Question: What is income from business; explain scope and tax-ability of income from business?
Answer: Income from business-section-18
Income from business is a 3rd source of income and it is chargeable to tax under sectin-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.
SCOPE OF BUSINESS INCOME
All income derived out of above-mentioned activities will come under the head of business income. Following business income are taxable under this section-18 of income tax ordinance 2001.
- Profits and gains
Profit or gain earned or received by a person from any business during the tax year will be treated as his income from business.
- Income of associates
Any income derived by any trade professional or other associates from the sale of good or from provision of services is also business income. For example income of AOP, ICMA, chamber of commerce etc.
- Income from hire or lease
If any income is received from hire or from lease of any tangible moveable property will be treated as income from business. For example, income of a leasing company.
- Value of benefits
The fair market value of any benefit or perquisite, whether convertible into money or not, derived by a person in the course of a past, present or prospective business relationship is also business income.
- Income of Management Company
Management fee received by a management company or by Modaraba Management Company is treated as business income of such company.
- Profit on debt
Any sum received as interest or profit on debt by a person provided that his business is to derive such income is also considered as business income. For example income of a financial institution
- Income of lessor
If lessor is a schedule bank or investment bank or development finance institution or Modaraba or leasing company, leasing income of these entities will be treated their business income shall be chargeable to tax under the head Income from business.
- Income of banking or non-banking finance company
Any sum received by banking company or a non-banking finance company. Where such income may be a sum distributed by a mutual fund out of its income shall be chargeable to tax under the head Income from business.
- Speculation business
Speculation business mean any business in which a contract for the purchase and sale of any commodity (including [stock] and share) periodically or ultimately settled otherwise than by the actual delivery of the commodity. Speculation business shall be treated as distinct and separate from any other business carried on the person.
Income not taxable as the business income
Following income are not taxable under the head income from business but are taxable as income from other sources under section 39.
- Income of a non-professional writer
- Professional dues realized after discontinues of business
- Remuneration received by professional men as an examiner
- A casual income. For example income from lottery or prize bond
Business Income Exempt From Tax
1. Income of an educational institution
Income of a university or any other educational institution is fully exempted from tax. It must be noted that institution must be established for educational purpose and not for profit purpose.
2. Income of computer training institution
Income of computer training institute or computer training scheme for the period of five-year is exempt from tax. If it is set up between (1-07-1997 to 30-06-2005).
3. Export of computer software
Income from export of computer software and its related services is fully exempted from tax but such software must be developed in Pakistan.
4. Agriculture income
Agriculture income is fully exempted from tax irrespective of its amount.
5. Income of trust or non-trading organization
Income of a trust, welfare organization and non-trading institution is exempt from tax. For example income of EDHI welfare trusts, SHOUKAT KHANAM and, SAHARA Life trust etc.
6. Income of KOT ADU power station
Income of KOT ADU power station is exempt from tax for the period of 10 year commencing from 18th June 1996.
7. Profit on debt of hub power company
Profit of hub Power Company on its bank deposits is also exempt from tax.
8. Income of any power producing company
Income of any power production company is exempt from tax for the sake of promoting power generation in Pakistan