The Finance Bill 2022 has proposed changes in the tax rates for Association of Persons (AOP) in Pakistan. This article aims to explain these changes in detail for the benefit of Pakistani readers.
AOP is a group of two or more persons who carry out a business or profession together with a view to earning a profit. The income earned by an AOP is taxed separately from the income of its members.
The proposed AOP tax rates for the tax year 2022 are as follows:
- Where taxable income does not exceed Rs. 600,000/-: 0%
- Where taxable income exceeds Rs. 600,000 but does not exceed 800,000/-: 5% of the amount exceeding 600,000
- Where taxable income exceeds Rs. 800,000 but does not exceed 1200,000/-: Rs. 10,000 + 12.5% of the amount exceeding Rs. 800,000
- Where taxable income exceeds Rs. 1200,000 but does not exceed 2400,000/-: Rs. 60,000 + 17.5% of the amount exceeding Rs. 1200,000
- Where taxable income exceeds Rs. 2,400,000 but does not exceed 3,000,000/-: Rs. 270,000 + 22.5% of the amount exceeding Rs. 2,400,000
- Where taxable income exceeds Rs. 3,000,000 but does not exceed Rs. 4,000,000/-: Rs. 405,000 + 27.5% of the amount exceeding Rs. 3,000,000
- Where taxable income exceeds Rs. 4,000,000 but does not exceed Rs. 6,000,000/-: Rs. 680,000 + 32.5% of the amount exceeding Rs. 4,000,000
- Where taxable income exceeds Rs. 6,000,000/-: Rs. 1,330,000 + 35% of the amount exceeding Rs. 6,000,000
It is important to note that these tax rates only apply to the taxable income of an AOP. Taxable income is calculated by deducting allowed expenses from the total income earned by an AOP during the tax year.
For instance, if an AOP earns a total income of Rs. 8,000,000 during the tax year and the allowed expenses are Rs. 2,000,000, then the taxable income would be Rs. 6,000,000. Therefore, the tax payable by the AOP would be Rs. 1,330,000 + 35% of the amount exceeding Rs. 6,000,000, which is Rs. 2,275,000.
In addition, the Finance Bill 2022 has added an explanation in section 92 of the Income Tax Ordinance 2001 regarding the taxation of AOP. The explanation clarifies that if the income of an AOP is exempt and no tax is payable under the Ordinance due to this exemption, the share received by a member of the AOP out of the income of the AOP shall remain exempt.
In conclusion, the proposed changes in AOP tax rates under the Finance Bill 2022 will have a significant impact on the taxation of AOPs in Pakistan. It is important for AOPs to understand these changes and plan their finances accordingly. This article provides a comprehensive overview of the proposed changes to help Pakistani readers understand the new tax rates.