The tax year is 1 July through 30 June. However, tax authorities are empowered to approve a special year-end.
All companies are required to file an income tax return each year by 31 December for the preceding financial year (1 July through 30 June) by accounting for business income on an accrual basis. If the special year granted by the tax authorities ends between 1 July and 31 December, then the tax return is required to be filed by 30 September following the year-end.
An across-the-board self-assessment scheme is in place whereby assessment is taken to be finalised upon filing of the return. The Commissioner, however, has powers to amend the assessment if it is believed that the Ordinance has been incorrectly applied or there is definite information that the assessment made is incorrect. These powers are to be exercised within a prescribed time frame. In the case of transactions between associates, the Commissioner can substitute the transaction value with the fair market consideration. The Commissioner is also empowered to determine tax liability according to the substance of the transaction, disregarding formal arrangements between the parties.
Tax authorities can require a non-filer to file income tax return for any of the last ten years.
Payment of tax
Companies are required to pay advance tax on the basis of tax liability of the immediately preceding tax year in respect of their income (excluding capital gains and presumptive income). The advance tax is to be paid after adjusting the taxes withheld at source (other than the tax withheld relating to FTR).
Advance tax is required to be paid in four quarterly instalments on or before 25 September, 25 December, 25 March, and 15 June in each financial year. Credit for tax paid in a tax year shall be allowed against tax liability of that year. However, in case of banking companies, such advance tax is payable on a monthly basis.
The total tax liability is to be discharged at the time of filing the return of income.
Advance taxes and taxes withheld are adjustable against the tax payable with the return of income.
Tax audit process
The Federal Board of Revenue (FBR) is authorised to prescribe criteria for selection of audit of taxpayers who have filed their returns for a tax year. Based on such criteria, cases are selected through computer ballot separately for income tax, sales tax, and federal excise duty (though recently, the concept of a composite tax audit has also been introduced). The returns are examined by tax authorities, and related documents and information are requisitioned. Show cause notices are then raised and, on receipt of explanations from taxpayers, income or loss is assessed. In case of disagreement with assessments, the taxpayer has the right to agitate the issues before appellate forums.
A taxpayer shall not be selected by the FBR and the Commissioner of Inland Revenue for a tax audit where its income tax affairs were already audited in any of the preceding three tax years. The Commissioner may, however, still select a taxpayer for audit with the approval of the FBR.
Statute of limitations
An audit of the tax return filed by a taxpayer can be conducted by the tax authorities within five years of the end of the financial year in which the return is filed.
A non-resident not operating in Pakistan through a PE can apply to the FBR to issue an advance ruling setting out the Board’s position regarding application of the provisions of the Income Tax Ordinance to a transaction proposed or entered into by the taxpayer. The tax ruling, once issued, is binding on tax authorities.
Topics of focus of tax authorities
Tax authorities focus on the following issues:
- Transfer pricing.
- Relationship of expenditure with the business of the taxpayer.
- Advance tax.
- Payment of tax due within the time prescribed.
- Audit of returns filed.
- Compliance by taxpayers.
- Collection of arrears.