Question: Define income from business? What expenses are not admissible for tax purpose under the head business OR explain un-admissible deductions under the head income from business?
Income from business-section-18
Income from business is a 3rd source of income from which a person can derive income. Income from business is chargeable to tax under section-18 of income tax ordinance 2001.Let us define business and then income from business.
“Business includes any trade, commerce, manufacture, profession, vocation or adventure or concern or in the nature of trade, commerce, manufacture, profession, vocation but does not include employment”
Certain expenses have been charged to the profit and loss account by a business entity. But these business expenses are not admissible for the purpose of taxation. So these expenses will be add back to the net profit of the business to find out taxable profit. Following are some examples of un-admissible expenses.
Cess Rates or Tax:
Any rate or tax levied on profit or gain of the business is not allowed as expense. Whether it is paid or payable by a person in Pakistan or outside the Pakistan
Sum paid to Non Resident:
Any salary interest profit rent fee brokerage commission or any amount which is chargeable to tax paid to a nonresident is not deductible expense. If the tax on it has been paid or deducted paid to income tax department u/s 149,158,233
Remuneration to Member By AOP:
Any amount of salary interest and profit on debt commission or other remuneration paid to its members by an association of person is not admissible as deductions of AOP
Fine or Penalty Paid:
Any sum paid or payable by a person as fine or penalty on violation of any law, rule of regulation is not admissible expense for the purpose of tax
Any personal expenditures of the owner is not allowed as expense of the business
Entertainment expense are allowable expenses up to certain limit and under certain conditions. Any entertainment expenses in excess of limit or in violation of conditions are not admissible.
Capital Nature Expenditures:
Any expenditures which is of capital nature, is not allowed as expense of the business for tax purpose .Foe example Rs 50000 paid to purchase furniture. However depreciation on such assets will be allowed
Salary Excess Rs 15000 Pm In Cash:
Salary exceeding Rs. 15000 per month should be paid through cross cheque or should transfer in employee bank account otherwise it will not allow as admissible deductions
Contribution to Un approved funds:
Any contribution towards unapproved provident fund or gratuity fund unapproved pension or to unapproved superannuation fund is not allowed as admissible deductions.
Employer Contribution to fund:
Any employer contribution towards provident fund is not admissible unless he deducts tax source from any payment made out such fund
Limitation on prerequisites:
Any expenditures on account of perquisites allowance or other benefits to any employer exceeding 50% of his salary is not admissible. This clause is not applicable from year 2007
Appropriation of funds:
Appropriations of any amount out of its profit such as transfer to reserve fund or amount capitalized is not allowed as admissible for tax purpose
Payment exceeding Rs 5000 pain in cash:
If amount of any expenditure exceeds Rs. on aggregate and it is paid in cash on a single head then such expedite will not be allowed as deduction because it should be paid through a cross cheque. This clause shall not apply in the case of:
- A)Expenditure not exceeding ten thousands rupees
- B) Expenditures on account of Utility Bill, Freight Charges, Travel Fair, Postage