Taxpayers must note that a prescribed person is required to deduct tax from the gross amount of rent which includes payments on account of rent of immovable property, payment on account of rent of furniture and fixtures in such immovable property and payments for any services relating to such property.
The WHT deducted by such prescribed person shall be the final discharge of tax liability on the income from property. The concept of Full and Final Discharge of Tax Liability enunciates that no deduction of expenses and no Tax Credits shall be allowed from the gross receipts.
However, the Tax deducted shall be refundable where IFP is owned by an individual or an AOP and the rent does not exceed Rs 150,000. Similarly, the Tax Deduction from the payments shall be treated as Advance Tax where the amounts are covered in the exclusions from Income from Property and taxed under Income from other sources.
The prescribed person normally provided a Tax Payment Receipt to the Landlord which need to be submitted along with statement under section 115(4) on September 30 following normal Tax Year. However, in IFP under FTR, the prescribed person is also required to withhold tax on total security deposit at the time of payment. Consequently, the security deposit is not taxed in instalments as evidenced in Income from Property under Normal Tax Regime.
Moreover, the tax liability of 5% under section 155, which is treated as Full and Final Discharge of Tax Liability, can neither be reduced by claiming the deduction of Zakat, WWF and WPPF wherever applicable nor any Tax Credits like on Charitable Donation, Investment in Shares, Retirement Annuity Scheme and Profit on Debt will be available in contrast to Income from Property under Normal Tax Regime.
EXAMPLE 4: Assume that the scenario is the same as given in Example 4 except that on 1 July 2007 the building was let to the diplomatic mission of the Kingdom of Saudi Arabia in Pakistan instead of Mr Wail.
REQUIRED:
a) Compute the taxable income of Mr Subaiyal for the tax year 2008.
b) Compute the tax payable to Mr Subaiyal for the tax year 2008.
SOLUTION:
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a) MR. SUBAIYAL - COMPUTATION OF TAXABALE INCOME TAX YEAR 2008
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Rupees
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Income from Salary Rs 1,000,000
Loss under Income from Other Sources Rs 28,600
Taxable Income Rs 971,400
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b) MR. SUBAIYAL - COMPUTATION OF TAX PAYABLE TAX YEAR 2008
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Rupees
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Tax on Taxable Income [971,400 @ 10%] Rs 97,140
Tax on Income under section 155 [working 1] Rs 40,000
Less: Withholding Tax u/s 155 [working 1] Rs 40,000
Less : Advance Tax under section 149 from Salary Rs 100,000
Tax Refundable Rs 2,860
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Working 1
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Annual rent paid by the diplomatic mission 700,000
Non-adjustable deposit 1,000,000
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1,700,000
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Tax Deduction by Diplomatic Mission under section 155 -
being Full and Final Tax - 5% of. 800,000 [700,000 + -
[10% x 1,000,000 40,000
(Note 2)]]
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Working 2
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Rupees
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Amount received for electricity and services of gardener 100,000
Deductible expenditure (128,600)
Income from Other Sources - Loss 28,600
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NOTE:
1. Diplomatic Mission of the Kingdom of Saudi Arabia is a Withholding Tax Agent and is required to deduct tax under section 155.
2. Diplomatic Mission is required to Withhold Tax on all payments on account of rent including Rs 100,000 for electricity and services of gardener and 10% of Security Deposit and 10% of Security Deposit.
IFP OF JOINT OWNERS: The Income from Property under Normal Tax Regime shall not be assessed as Association of Person where the property is owned by two or more persons have definite and ascertainable share in such property. However, each person is required to account for his respective share of Income from Property in his taxable income for the Tax Year.
EXAMPLE 5 - NORMAL TAX REGIME: Mr Yousha and Mr Yasaa purchased a building for Rs 2,000,000 in the name of Yousha Yasaa Associates each investing Rs 1,000,000. Profits or losses from the building are shared equally. The building was rented to Mr Young on 1 July 2002 when Mr Young besides paying the annual rent also paid Rs 100,000 as a deposit which was not adjustable against the rent payable.
On 1 June 2006, Mr Young terminated the tenancy and the deposit of Rs 100,000 was refunded to him on 15 June 2006. On 1 July 2006, the building was rented out to Mr Old for an annual rent of Rs 600,000 and Mr Old also paid a non-adjustable deposit of Rs 400,000.
Mr Yousha has a salary income of Rs 500,000 in the year ended 30 June 2007 and has paid Rs 10,000 as zakat. Rs 15,000 has been deducted at source by Yousha's employer on the salary income. Mr Yasa has no taxable income other than his share of income from the building in the tax year 2007.
REQUIRED:
a) Compute the taxable income of Yousha Yasaa Associates for their accounting year 30 June 2007 and the tax payable for the relevant tax year;
b) Compute the taxable income of Mr Yousha and Mr Yasaa respectively for the year ended 30 June 2007;
c) Calculate the tax payable by Mr Yousha and Mr Yasaa for the relevant tax year.
Solution.
a) As the shares of Mr Yousha and Mr Yasaa in the income from the building are definite and ascertainable (50% each). Yousha Yasaa Associates will not be taxable as an AOP and no tax is payable by Yousha Yasaa Associates.
b) Computation of tax payable for the tax year 2007
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Mr Yousha Mr Yasa
Rupees Rupees
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Salary 500,000 -
Income from property (working 1) 318,500 318,500
Total income 818,500 318,500
Zakat paid 10,000 -
Taxable income 808,500 318,500
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Working 1
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Total Mr Yousha Mr Yasa
Rupees Rupees Rupees
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Annual rent received from Mr Old 600,000 300,000 300,000
Non-adjustable deposit (NAD)
received from Mr Old 400,000 - -
Less: Portion of NAD received from Mr Young treated as rent
chargeable to tax in the tax years:
- 2003 (10,000)
- 2004 (10,000)
- 2005 (10,000)
- 2006 [Note 1]-
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370,000
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10% of Rs 370,000
chargeable to tax 37,000 18,500 18,500
637,000 318,500 318,500
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c) Tax payable
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Rupees
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Mr Yousha
Tax on income from property [Rs 318,500 x 5%] 15,925
Tax on balance of taxable income of -
Rs 490,000 at 3.50% [Note 2] 17,150
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33,075
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Less: Tax deducted on salary income 15,000
Tax payable 18,075
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Mr Yasaa
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Tax on income from property at the -
rate of 5% [Rs 318,500 x 5%] 15,925
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NOTE:
1. No amount chargeable to tax as the deposit was refunded.
2. There are two types of tax rates prescribed for individuals in the Part 1 of First Schedule of Income Tax Ordinance, 2001, one is meant for salaried individuals and other is meant for individuals other than salaried individual. Mr Yousha's salary income [Rs 500,000] is more than 50% of his taxable income [Rs 808,500], hence, the salaried individual rates will be applicable.
Consequently, Income Tax on balance of taxable income of Rs 490,000 (Rs 808,500 less Rs 318,500) at 3.50% [Rate card will be provided with examination paper.
EXAMPLE 6 - FINAL TAX REGIME: Assume that the scenario is the same as given in the Example 5 except that on 1 July 2006, instead of the building being rented to Mr Old, it was rented to Old (Private) Ltd.
REQUIRED: What differences would arise on computation of Income covered under section 155. Your answer should include Withholding Tax Payment Receipt, Computation of Total Income and tax payable. You may refer to working in the above referred example.
SOLUTION: Old (Private) Limited will be required to Deduct 5% Withholding Tax from Rs 637,000 [refer working 1 in example 6]. However, the Tax Payment Receipt must contain the names and Computerised National Identity Card [CNIC] or National Tax Number [NTN] of Mr Yousha and Yasaa as follows.
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S.No Name CNIC/NTN GROSS AMOUNT TAX
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1. Mr Yousha xxxxx 318,500 15,925
2. Mr Yasaa xxxxx 318,500 15,925
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There would be no difference on Computation of Total Income but the Tax Payable would be as follows.
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Yousha Yasaa
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Tax Payable as per Part c of example 5 18,075 15,925
Less : WHT deducted under section 155 15,925 15,925
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Tax Payable 2,150 0
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However, Mr Yousha and Yasaa will be required to obtain the Withholding Tax Payment Receipt from Old (Private) Limited and attach it with the Return of Total Income.
(Concluded)
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