What is a Tax Year?

What is a Tax Year?

Focus on the word TAX YEAR in the basic sentence below:

For each Tax Year, the government imposes Income Tax at a specified rate on every Person who has Taxable Income.

The discussion below will develop an understanding of the word TAX YEAR.

Note the word "each" in our basic sentence:

Income Tax is imposed on every Person who has Taxable Income for eachTax Year.

The Income Tax is periodic in nature, and a person has to pay tax after a period of twelve months—a Tax Year. However, the meaning of Tax Year is not the same as the meaning of a year we use in our day-to-day conversation. A Tax Year not only has special meanings, but also has three types. The three types are:

1.       Normal Tax Year,

2.       Special Tax Year, and

3.       Transitional Tax Year.

Normal Tax Year

A Normal Tax Year is a period of twelve months which ends on 30^th June of the year in its name.

A Normal Tax Year of twelve months has six months from a year and another six months from the next year. For example, the Tax Year 2014 has six months from year 2013 and six months from year 2014. In the diagram, the Tax Year 2014 is shown. Note the following details to understand the definition of a Tax Year.

(1)      First six months of Tax Year 2014 fall in calendar year 2013;

(2)      Second six months of it fall in calendar year 2014;

(3)      It is a twelve months long period;

(4)      It starts from 1st July, 2013;

(5)      It ends at 30th June, 2014.

There are cases when a Normal Tax Year is not twelve months long. For example, Mr. Rashid Rao starts business on 1^st October, 2013. He will have a Tax Year 2014 which ends on 30^th June, 2014. Therefore, his Tax Year 2014 will be nine months long. The situation is shown in the diagram.

Most of the taxpayers have Normal Tax Years ending on 30^th June of a year.

Special Tax Year

Some particular businesses have specific business cycles which do not fit into the period of twelve months of a Tax Year. For example, a cotton season in Pakistan starts on 1^st of September of a year and ends on 30^th October next year. To match the business cycle of cotton season with the taxation cycle, the Federal Board of Revenue has specified that their Tax Year will commence on 1^st October and will end on 30^th September following. A Special Tax Year is denoted by the calendar year of the Normal Tax Year in which it’s ending date falls.

The FBR may specify a twelve months period that makes up a Special Tax Year for:

1.       a person,

2.       a class of persons, and

3.       a source of income.

Following are some of the notified Tax Years:

Type of business	Starting date	Ending date
Manufacturing of jute goods	1st July	30th June
Manufacturing of sugar	1st October	30th September
Manufacturing of cotton textiles	1st October	30th September
Export of rice	1st January	31st December
Ginning of cotton	1st September	31st August
Rice husking	1st  September	31st August
Oil mills	1st September	31st August
Manufacturing of shawls	1st April	31st March
Trading of shawls	1st April	31st March
Insurance	1st January	31st December
Banking	1st January	31st December

A Person can get his Tax Year changed from Normal Tax Year to a Special Tax Year or a Special Tax Year to a Normal Tax Year by applying to a Commissioner. The Commissioner has powers to makes such changes in Tax Years in cases of needs.

The Board has powers to permit a class of persons or a type of business to change their Tax Year from Normal Tax Year to a Special Tax Year. Similarly, the board also can make the reverse change i.e. the change of a Special Tax Year to Normal Tax Year devote notifies all such changes.

Transitional Tax Year

When Tax Year of any class of persons or a single person is changed as a result of an order by the Board or Commissioner of Income Tax, it results:in the emergence of a changing period which is known as "Transitional Tax Year" and is treated to be a separate Tax Year. It consists of the period between the end of last year before change and the start of the changed Tax Year.