Tax Credits Chapter- 15
If foreign income is under more than one head including speculation business, the provisions of this
section will apply separately to each head.
The foreign tax credit will be allowed before any other credit but if the credit cannot be wholly allowed,
the remainder will neither be refunded, carried back nor carried forward to the following tax year.
A tax credit shall be allowed under this section only if the foreign income tax is paid within 2 years
after the end of the tax year in which the foreign income was derived by the resident taxpayer.
Foreign tax credit [Rule 16]
A resident taxpayer claiming a foreign tax credit for a tax year shall submit an application in the form
as specified in Part I of the First Schedule to IT Rules, 2002 for the credit with the taxpayer's return of
income for that year.
An application for a foreign tax credit shall be accompanied by declaration from the payer along-with
certified copy of evidence of tax deducted at source from the foreign tax authority.
Where a resident taxpayer cannot obtain evidence of the deduction of tax from the payer of income
as above, the Commissioner Inland Revenue may accept such secondary evidence of the deduction
as is determined by him.Example: Miss Samina has provided you following information for computation of taxable income
and tax liability:
Pakistan source income:
(a) Income from business Rs. 537,500,
(b) Income from other sources Rs. 100,000
Foreign source income:
Income from business 212,500
Note: Income tax paid on foreign source income is Rs. 10,000.
Solution:
Miss Samina
Computation of taxable income and tax thereon Rs. Rs.
Income from business (Pakistan source) 537,500
Income from other sources 100,000
Income from business (Foreign source) 212,500
Taxable income 850,000
Computation of tax liability
Tax on Rs. 850,000 [Rs.10,000 + 1 2.5% x (850,000 – 8 00,000)] 16 , 250
Less: Foreign tax credit
Lower of:- Pakistan tax in respect of foreign source income
( 16 , 25 0 x 212,500 / 850,000) 4,063
OR - Foreign income tax paid 10,000 4 , 063
Balance tax payable 12,187
- Charitable donations (Section 61)
(1) A person shall be entitled to a tax credit in respect of any sum paid, or any property given by the
person in the tax year as a donation, voluntary contribution or subscription to —