Exceptions to Advance Tax under Section 147 of Income Tax Ordinance

Section 147 of the Income Tax Ordinance requires taxpayers in Pakistan to pay advance tax. However, there are certain exceptions to this rule. Let’s explore the circumstances where taxpayers are not legally bound to pay advance tax.

Firstly, taxpayers whose latest assessed taxable annual income is less than one million are exempt from paying advance tax. Secondly, salaried individuals who are subject to tax deduction at source are also excluded from the advance tax regime. Thirdly, certain categories of income, such as dividend income, shipping and air transport companies, payments to non-residents, commercial importers, contracts, export of services, profit on debt, rent on property, and prize winnings, fall under final tax, and taxpayers do not have to pay advance tax on them. Finally, any taxpayer who has already paid tax equivalent to or more than the advance tax payable is not required to pay advance tax.

Now, let’s understand how the Federal Board of Revenue assesses future tax liability for the advance tax regime. The advance tax is basically a form of advance payment of the tax that will be payable by the taxpayer in the future. Businesses prepare monthly and quarterly estimates of their projected profits. Maintaining proper accounts enables them to estimate year-end revenues at the start of the year. Tax laws specify the formula to calculate advance tax on a quarterly basis. The tax assessed in the previous year is divided by four, and the amount is payable in four equal installments. For each quarter, if any other taxes are withheld or paid by the taxpayer, they can be deducted from the tax payable. The taxpayer may end up with either tax payable or refundable, depending on the amount of taxes paid in each quarter.

It is important to note that if a taxpayer receives a notice to pay advance tax in the Iris portal, they should not ignore it. Instead, they should respond with proof of their exemption from the liability. Failing to do so can lead to legal consequences.

In conclusion, advance tax is an important facet of Pakistan’s taxation system. However, certain categories of taxpayers are exempt from paying advance tax. The Federal Board of Revenue assesses future tax liability for advance tax based on quarterly estimates of projected profits. It is crucial for taxpayers to respond to advance tax notices and provide proof of their exemption to avoid legal issues.

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