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CHAPTER II
DETERMINATION OF INCOME – HEADS OF INCOME

PART-1:  SALARY

3.        Valuation of perquisites and benefits. - For the purposes of computing the income chargeable to tax under the head "Salary", the value of perquisites and benefits includable in the said income shall be taken as determined under these rules.

     4.         For the purpose of these rule:-

(a)     “Basic salary” means any pay, wages or other remuneration provided to an employee, excluding leave pay, payment in lieu of leave, overtime payment, bonus, commission, fees, gratuity, work condition supplements or any other allowances and perquisites referred to in sub-clauses (b) to (f) of sub-section (2) of section 12, sub-section (3) of section 12 and section 14.

(b)     “Salary” means “Salary” as defined in sub-section (2) of section 12 excluding the exempt value of allowances, perquisites or benefits determined/ computed under rules 5 and 9.

(c)     “Unfurnished accommodation or housing” includes electric fans, built in cupboards, cooking range and water heater.

 “Furnished accommodation or housing” includes basic furniture and furnishing, appliances for cooking, refrigeration and heating and cooling appliances in addition to the items available in respect of ‘unfurnished accommodation or housing’.

 5.         House rent receivable in cash.-       Where no accommodation or housing is provided by the employer to an employee, whose salary is less than Rs. 600,000 in a year, the house rent allowance receivable in cash exceeding 45% of the minimum of the time scale of the basic salary shall be added to the income.

     6.         Valuation of perquisites. - (1) The value of motor vehicle for the purposes of sub-section (3) of section 13 shall be determined as under:

 (a)     Where the motor vehicle is provided by an employer wholly for private use of the employee ten percent of the cost to employer for acquiring the motor vehicle or, if the motor vehicle is taken on lease by the employer, ten percent of the fair market value of the motor vehicle at the commencement of the lease. The value as determined at the time of commencement of lease shall be adopted for the purpose of this rule on the transfer of the motor vehicle at any time under the lease agreement.

(b)     Where the motor vehicle is provided by an employer partly for private use of the employee:

(i)     where the salary does not exceed Rs. 600,000/-. 5% of the basic salary.

(ii)    where the salary exceeds Rs. 600,000/-                               50% of the value determined under clause (a).

 (c)     (i) Where motor vehicle is hired by the employer for private use by the

employee, the amount of hire charges paid by the employer shall be added as income of the employee.

(ii)      Where, however, salary is less than Rs. 600,000/-, addition shall be restricted to 50% of the hire charges borne by the employer or 5% of the basic salary whichever is higher.

7.         Value of accommodation and housing.- (I) The value of accommodation or housing for the purposes of sub-section (12) of section 13 shall be determined as under:-

 (I)                   Where annual salary does not exceed Rs. 600,000/-,

                 (ii)  Where rent free furnished accommodation is provided, in addition to amount

determined under sub-clause (1), if any, an amount equal to 15% of the basic salary shall be added to the taxable income.

 (a)     Where the annual salary exceeds Rs. 600,000/-.

3.                  Valuation of perquisites, allowances benefits.- For the purposes of computing the income chargeable to tax under the head “salary”, the value of perquisites, allowances and benefits includable in the said income shall be determined in accordance with the rule 4 to 9.

 4.                  For the purpose of determining the value of perquisites, allowances and benefits under rule 3,-

 (a)       “annual value” of an accommodation means the sum for which the accommodation might reasonably be expected to let from year to year; 

 (b)       “basic salary” means the pay and allowances payable monthly or otherwise, but does not include-

(iii) For rent free unfurnished accommodation or housing

(iv) Where rent free furnished accommodation is provided, in addition to amount determined under sub-clause (1), if any, an amount equal to 15% of the basic salary shall be added to the taxable income.

(c)           Where the accommodation or housing is provided by the employer at a concessional rate the value as determined under clause (a) or (b), as the case may be, as reduced by the payment made by the employee for the accommodation or housing.

(3)     For the purpose of this rule and rule 5, where time scale of the basic salary is not provided in the terms of employment, the basic salary would be taken instead of minimum in time scale of the basic salary.

 8.             Free or confessional passage for travel abroad or within Pakistan.-Where free or concessional passage for travel abroad or within Pakistan by an employer to an employee (including members of his household and dependants), or where the expenditure incurred by the employee on such travel by the employee is reimbursed by the employer, or where any allowance is granted by the employer to the employee for in respect of such travel, there shall be included in the taxable income of the employee.

9.             Minor perquisites. - The provision by an employer to an employee of tea, coffee and other similar refreshments at the employer’s business premises during the course of work shall not be treated as salary of the employee.

(i)         dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

(ii)        employer’s contribution to a recognised provident fund or a fund to which the Provident Funds Act, 1925 (XIX of 1925), applies and the interest credited on the accumulated balance of an employee in such fund;

(iii)       allowances which are exempt from the payment of tax under any provision of this Ordinance;

(iv)       allowances and perquisites referred to in sub-clauses (b) to (f) of sub-section (2) of section 12, sub-section (3) of section 12, section 14; and

(v)        allowances, perquisites, annuities and benefits referred to in rules 5 to 9;

 (c)        “salary” means remuneration or compensation for services rendered, paid or to be paid at regular intervals and includes overseas, dearness or cost of living            allowance by whatever name it may be described, and bonus or commission which is payable to an employee in accordance with the terms of his employment as remuneration or compensation for services including any amount received by an employee from any employment, whether of a revenue or capital nature, including the amounts referred to in sub-section (2) of section 12,  but does not include the employer’s contribution to a recognized provident or superannuation fund or gratuity fund or any other sum which does not enter into the computation for pension or retirement benefits;

(d)       “employee” includes a director of a company working whole-time for one company

(e)       "unfurnished accommodation or housing" includes electric fans, built in cupboards, cooking range and water heater; and

(f)         "furnished accommodation or housing" includes basic furniture and furnishing, appliances for cooking, refrigeration and heating and cooling appliances in addition to the items available in respect of "unfurnished accommodation or housing".

5.         House rent allowances receivable in cash.-  Where the house rent allowance is receivable by the employee in cash, the amount, if any, by which the house rent allowance so receivable exceeds forty-five per cent of the minimum of the time scale of the basic salary or the basic salary where there is no time scale, shall be included in his income.

 5A.      Rent-free unfurnished accommodation.-  Where rent-free accommodation is provided to an employee, there shall be included, in the total income of such employee, an amount calculated as under:-

  5B.      Rent free furnished accommodation.-  Where rent free furnished accommodation is provided to the employee, an amount equal to ten percent of his salary over and above the amount determined for inclusion under rule 5A shall be added to his income.

5C.      Accommodation hired by the employee with rent payable by the employer.-  Where the accommodation is hired by the employee in his own name but the rent is payable by the employer, the amount includable in the salary shall be determined under rule 5A or 5B, as the case may be as reduced by any payment made by the employee for such accommodation.

5D.      Accommodation provided at a concessional rate.-  Where the accommodation is provided to the employee, other than a person in the civil or military employment of the Government, at a concessional rate, the difference  between the rent actually paid by him and the amount determined to be includible in an employee’s salary under rule 5A or 5B shall be added to his income.

5E.      House rent allowance receivable in addition to accommodation, etc.- Where any house rent allowance is receivable by the employee in addition to the benefits referred to in rules 5A, 5B, 5C or 5D, the whole amount of the allowance shall be added in his income in addition to the amount computed under any of the said rules.

 6.         Conveyance allowance receivable in cash with no conveyance facility.-  Where neither any conveyance is provided by the employer nor any conveyance owned or maintained by the employee is used by him in the performance of the duties of office held by him and conveyance allowance is receivable by him in cash, the amount of such allowance exceeding Rs. 3600 or the actual expenditure incurred by the employee, which ever is less, shall be included in his income.

6A.      Motor vehicle provided exclusively for personal or private use.- Where a motor vehicle is provided by the employer for the use of the employee exclusively for personal or private purposes, there shall be included in the employee’s income an amount equal to-

(a)       the sum actually expended by the employer on running and maintenance of the motor vehicle (including normal depreciation, where the motor vehicle is owned or the amount of rental where the motor vehicle is hired by the employer) if the motor vehicle is used by one employee; and

(b)       the sum arrived at by dividing the amount as computed under sub-rule (a) by the number of persons entitled to use the motor vehicle if the motor vehicle is used by more than one employee.

6B.      Additional conveyance allowance.-  Where any conveyance allowance is receivable by an employee in addition to the perquisite mentioned in rule 6A, the whole amount of such allowance plus the amount determined under the rule 6A shall be included in his income.

6C.      Motor vehicle used partly for personal and partly for business purposes.-  Where the motor vehicle is used by the employee partly for his personal and partly for business purposes, there shall be included in his income,-

(a)       where the motor vehicle is owned or hired by the employer and its running (including hire and maintenance) costs are also borne by the employer and the motor vehicle is used exclusively by one person, 50 per cent of the sum actually expended on the running of the motor vehicle (including maintenance and normal depreciation where the motor vehicle is owned or the amount of rental where it is hired by the employer) or Rs.3600, whichever is the less;

(b)       where the motor vehicle is owned or hired by the employer and its running (including hire and maintenance) costs are also borne by the employer and the motor vehicle is used by more than one person, the sum arrived at by dividing the amount representing 50 per cent of the sum actually expended by the employer on the running of the motor vehicle (including maintenance and normal depreciation where the motor vehicle is owned or the amount of rental where it is hired by the employer) by the number of such persons or Rs.2400, whichever is the less;

(c)        where the motor vehicle is owned or hired by the employer and its running cost is borne by the employee, the amount, if any, by which the conveyance allowance paid by the employer exceeds Rs.2400 or 7.5 per cent of the basic salary, whichever of these two sums  is the higher;

(d)       where the motor vehicle is owned by the employee and its running (including hire and maintenance) costs are also borne by him the amount by which the conveyance allowance paid by the employer exceed Rs.3600 or 10 per cent of the basic salary, whichever of these two sums  is the higher; and

(e)       where the motor vehicle is owned by the employee and its running (including hire and maintenance) costs are borne by the employer, the amount, if any, by which the conveyance allowance paid by the employer exceeds Rs.1200 or 2.5 per cent of the basic salary, whichever of these two sums  is the higher.

6D.      Motor vehicle used exclusively for business purposes.-  Where the motor vehicle is used by the employee exclusively for business purposes, there shall be included in his income,-

(a)       where the motor vehicle is owned or hired by the employer  and its running (including hire and maintenance) costs are also borne by him, the whole amount of the conveyance allowance, if any, receivable by the employee;

(b)       where the motor vehicle is owned or hired by the employer and its running (including hire and maintenance) costs are borne by the employee, the amount, if any, by which the conveyance allowance paid by the employer exceeds the actual expenditure incurred by the employee on the running (including maintenance) of the motor vehicle;

(c)        where the motor vehicle is owned or hired by the employee and its running (including maintenance) costs are borne by him, the amount, if any, by which the conveyance allowance paid by the employer exceeds Rs.4800 or 10 per cent of the basic salary, whichever of these two sums  is the higher; and

(d)       where the motor vehicle is owned by the employee and its running (including maintenance) costs are borne by the employer, the amount, if any,  by which the conveyance allowance paid by the employer exceeds Rs.2400 or 7.5 per cent of the basic salary, whichever of these two sums  is the higher.

7.         Provision of passage for travel.-  (1) Where free or concessional passage for travel abroad or within Pakistan is provided by the employer to an employee (including the members of his household and dependants), there shall be included in the income of the employee-

(i)         where the passage is provided in accordance with the terms of employment, an amount equal to the sum by which the cash payment, if any, made by the employer exceeds the actual expenditure on fare incurred by  the employee; or

(ii)        where the passage is not in accordance with the terms of employment, the whole of the amount paid in cash, if any, or if no cash payment is made, the amount which would have been expended by the employee had the free or concessional passage, as the cash may be, not been provided by the employer:

            Provided that where free or concessional passage for travel abroad is availed of by the employee more than once in two years and more than once in three years for the members of his household and dependants, the whole of the amount paid to him in cash, if any, for such additional passage or if no cash payment is made the amount which would have been expended by him, had the additional passage not been provided by the employer shall be included in his income.

            (2)       Where the transport is provided free of cost, or at the concessional rate, by an undertaking engaged in the transport of passengers or the carriage of goods to any employee of the undertaking (including the members of the household and dependants) in any conveyance owned or chartered by the undertakings for the purpose of the transport of the passengers or carriage of goods, nothing shall be added in his income.

8.         Minor Perquisites.-  The provision by an employer to an employee of tea, coffee and other similar refreshment at the employer’s business premises during the course of work shall not be treated as salary of employee.

9.         Valuation of perquisites, allowances, benefits where salary is Rs.600,000 or more.-  (1)  Where income chargeable under the head “Salary” of an employee including the value of perquisites as determined under rule 4 to 8 is six hundred thousand rupees or more for any tax year, the value of allowances perquisites and benefits shall be determined in accordance with sub rule (2 to 5) of this rule.

(2)       Where any perquisite is receivable in cash the whole  amount shall be included in employee’s salary

(3)       Where any perquisite is receivable otherwise, than in cash, the amount chargeable to the employee under the head “salary” for that year shall include the fair market value of the perquisite, determined at time it is provided, except provision of housing or accommodation, and provision of motor vehicle, as reduced by any amount paid by the employee for the perquisite.

(4)       The value of accommodation or housing for the purposes of sub-section (12) of section 13 shall be determined as under:

(a)       Where free unfurnished accommodation or housing is provided to the employee, the value for addition to the income shall be made on the following basis:

(b)       Where free furnished accommodation is provided to the employee, the value for addition to income shall be the amount determined under clause (a) of this sub-rule as increased by and a further sum equal to 15 per cent of the said amount.

(5)       The value of perquisite representing provision of a motor vehicle, for the purposes of sub-section (3) of section 13, shall be determined as under:-

(a)               where the motor vehicle is provided by an employer wholly for private use of the employee, 10% of the cost to the employer for acquiring the motor vehicle or the fair market value of the vehicle at the commencement of lease, if the motor vehicle is taken on lease by the employer;

(b)               where the motor vehicle is provided by an employer partly for private use of the employee, 5% of the cost to the employer for acquiring the motor vehicle or the fair market value of the vehicle at the commencement of lease, if the motor vehicle is taken on lease by the employer;

(c)               where the motor vehicle is used by more than one employee, the amount as determined in clause (a) or (b), as the case may be, divided by number of employees using the motor vehicle;

(d)              where an employee makes any payment to the employer in respect of the use of motor vehicle, the value of perquisite as determined under clause (a), (b) or (c) as reduced by the amount paid by him.].

PART- 2

INCOME FROM BUSINESS

10.       Entertainment expenditure. - (1) For the purpose of clause (d) of section 21, which provides for a limitation on the deduction of entertainment expenditure, and subject to sub-rule (2), a deduction for entertainment expenditure shall be limited to expenditure incurred by a person that satisfies the conditions laid down in sub-section (1) of section 20 and which is -

(a)               expenditure incurred outside Pakistan on entertainment in connection with business transactions or where such expenditure is allocated as head office expenditure;

(b)               expenditure incurred in Pakistan on entertainment of foreign customers and suppliers;

(c)               expenditure incurred on entertainment of customers and clients at the person’s business premises;

(d)               expenditure incurred on entertainment at a meeting of shareholders, agents, directors or employees; or

(e)               expenditure incurred on entertainment at the opening of branches.

(f)                 any other entertainment expenditure incurred on refreshment to employees as per rule 9.

            (2)       A person shall be allowed a deduction under sub-rule (1) only for expenditure incurred on the entertainment of persons related directly to the person’s business.

            (3)       In this rule, “entertainment” means the provision of meals, refreshments, and reasonable leisure facilities in accordance with the tradition of business and subject to overall norms and customs of business in Pakistan.

11.       Agricultural produce as raw materials. - (1) This rule applies to a person who is a cultivator or receiver of agricultural produce as rent-in-kind and who uses agricultural produce raised or received as raw materials in a business the income from which is chargeable to tax under the head “Income from Business”.

            (2)       In determining the amount of income of a person to whom this section applies, the market value of any agricultural produce raised or received as rent-in-kind by the person and used as raw materials in the person’s business shall be allowed as a deduction.

             (3)       For the purposes of sub-rule (2), the market value of agricultural produce shall be-

(a)               where the agricultural produce is ordinarily sold in the market in its raw state or after application of any process ordinarily employed by a cultivator or receiver of agricultural produce as rent-in-kind to render it fit to be taken to market, the market price for the produce at the time it is used as raw materials in the person’s business; or

(b)               in any other case, the sum of the following amounts, namely:-

(i)                 the expenses of cultivation; and

(ii)               the land revenue rent paid for the area in which the produce is grown.

            (4)       No deduction shall be allowed for any expenditure incurred by a person as cultivator or receiver of agricultural produce as rent-in-kind, other than as specified in sub-rule (2).

12.       Particulars required to be furnished for claiming depreciation deduction or initial allowance amortisation deduction. - (1) The following particulars shall be furnished by a taxpayer at the time of furnishing a return of income for any tax year in order to claim a depreciation deduction under section 22, an initial allowance under section 23 or an amortisation deduction under section 24 read with the Third Schedule to the Ordinance, namely: -

(a)               a description of each depreciable asset and intangible in respect of which a deduction is claimed;

(b)               where a depreciable asset or intangible is used in the tax year only partly in deriving income from business chargeable to tax, the extent of such part use;

(c)               Prior months for which in assets as in (b) are put to use in deriving business income;

(d)               if the depreciable asset or intangible was acquired in the tax year, the date of acquisition;

(e)               the written down value of each depreciable asset at the beginning of the tax year computed in accordance with sub-section (5) of section 22 and the cost of each intangible as determined under sub-section (11) of section 24;

(f)                 the amount of capital expenditure incurred in the tax year on additions, alterations, improvements or extensions in relation to any depreciable asset or intangible and where the depreciable or amortisable amount of such expenditure is limited under the Ordinance, the lower amount shall also be stated;

(g)               the total value of each depreciable asset for which a depreciation deduction is allowable for the tax year (this is the sum of the amounts specified in clauses (e) and (f), less any initial allowance allowed for the asset in that year;

(h)               the prescribed rate of depreciation and initial allowance (if any) for each depreciable asset or class of asset for the tax year, and the normal useful life.for each intangible;

(i)                 the amount of depreciation deduction and initial allowance (if any) for each depreciable asset for the year and the amount of amortisation deduction for each intangible for the year;

(j)                  the total depreciation deduction, initial allowance and amortisation deduction allowed for the tax year; and

(k)               the written down value of each depreciable asset and the cost of intangible at the end of the tax year, and the remaining normal useful life.

Explanation: Addition to intangible to be separately shown.

            (2)       The following particulars shall be furnished by a taxpayer at the time of furnishing a return of income for any tax year in which a depreciable asset or intangible is disposed of in the year, namely:-

(a)       the consideration received for the asset or intangible;

(b)       the written down value of the asset or intangible disposed of at the beginning of the tax year; and

(c)        the excess or deficit of the consideration received in relation to the written down value (i.e., clause (b) less clause (a) or clause (a) less clause (b), as the case may be).

13.       Apportionment of expenditures.-  (1) This rule applies for the purposes of section 67, which provides for apportionment of expenditure incurred for more than one purposes.

(2)       Any expenditure that is incurred for a particular class or classes of income shall be allocated to that class or classes, as the case may be.

 (3)      (a) Any common expenditure including financial expenses, excluding relatable or attributable to the non-business advances or loans and amount at (2); relatable to business including presumptive and exempt income, shall be allocated to each class of income according to the following formula, namely:-

A x B/C

where –

A         is the amount of the expenditure incurred;

B         is the total amount gross receipts (without deduction of expenditures) for the tax year for the class of income; and

C         is the total amount gross receipts (without deduction of expenses) and net gains for the tax year of all classes of income;

(b) where, however, there is net gain, brokerage, commission and other income is to be taken and turnover of such transactions is taken at these figures, such income is to be compared with gross profit from business for adopting figures for component “B” and “C” of the formula at (a) above.