ADVANCE TAX - FBR Advance Income Tax in Pakistan
FBR - Advance Income Tax
Advance Income Tax is a provisional tax payment system implemented by the Federal Board of Revenue (FBR) in Pakistan. It is designed to streamline tax collection by requiring taxpayers to make payments throughout the financial year rather than a lump sum at the end. This system aligns with the principle of ‘Pay as You Earn,’ offering benefits to both taxpayers and the government in terms of convenience and efficient revenue management.
Who is Liable to Pay Advance Income Tax?
According to Section 147(1) of the Income Tax Ordinance, 2001, any individual whose income was chargeable to tax during the most recent tax/assessment year is required to pay advance income tax quarterly. Similarly, Associations of Persons (AOPs) and companies must pay advance income tax based on their quarterly turnover. This is applicable even if there is no previously assessed income or declared turnover, as outlined in Section 147(6A).
An exception exists for individuals whose latest assessed taxable income is less than Rs. 1,000,000. Such individuals are exempt from advance tax liability under Section 147(2).
Calculation and Payment of Advance Income Tax
For companies, the advance income tax liability is calculated based on the tax liability of the immediately preceding tax year, excluding capital gains and presumptive income. This liability must also account for super tax and adjust taxes already withheld at the source.
Advance tax payments are to be made in four quarterly installments:
- 25 September
- 25 December
- 25 March
- 15 June
For banking companies, advance tax is payable monthly.
The total advance income tax paid during the year is credited against the final tax liability of the taxpayer, ensuring no double taxation occurs. Penal actions are prescribed if the tax payable at the time of filing the return exceeds 10% of the total tax liability.
Exceptions and Exemptions
Certain incomes are exempt from advance tax payment under Section 147(1), including:
- Dividends (Section 5)
- Payments to non-residents (Section 6)
- Shipping and air transport income (Section 7)
- Salary income where tax is deducted at source (Section 149)
- Incomes where tax has already been collected as final liability and no tax credit is allowed under Section 168(3).
Adjustment and Refunds
Advance tax payments are not considered a tax but are treated as provisional payments toward the final tax liability. Under Sections 147(8), (9), and (10), taxpayers can claim credit for advance tax payments when calculating their final tax due. Any excess amount paid can be refunded to the taxpayer under Section 170 of the Income Tax Ordinance.
Benefits of Advance Income Tax System
Advance tax offers multiple benefits:
- Avoids Year-End Burden: Paying taxes quarterly prevents a financial strain at the end of the year.
- Improved Cash Flow Management: It allows the taxpayers to manage their cash flow efficiently.
- Government Revenue Estimates: The system ensures real-time tax collection estimates for the government.
- Compliance with Taxing Principles: It adheres to universally recognized principles of taxation, such as ‘Pay as You Earn.’
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Legal and Practical Considerations of Advance Income Tax Collection
Advance tax collection is grounded in Section 147 of the Income Tax Ordinance, 2001, ensuring a clear and structured approach. The collected amounts are credited to the taxpayer’s account and do not become government property until the final tax assessment. This ensures transparency and fairness in tax collection.
In short, Advance Income Tax is a vital mechanism in Pakistan’s tax framework. It balances the needs of taxpayers and the government, promoting ease of compliance, financial planning, and efficient revenue collection. For individuals and businesses alike, understanding and adhering to advance tax requirements is essential to maintain compliance and avoid penalties.
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