ALL ABOUT ADVANCE TAX U/S 147 OF ITO, 2001 (Inclusive of Case Laws)

This blog is in continuation to our previous blog written in detail on Withholding Taxes. 

In this blog we will particularly discuss about the mechanism of the provisions of Advance Tax under the section 147 of the Income Tax Ordinance 2001. 

Definition of Advance Tax

"Advance tax is not a tax but is nearly a provisional payment of an amount towards due tax....  Therefore, it is a supplementary tax collection system, which is finally adjust it in the tax payable of the taxpayer" (2010 PTD 1295)

Scope of Advance Tax under section 147 of the Income Tax Ordinance 2001 

• Indivduals: Subject to the exceptions as discussed below every individual who has been charged to tax liability for latest tax/assessment year is liable to pay Advance Tax every quarter under the section 147 one of the Income Tax Ordinance 2001. 

• AOP/Company: Subject to the exceptions discussed below every AOP and Company is liable to pay Advance Tax even if there is no tax due on last assessed income or turnover under the section 147(6A) of the Income Tax Ordinance 2001.

In the absense of Tax on latest assessed income/turnover the AOP/Company shall be liable to advance tax on the basis of the quarterly turnover after adjusting the tax payable under Section 113 and any other taxes if already paid.

Credit of Advance Tax (Sec. 43)/Refund (Sec 170)

As per the provisions of section 147(8) (9) and (10) of the Income Tax Ordinance, 2001 the person who has paid the Advance Tax under the section 147 of the Income Tax Ordinance, 2001 is allowed to claim a credit under section 43 of the Income Tax Ordinance, 2001 at the time of computing the tax due on its taxable income and in the case where he is not able to credit the same then it shall be refunded to the taxpayers in accordance with section 170 of the Income Tax Ordinance 2001.

Exceptions from the provisions of Advance Tax under the section 147 of the income tax Ordinance 2001

'Person' driving income from the following sources are not required to deduct Advance Tax under the section 147 of the Income Tax Ordinance 2001:

• Dividend (Section 5) 
• Tax on certain payments to non residents (Section 6) 
• Shipping and air transport (Section 7) 
• Income subject to deduction of tax at source under the head salary under section 149; and 
• Income under the heads of income on which tax has been collected as final tax liability and no tax credit is allowed as result of Section 168(3) of the Income Tax Ordinance, 2001
• Individuals who is latest excess taxable income is less than 1 million are not required to pay Advance Tax section 147 2 of the Income Tax Ordinance 2001

Time of payment 

Individuals are required to pay Advance Tax under section 147(5) of the Income Tax Ordinance, 2001 on 15th of:

• September 
• December 
• March
• June

In case of AOP and Company the payment of advance tax under section 147(5A)  of the Income Tax Ordinance 2001 shall be made on the 25th of the following:

• September 
• December 
• March
• June

Computation

For an AOP and a Company, the amount of advance tax due for a quarter shall be computed using the following formulae:

(A x B/C) – D

• A is taxpayers turnover for the quarter;
• B is the tax assessed to the tax payer for the latest tax year;
• C is the taxpayers turnover for the latest tax year; and
• D is the tax paid in the quarter for which tax credit is allowed u/s 168 (Section 147(4))

For an individual having latest assessed income more than Rs. 1,000,000/-, advance tax shall be calculated using the following formulae: 

(A/4) – B

• A is the tax assessed to the tax payer for the latest tax year; and
• B is the tax paid in the quarter for which tax credit is allowed u/s 168 (Section 147(4B))

Minimum Tax Consideration

Tax liability u/s 113 shall also be taken into account while working out payment of advance tax liability. (Section 147(4AA)

This means that if the minimum tax for the quarter turns out to be more than the advance tax calculated u/s 147(4) then the minimum tax shall be payable as advance tax for that quarter.

Estimation of Tax

Every AOP and Company shall estimate its tax payable for the relevant tax year before the Second Installment is due.

• If tax payable is likely to be more than the tax that is payable u/s 147 (4) then the taxpayer is required to furnish to the Commissioner an estimate of the amount of tax payable before the due date and  thereafter pay 50% of such amount after making adjustment of the amount already paid.
• The remaining 50% amount shall be paid in equal installments. (Section 147(4A))

Every tax payer who estimates its tax payable anytime before the last installment is due to be less than the amount he is required to pay u/s 147(1) for the relevant tax year shall furnish to the Commissioner an estimate of the amount of tax payable by him and thereafter pay such estimated amount as reduced by the amount, in any, already paid u/s 147(1). (Section 147(6))

Advance Tax for Non-Filer (Section 147(A))

• Every Non filer who is registered with the provincial sales revenue authority is required to pay advance tax every month at the rate of 3 % of its turnover declared before the provincial revenue authority in its monthly sales tax return. (Section 147A (1),(2) & (8))

• Advance tax paid under this section may be taken into account while computing advance tax payable u/s 147. (Section 147(A)(3))

• A taxpayer who has paid advance tax shall be allowed tax credit u/s 4(3) at the time of computing the tax due by the taxpayer on it taxable income and if the tax is not able to credited then it shall be refunded to the taxpayer in accordance with Section 170. (Section 147A(5)(6) & (7))

Advance Tax on capital gain on securities (Section 147(5B))

• Advance tax is also payable on capital gain on securities within a period of 21 days after close of each quarter.

• 2% of capital gains derived during the quarter is payable as advance tax where holding period of the security is less than six months.

• 1.5% of capital gains derived during the quarter is payable as advance tax where holding period of the security is less than six months.

Penalty for non payment of Advance Tax

• Section 147 (7) r/w Section 205 (1B) provides that if advance tax is not paid or the tax so paid is less than 90% of the tax chargeable for the relevant tax year, then the taxpayer shall be liable to pay default surcharge at the rate of 12% on the amount by which the tax paid by him falls short of 90%.

• Default surcharge shall be calculated from the 1 st Day of April in that year to the date on which the assessment is made or the 30th Day of June of the next financial year, whichever is earlier.

CASE LAWS ON ADVANCE TAX U/S 147

2017 PTD 1774 – LHC

In Paras 8 and 10 the Honorable LHC has discussed the concept of Advance Tax wherein they have held that basic theme of Advance tax is based on the estimate made by the tax payer and the tax authorities have no authority to disturb the estimate they have made. At most they can take action u/s 147(7) and that can be done only after the return has been filed and if it is seen that the advance tax paid is less than the tax that was actually due at the time of filing of the return.

2011 PTD 1996 – SHC

In para 13 of the judgment the Court has held that when a wrong estimate is filed by the tax payer the tax officer at most can impose default surcharge u/s 205(1B) and that to after the assessment order for the tax year to which this advance tax pertains has been passed.

2011 PTD 476 – SHC

The Court in Para 11 of this case emphasized that in case no advance tax is paid or advance tax paid is less than 90 % of the tax chargeable for that tax year, then default surcharge will be levied pursuant to Section 147(7) r/w Section 205 (1B).