How to prorate expenses under the Income Tax Ordinance, 2001?

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In this blog we will discuss the procedure of apportionment of expenditure, deduction and allowance which relates to the following:

(i) the derivation taxable income of more than one head of income; or

(ii) derivation of taxable income and any class of income subject to Final Tax Regime.

(iii) the derivation of income chargeable to tax under any head of income and to some other purpose


Rules for apportionment of expenditures, deductions & allowances (Rule 13)


Common expenditure, deductions & allowances means any expenditure, deductions & allowances that is not clearly allocable to any particular class or classes of incomes. Rules regarding apportionment of such expenses, deductions & allowances are given as follows:

Any expenditure, deductions & allowances that is incurred for particular class of income (chargeable income, FTR income or exempt income) shall be allocated/apportioned to that class only.

Fourmula:


Any common expenditure shall be apportioned amongst each class of income according to the following formula:

(Amount of expense x Gross receipts for the class of income) / Gross receipts for all class of income

Note: Gross receipts means net off receipts or turnover of sales tax of FED paid.

While allocating common expenditure, deductions & allowances (particularly selling expenses) the nature and source of each class of income must be taken into account.

The basis determined for allocation of expenditure, deductions & allowances should be certified by a Chartered Accountant or a Cost and Management Accountant. This certificate shall be accepted by CIR unless there is significant variations (10% + beyond the limits) from allocation under the rules.

Where in case of certain transaction the net gain, brokerage, commission and other income is taken as turnover, then the gross profit from business shall be taken as gross receipts for the purpose of apportionment of expenditures.

For the purpose of these rules a person may have following classes of incomes:

Pakistan source incomes as well as Foreign source income further classified as:

(i) Salary (may be ignore as well)

(ii) Income from property

(iii) Income from business- Non speculation

(iv) Income from business-speculation

(v) Capital gains

(vi) Income from other source

(vii) Income chargeable to tax as separate block

(viii) Income exempt from tax e.g. agriculture income

(ix) Income chargeable to tax under final tax regime


- Apportionment of deductions (Sec-67)

Comments

  1. Nina Athena18 October 2018 at 00:43

    Sometimes, owning a business or not, we still need to manage our income, especially when it comes to taxes and that’s the hardest part. Hiring a tax advisor will be a good step to start when you have to deal with small business tax but it is also effective whether your purpose is to manage personal income or manage a business. Thank you for sharing your thoughts! Would love to see more updates from you.

    ReplyDelete

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