Advance Income Tax in Pakistan
What is Advance Income Tax of FBR?
FBR’s Advance income Tax reflects the real-time quarterly collection of Income Tax in Advance. This advanced income tax system is being used in all developed & developing countries, including Pakistan. Taxpayers don’t have to deal with the excessive burden at the end of a financial year because advance taxes are paid quarterly. The government can also estimate tax collection in real-time. Furthermore, it is consistent with the universally acclaimed taxing principle of ‘Pay as You Earn’. There is no arbitrary basis for collecting Advance Tax. It is collected in accordance with a set of clearly defined criteria stipulated under Section 147 of the Income Tax Ordinance 2001, and the credit is given to the taxpayer upon filing the tax return.
Payment of Advance Income Tax:
In most cases, advance tax is paid after the taxes withheld at the source have been adjusted. Each financial year, the advance income tax must be paid in four quarterly installments by 25 September, 25 December, 25 March, and 15 June. Taxes paid in a tax year shall be credited against that year’s tax liability. Banks, on the other hand, pay advance income tax on a monthly basis. In the case of filing an income tax return, the total tax obligation must be discharged. Amounts paid in advance and taxes withheld are credited against the tax payable on the return of income. Through an automated system, the FBR can prescribe a procedure for filing and calculating quarterly turnovers.
Tax Audit Process
Taxpayers who have filed returns for a tax year are eligible to be audited by the FBR based on certain criteria. Through computer balloting, cases are selected separately for income tax, sales tax, and federal excise duties (although a composite tax audit concept has also been introduced recently). Documents and information related to returns are being requisitioned by tax authorities. Upon receipt of taxpayer explanations, notices of show cause are subsequently issued, leading to an income or loss assessment. In the event that a taxpayer disagrees with an assessment, he has the right to appeal the decision.
The tax authorities have proposed to have their system automatically scrutinize a tax return within six months of filing so as to identify and correct (after providing taxpayers with a chance to be heard) any clerical or arithmetical errors, incorrect claims, or disallowance of tax credits/deductions and losses on the field version of the taxpayer’s return. For the purpose of determining taxable income, tax authorities can apply generic sectoral benchmarks and ratios, without regard to the results provided by taxpayers. The provision is only applicable in cases where an audit is selected and the taxpayer fails to provide the information/documents/explanations required.
Who should pay Advance Income Tax?
Advance taxes are paid by the AOP, companies and Individuals. Below are the formulas to pay advance income taxes in Pakistan
Formula for AOP’s and Companies;
A person or company who is a member of an association or company shall compute the amount of advance income tax due for a quarter according to the following formula, namely;
(A x B/C) –D
- ‘A’ is the taxpayer‘s turnover for the quarter;
- ‘B’ is the tax assessed to the taxpayer for the latest tax year;
- ‘C’ is the taxpayer‘s turnover for the latest tax year;
- ‘D’ is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 155.
Formula for Individuals
If the taxpayer is an individual with an assessed income of five hundred thousand rupees or more, as determined under sub-section (2), the advance income tax due for a quarter is calculated as follows, namely: –
(A/4) – B
- ‘A’ is the tax assessed to the taxpayer for the latest tax year or latest assessment year under the repealed Ordinance; and
- ‘B’ is the tax paid in the quarter for which a tax credit is allowed under section 168, other than tax deducted under section 149 or 155.
Persons not responsible for payment of Advance Tax:
Generally, everyone whose income is taxable must pay advance income tax under section 147, with the exception of the following:
- Income Chargeable to tax
- Dividend Income (Section 5)
- Income of Non-resident person (Section 6)
- Air transport and shipping income of the non-resident person (Section 7)
- Income subject to deduction of tax at source under salary Income (149).
- The income is covered under section 168(3).
Why Pay Advance Taxes?
- Typically, advance tax relates to one’s expected tax liability and not to anything that has no nexus with one’s admitted liability for that year.
- If a taxpayer knows he is going to incur heavy losses, he has no choice but to pay advance tax based on turnover.
- Where income was assessed under the repealed Ordinance in the most recent assessment year rather than otherwise, taxpayers will have to pay advance income tax.
- Sub-section 4 also contains a consequential amendment that calculates advance tax liability on the basis of turnover for the latest assessment year under the repealed Ordinance or the latest tax year.
What is the purpose of taxes when they are refunded?
Advance Income Tax and Withholding Taxes are to be calculated at the end of a fiscal year. If these taxes are to be returned then why does the government collect these taxes? It is because the government has to keep the records of income and sales of every individual and company, the advance income taxes collected are to be refunded to filers at the end of a fiscal year. Those who earn less than Rs. 800,000 annually are eligible to refund their taxes and those earning more than Rs. 800000 can pay their total taxes subtracting the refundable taxes they paid during the fiscal year.
An individual can only claim a refund if they have filed their income tax return electronically. Refunds cannot be claimed by filing a manual return. Your Income Tax Return in Iris Portal of FBR should clearly show your refund amount. Filing a separate IRIS application is required for the claim of tax refunds resulting from the Income Tax Return. If you wish to claim your refund later after submitting your Income Tax Return, you must do so within two years of the date when you filed the return (date of assessment), or two years after getting the refund from the date the tax was paid.
Do you want to remain a regular Advance Income Taxpayer in the FBR records? We can help!
Our Tax Lawyers and Consultants can assist you in the quarterly Challan creation, payment, and filing of Advance income Tax so that you can remain a law-abiding citizen of Pakistan. We have been dealing with all the taxation & corporate matters for more than 36 years, including Company Registration, Firm Registration, Trademark Registration, and Proprietorship Registration, etc. For more details about corporate – taxation matters, please send us an email with your query, or book an appointment with our expert attorneys. We provide free 30 minutes consultation in the above-mentioned areas.
Provincial Tax Authorities
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