Tax calculation in income from business;
Are you confused in between expenditures and Incomes generated in business? Your confusion will be solved in this article.
1. Add BACK
the following in Profit/loss of Accounting year
a) In-Admissible
expenses already charged to Profit/Loss Account Tax
Charge or levy paid to the Govt. on profits
·
∙ Cess, rate or income tax calculated and
paid as a percentage of Profit
·
∙ Income tax deducted at source
·
∙ Provision for income tax
Note:
a) Custom duties on import of raw material and property tax on
business premises is allowed expense because these taxes are not based on
profit.
b) Professional tax or subscription
payments to trade associations working or welfare of business is allowed
expense
b) Amount
of any tax deducted from an income earned by person XX c) Tax deductions from
payments
∙ Taxable
Salaries {more than Rs. 600,000
p.a.) paid without deduction of
tax at source
∙ Any
other expenditure subject to withholding tax is paid without tax deduction ∙ Purchases of raw materials and finished
goods are paid without deduction of tax - Disallowance should not exceed 20% of purchase
cost.
c) Entertainment expenditure, XX e) Contribution
to Employee welfare funds
d) fine or penalty for the violation of any law, rule or
regulation
- ∙ Penalty for late payment of sales tax
- ∙ Penalty for violation of environmental law
Note: Penalties for breach of contract in ordinary course of business, Late payment
surcharge with utility bills is an allowable expense.
f) Personal expenses (Drawings) of owner and his
dependents charged as expense in
P&L ∙ Repairs cost of personal vehicle ·.
·
Medical
expenses of himself' and any other family member
·
Personal legal expenses.
· School fee of children.
g) Amount transferred to a Reserve fund or capitalized
§ ∙ Amount
transferred to general reserve
§ ∙ Amount
transferred to dividend equalization fund
§ ∙ Amount
transferred to debenture sinking fund
h) Payment
to a member (partner) by an AOP
§ ∙ Salary
given to partner (member) of AOP
§ ∙ Interest
on loan (profit on debt) given to partner (member) of AOP
§ ∙ Interest
on capital given to partner (member) of AOP
§ ∙ Brokerage
(commission) given to partner (member) of AOP
§ ∙ Any
other remuneration of partner (member) of AOP
 |
| How to calculate Business taxes? |
I) Any expense
under single head more than Rs. 250,000 as well as individual payment
exceeding
Rs. 25,000 paid in cash
J) Salaries
exceeding Rs. 25,000 per month paid through cash
k) Capital expenditures
·
Construction cost
of depreciable asset charged as expense in
P&.L ∙ Installation cost of
depreciable asset charged as expense in p
&L
·
Additions
of depreciable asset charged as expense in P&L
·
Improvement
cost of depreciable asset charged
as expense in P&L
·
Acquisition/Renewal/Development
cost of intangible assets charged
as an expense in P&L
L) Advertisement-and sales
promotion expense by. a pharmaceutical manufacturer in excess of 10% of sales revenue.
Depreciable assets (Sec 22 & 23)
Add Accounting
Depreciation of depreciable assets - disallowed
expense XX Add Accounting
Depreciation of asset taken under
finance lease - disallowed expense
XX Add Accounting
loss on disposal of depreciable assets - disallowed expense XX Add Tax
gain on sale of depreciable assets - allowed income not
credited in P&L
Sale proceeds
Less: Tax
Written Down
Value ,
{Written
down value + Tax depreciation
for non-business
use}
Add Tax
gain on sale of immovable business properly (Sales proceeds are more than its original cost)
Sale
Proceeds
Less:
Tax Written Down Value
Original
cost (taken equal
to sales .proceeds)
Less:
Accumulated tax depreciation
Add Tax
gain on export (transfer out) of depreciable asset
outside Pakistan
Consideration
received (taken equal to its original cost)
Less:' Tax
Written Down· Value
Less
Accounting gain
on disposal
of depreciable assets- disallowed
income
Less Tax depreciation of depreciable assets allowed
expense
not charged in P&L
Less Tax loss
on sale of depreciable assets - allowed
expense not charged in P&L
Scrap
proceeds
Less:
Tax Written
Down Value
{Written down value+ Tax
depreciation for non-business use]
Intangibles (Sec 24)
Add
Accounting amortization – Disallowed expense
Add Accounting
loss on disposal of intangibles - disallowed
expense
Add Tax gain on disposal of intangibles (Sale proceeds
- Tax WDV
of intangibles)
–
Less Accounting gain on disposal of intangibles
Less Tax amortization of intangibles
- allowed expense not charged in P&L
Less Tax loss on
disposal of intangibles (Sale
proceeds - Tax WDV of
intangibles}-allowed
Pre-commencement
expenditures (Sec 25)
Add Accounting amortization of
pre-commencement expenditures – disallowed Expense XX
Less Tax amortization of Pre-commencement
expenditure – allowed expense not charged in P&L
(Cost of Expenditure *
20% on straight line basis)
Scientific research
expenditure (Sec 26)
Add Scientific research expenditure incurred and
paid to institution outside Pakistan.
Bad Debts (Sec 29)
Add
·
∙ Advance given to employee written off
·
∙ Loan to employee written off•
·
∙ Advance given to supplier for purchase of raw
material Written off ∙ Loan to associates written off
Less Decrease
in Provision for doubtful debts credited as income in P& L
Less Accounting recovery of
bad debts previously written off (XX)
Tax Recovery of bad debt previously
written off
Add/ Less
Amount received against
bad debts previously written off Less: Previously inadmissible bad debt expense
Actual Bad debts expenses charged in P&L
Less: Actual Bad debts allowed as per tax law