04/09/2021
Minimum, final and normal tax:
It is usually considered confusing to distinguish between the above forms of taxation under the Income Tax Ordinance, 2001. Let us make it easier to understand.
In standard form of taxation, a taxpayer is required to calculate his income under various heads like salary, property, business, capital gains and other sources. This is "total income". If the taxpayer has paid any deductible allowances like zakat, workers' welfare fund, workers participation fund, etc., the same are subtracted from total income and the resulting sum will be "taxable income". The rates of tax to be imposed on income are given in Part 1 of First Schedule. The taxpayer finds the rate applicable to his taxable income and thus calculates income tax payable by him for relevant tax year.
At this stage, he finds out any income tax already paid in advance which may be advance tax paid in four equal installments, or withholding tax paid on various transactions during the year. Out of this advance tax, certain taxes withheld from him are "adjustable " which means if withholding tax paid is higher than the tax payable by him on his income, excess tax paid is refundable to the taxpayer. However, certain withholding taxes have been made "minimum" tax which means if withholding tax paid is higher than tax payable on income, excess tax is not refundable to taxpayer. If, on the other hand, his tax payable is higher than advance tax paid, the difference is to be paid by the taxpayer.
Second mode of taxation is termed as "final or fixed" tax. It means taxation of "amount" instead of "actual income". For instance, in case of exports, the taxpayer is required to pay 1% fixed tax on "export proceeds realized", without considering actual income or loss earned by him. Another example is of rental income of individuals and associations of persons. Up to 30th June 2021, income tax on rental income in such cases is payable on "gross rent" received by the taxpayer without calculating actual income earned by him. This type of taxation is distinct from standard form of taxation in that the "amount" taxed is not "actual income" and is, therefore, kept separate from "taxable income".
Once tax payable is calculated on such amounts/transactions, the taxpayer finds out whether he has already paid tax through withholding. If tax has already been withheld from him, no further tax is then payable by the taxpayer in respect of such transactions.
Conclusion:
1. If withholding tax paid is "adjustable", excess tax paid is refundable to taxpayer. If withholding tax paid is less than actual tax payable on income, the difference is to be paid by the taxpayer.
2. If withholding tax paid is "final", neither any further tax is payable by taxpayer nor can he claim refund out of it.
3. If withholding tax paid is "minimum", the taxpayer cannot claim refund out of the same. However, if actual tax payable on income is higher, the difference is to be paid by the taxpayer.
Hope readers find the above post useful.
