exemption of certain types of income from taxation in both countries and give the right to claim tax credits for taxes paid in the other country. Finally, Pakistani nationals are subject to tax on their worldwide income. This includes income earned from foreign sources, such as interest, dividends, and capital gains.

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The latest tax laws in Pakistan have had a major impact on both individuals and businesses. For individuals, the government has introduced a revised income tax rate structure which includes an increase in the highest tax rate from 30% to 35%. This has resulted in a significant increase in the amount of tax that individuals must pay, while also making it more difficult for them to save and invest. For businesses, the government has introduced a new tax regime which includes a standard corporate tax rate of 30%, a reduced rate of 25% for small and medium-sized enterprises, and a 10% tax on digital services. These changes have led to an increase in the overall tax burden for businesses, and have made it more difficult for them to remain competitive in the global market. Additionally, the government has also introduced a withholding tax on payments made to non-residents and foreign companies, which has further increased the tax burden for businesses. Overall, the latest tax laws in Pakistan have had a significant impact on both individuals and businesses, leading to an increased tax burden for both.

If you have any questions or concerns regarding your tax returns, please do not hesitate to contact us. We are here to help and are happy to provide answers to any questions you may have.

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• Not filing a return at all.
• Filing with the wrong status: Choose the correct filing status for your situation.
• Not claiming all of your income: Make sure to report all of your income, even if you don’t receive. This includes self-employment income, rental income, and any other income you received during the year.
• Claiming the wrong deductions or credits: If you are eligible for deductions or credits, make sure to claim them. However, be careful not to claim deductions or credits you are not entitled to, as this could result in a larger tax bill or even penalties.
• Not keeping good records: Good record-keeping is important when it comes to preparing your tax return. Keep copies of your tax returns, as well as receipts, records, and other documentation related to your income and deductions. This will make it easier to prepare your return and will also come in handy if you are audited.
• Filing electronically without double-checking: When you file your taxes electronically, it’s important to double-check your return for accuracy before submitting it. Make sure that all of the information is correct and that you have included all required documentation.
• Not requesting an extension if you need one: If you need more time to file your tax return, you can request an extension. Keep in mind that an extension of time to file is not an extension of time to pay, so you should still pay any tax due by the original deadline to avoid interest and penalties.

If you have any questions or concerns regarding your tax returns, please do not hesitate to contact us. We are here to help and are happy to provide answers to any questions you may have.

Here are some tips for properly filing your taxes as a freelance worker:

1. Keep track of your income: As a freelance worker, it’s important to keep track of all of your income throughout the year. This includes any payments you receive from clients or customers, as well as any other income you earn from self-employment activities.
2. Set aside money for taxes: As a freelancer, you are responsible for paying your own taxes, including both federal and state income taxes and self-employment taxes. To avoid any tax surprises, it’s a good idea to set aside a portion of your income throughout the year to cover these taxes.
3. Gather your tax documents: As a freelancer, you may receive a variety of tax documents. Make sure to gather all of these documents before you start preparing your tax return.
4. Determine your filing status: Choose the correct filing status for your situation.
5. Claim your deductions: As a freelancer, you may be eligible to claim various deductions that can reduce your tax bill. These may include deductions for business expenses, such as office supplies and equipment, as well as deductions for home office expenses if you use a portion of your home for business purposes.
6. File your tax return: Once you have gathered all of your tax documents and completed your tax return, you can file your tax return electronically using the IRIS e-File system. If you need more time to file your tax return, you can request an extension.

If you have any questions or concerns regarding your tax returns, please do not hesitate to contact us. We are here to help and are happy to provide answers to any questions you may have.

Small business owners may be able to claim various deductions to lower their tax bill. Here are some of the top tax deductions for small business owners:

1. Business use of your home: If you use a portion of your home for business purposes, you may be able to claim a deduction for the business use of your home. This includes the cost of utilities, insurance, repairs, and other expenses related to the business use of your home.
2. Business travel and entertainment expenses: You may be able to claim deductions for business-related travel and entertainment expenses, such as meals, lodging, transportation, and entertainment. However, you can only claim these deductions if the expenses are directly related to your business and not lavish or extravagant.
3. Business equipment and supplies: You may be able to claim a deduction for the cost of business equipment and supplies that you purchase. This includes items such as computers, printers, office furniture, and other items that you use in your business.
4. Business insurance: You may be able to claim a deduction for the cost of insurance premiums that you pay for your business, including liability insurance and insurance on business-related property.
5. Retirement plans: Small business owners may be able to claim a tax deduction for contributions made to certain types of retirement plans.
6. Health insurance premiums: If you are self-employed, you may be able to claim a deduction for the cost of health insurance premiums for yourself and your family.
7. Professional fees: You may be able to claim a deduction for the cost of professional fees, such as legal or accounting fees, that you incur in connection with your business.

It’s important to keep good records and to consult with a tax professional to determine which deductions you may be eligible to claim.

1. NTN CERTIFICATE
2. CNIC
3. ELECTRICITY BILL (NOT OLDER THAN 3 MONTHS)
4. GAS BILL (NOT OLDER THAN 3 MONTHS)
5. BANK ACCOUNT MAINTENANCE CERTIFICATE (NOT OLDER THAN 3 MONTHS) SHOWING DATE OF OPENING ACCOUNT AND ALSO SHOWING THE PHONE NUMBER, FAX NUMBER &
EMAIL ID OF THE BANK BRANCH
6. RENT AGREEMENT/OWNERSHIP REGISTRY
7. LETTER HEAD OF THE BUSINESS
8. SECP INCORPORATION CERTIFICATE WITH LIST OF DIRECTOR’S (WITH FORM 29 & 21) IN CASE OF LIMITED COMPANY
9. PARTNERSHIP DEED (FOR AOP)
10. CUSTOM LICENSE (FOR CUSTOM AGENTS, SHIPPING AGENTS, SHIP CHANDLERS & PUBLIC BONDED WAREHOUSE)
11. PORT AUTHORITY LICENSE/PERMIT (FOR STEVEDORES)
12. HOME DEPARTMENT LICENSE/PERMIT (FOR SECURITY AGENCIES)
13. OTHER LICENSE/PERMIT/REGISTRATION (AS MANDATORY APPLICABLE TO THE BUSINESS)

24B. COMPULSORY REGISTRATION.– [(1) IF AN OFFICER OF THE SRB IS SATISFIED THAT A PERSON IS REQUIRED TO BE REGISTERED UNDER THIS ACT AND THAT THE
PERSON HAS NOT APPLIED FOR REGISTRATION, THE OFFICER OF THE SRB SHALL, AFTER SUCH INQUIRY AS HE MAY DEEMED FIT, REGISTER THE PERSON THROUGH AN
ORDER TO BE ISSUED IN WRITING AND SUCH PERSON SHALL BE DEEMED TO HAVE REGISTERED FROM THE DATE HE BECAME LIABLE TO REGISTRATION.](2) NO PERSON MAY BE REGISTERED COMPULSORILY WITHOUT BEING GIVEN AN ADVANCE NOTICE AND AN OPPORTUNITY OF BEING HEARD.

24. REGISTRATION.–(1) REGISTRATION WILL BE REQUIRED FOR ALL PERSONS WHO:–
(A) ARE RESIDENTS;
(B) PROVIDE ANY OF THE SERVICES LISTED IN THE SECOND SCHEDULE FROM THEIR REGISTERED OFFICE OR PLACE OF BUSINESS IN SINDH; AND
(C) FULFIL ANY OTHER CRITERIA OR REQUIREMENTS WHICH THE BOARD MAY PRESCRIBE UNDER SUB-SECTION (2).
(2) REGISTRATION UNDER THIS SECTION WILL BE REGULATED IN SUCH MANNER AND SUBJECT TO SUCH CONDITIONS AND RESTRICTIONS AND RULES AS THE BOARD MAY, BY NOTIFICATION
IN THE OFFICIAL GAZETTE, PRESCRIBE.
(3) A PERSON WHO RECEIVES A SERVICE, WHICH IS A TAXABLE SERVICE BY VIRTUE OF SUB-SECTION (2) OF SECTION 3, AND IS NOT A REGISTERED PERSON SHALL BE DEEMED TO BE A
REGISTERED PERSON FOR THE PURPOSES OF THE TAX PERIOD IN WHICH SUCH PERSON:–
(I) RECEIVES THE SERVICE;
(II) AN INVOICE FOR THE VALUE OF THE SERVICE IS SENT TO THE PERSON; OR
(III) CONSIDERATION FOR THE SERVICE IS PAID BY THE PERSON;
WHICHEVER IS EARLIER AND ALL THE PROVISIONS OF THIS ACT AND RULES MADE THERE UNDER SHALL BE APPLICABLE TO SUCH PERSON FOR THAT PARTICULAR TAX PERIOD AND ANY
MATTERS RELATING TO, ARISING OUT OF, OR CONCERNING THAT TAX PERIOD AS IF THAT PERSON HAD PROVIDED THE SERVICE.
(4) THE BOARD SHALL PUBLISH ON ITS WEB SITE A LIST OF PERSONS REGISTERED UNDER THIS ACT.
(5) IT SHALL NOT BE REASONABLE FOR A PERSON TO BELIEVE THAT ANOTHER PERSON IS REGISTERED UNDER THIS ACT IF THAT OTHER PERSON IS NOT ON THE LIST PLACED ON THE WEB SITE
OF THE BOARD.
(6) IT SHALL BE REASONABLE FOR A PERSON TO BELIEVE THAT ANOTHER PERSON IS REGISTERED UNDER THIS ACT IF THAT OTHER PERSON IS ON THE LIST PLACED ON THE WEB SITE OF THE
BOARD.