ICAP CAF CAF-2: Taxation Principles and Compliance Syllabus

How is an employer-provided motor vehicle valued for personal vs partly personal use?

5% of the cost (or fair market value at lease commencement) if used partly for personal use; 10% of the cost (or FMV) if used wholly for personal/private use of the employee.

On what basis is salary income generally taxed — accrual or receipt?

Salary income is taxed on a receipt basis — it is chargeable in the tax year in which it is actually received by the employee, regardless of when it was due.

What is the charging basis of 'Income from Property' under section 15?

Income from property is the rent received or receivable for the tax year from leasing land or buildings; it is taxed on the higher of actual rent or fair market rent (where applicable).

Name three deductions allowed against income from property when it is taxed on net basis.

Repairs allowance (a fixed percentage of rent, e.g., 1/5th), property tax/local rates, insurance premium, interest on borrowed capital for the property, and collection/administration charges (subject to a cap).

What is the difference between income from property and income from business when a building is let out?

Mere letting of property is taxed as income from property; but if letting is part of a business (e.g., providing amenities/services as a business such as a hotel/serviced offices), it is taxed as income from business.

How is 'income from business' computed in principle?

It is the profit/gain from any business carried on, computed by deducting allowable business expenditures (incurred wholly and exclusively for the business) from business revenue, subject to the Ordinance's rules.

Give three examples of expenses that are inadmissible (not deductible) in computing business income.

Any tax paid on income (income tax itself), fines/penalties for breach of law, personal expenditure, and expenses on which required tax was not withheld/deposited; also expenditure exceeding cash-payment thresholds paid otherwise than by banking channel.

What is the tax treatment of depreciation on business assets — which method does the Ordinance use?

The Ordinance allows depreciation on the reducing balance (diminishing) method at prescribed rates on the written-down value of depreciable business assets, plus initial allowance on eligible new assets.

What is 'initial allowance' on a depreciable asset?

A one-time additional depreciation allowance (currently 25% for plant & machinery) granted in the year an eligible depreciable asset is first used in Pakistan, in addition to normal depreciation.

Define a 'capital asset' for the purpose of capital gains.

A capital asset is property of any kind held by a person, whether or not connected with business, but excluding stock-in-trade/consumable stores, depreciable/amortisable business assets, and immovable property to the extent covered by separate provisions.

How is a capital gain computed under the Income Tax Ordinance, 2001?

Capital gain = Consideration received on disposal minus the cost of the asset. No deduction is allowed for any expenditure already deducted under another head.

How does the holding period affect the taxable portion of a capital gain on certain assets?

For some capital assets (e.g., assets other than securities), if held for more than one year only 75% of the gain is taxable (25% reduced); securities and immovable property gains are taxed under their own holding-period-based rate slabs.

What is the head 'Income from Other Sources' — give the charging principle.

It is the residual head charging income not falling under the other four heads — e.g., dividends, royalties, profit on debt (interest), rent of sub-let property, ground rent, and certain annuities/prizes.

Give three examples of income chargeable under 'Income from Other Sources'.

Dividend, profit on debt (interest), royalty, ground rent, rent from sub-lease of property, income from leasing of plant/machinery (not part of business), prize/winnings, and certain gifts/loans treated as income.

What is the rule on cash loans/gifts received otherwise than through banking channel under 'Other Sources'?

A loan, advance, gift or sum received otherwise than by crossed cheque/banking channel may be treated as income chargeable under income from other sources (anti-avoidance to discourage cash transactions).

State the rule for set-off and carry-forward of a business loss (non-speculation).

A business loss is first set off against income under other heads in the same year (with restrictions), and any unabsorbed business loss is carried forward for up to 6 tax years, set off only against future business income.

How long can a speculation business loss be carried forward and against what can it be set off?

A speculation loss can be carried forward for up to 6 tax years and can be set off only against income from speculation business — not against any other income.

What is the carry-forward rule for unabsorbed depreciation and capital losses?

Unabsorbed depreciation can be carried forward indefinitely (against business income). A capital loss can be carried forward for up to 6 tax years and set off only against capital gains.

Distinguish between a 'deductible allowance', a 'tax credit', and an 'exemption'.

A deductible allowance reduces taxable income (e.g., zakat). A tax credit reduces the tax payable directly (e.g., credit for charitable donations). An exemption excludes specific income from tax entirely so it never enters the tax base.

Name two common deductible allowances available to an individual.

Zakat paid under the Zakat & Ushr Ordinance, and the allowance for profit on debt / education expenses (where applicable, subject to limits).

How is the tax credit for charitable donations to approved institutions broadly computed?

It is computed proportionately: tax credit = (A/B) x C, where A is tax assessed before credit, B is taxable income, and C is the lower of the donation amount or a specified percentage of taxable income (e.g., 30% for individuals/AOPs).

Who is required to file a return of income — name two categories.

Every company; every person whose income exceeds the taxable threshold; persons owning specified assets (e.g., immovable property of a certain area, a motor vehicle above a certain capacity); persons charged to tax in any of the preceding two years; and NTN holders / commercial connection holders.

What is a 'wealth statement' and who is required to file it?

A wealth statement is a statement of total assets, liabilities, and personal expenditure showing reconciliation of wealth. Every resident individual filing a return (and members of AOPs in certain cases) must file it along with a wealth reconciliation statement.

What is the purpose of the 'wealth reconciliation statement' attached to a wealth statement?

It reconciles the increase/decrease in net wealth during the year with income declared (taxable, exempt, and inflows), explaining the source of any increase in assets and identifying unexplained wealth.

What is a 'deemed assessment' (universal self-assessment) under section 120?

When a complete return is filed, it is treated as an assessment order issued by the Commissioner on the day the return is furnished (self-assessment), with the tax liability as declared — subject to later audit/amendment.

Under what circumstances can the Commissioner make a 'best judgement assessment' (section 121)?

When a person fails to furnish a return, wealth statement, or required documents, or does not produce accounts/evidence; the Commissioner may assess the taxable income and tax due to the best of his judgement based on available material.

What is an 'amended assessment' under section 122 and on what basis can it be made?

The Commissioner may amend an assessment where he is satisfied that income was under-assessed, taxed at too low a rate, wrongly relieved, or there is definite information of escaped income — generally within 5 years (or 1 year of definite information), after providing an opportunity of being heard.

What is the purpose of a tax audit under section 177/214C?

To verify the correctness of the taxpayer's declared income, deductions, and tax by examining records; cases may be selected by the Commissioner (s.177) or by the FBR through computer balloting/risk parameters (s.214C).

What is the first appellate forum against an order of the Commissioner, and the time limit to file?

The Commissioner (Appeals) is the first appellate authority; appeal must generally be filed within 30 days of service of the order/notice of demand, accompanied by the prescribed fee.

What is the hierarchy of appeals after the Commissioner (Appeals)?

Commissioner (Appeals) → Appellate Tribunal Inland Revenue (ATIR, on facts and law) → High Court (reference on questions of law) → Supreme Court of Pakistan (final appeal).

What is Alternative Dispute Resolution (ADR) under the Income Tax Ordinance and when is it used?

ADR allows a taxpayer with a pending dispute to apply to the FBR to resolve it through an appointed ADR Committee, which gives a decision/recommendation to settle the dispute, offering a faster, out-of-court resolution that, once accepted, is binding.