To a layman, ‘imputed income’ term confusing

This author wrote an article for this esteemed paper last week when the draft for the special regime for retailers was released to the public for comments. On July 27, 2026, the scheme was notified as a law vide notification SRO 1166(I)/2026. Various issues were raised in that article, which remained untackled; however, in this article only the complicated issue of ‘imputed income’ has been taken up. Unless this primary issue is settled both the government and retailers will not achieve the desired results. What is imputed income? For a layman, there is no clarity for the term ‘imputed income’. Nevertheless, this subject is a part of this regime as per an SRO. The concept of imputed income only arises in the case where the basis of taxation is other than net profit of the taxpayer. The examples are fixed tax, presumptive tax or turnover tax like this schemes. This is illustrated as under: For all practical purposes an income for the year is reflected by the increase in net assets over that period. The simplest calculation for the purposes of illustration is: =================================================== Net Assets as at June 30, 2026 Rs 65, 000, 000 Net Assets as at June 30, 2025 45, 000, 000 Difference: 20, 000, 000 Profit from Business: Turnover Rs 150, 000, 000 Cost of Sales 100, 000, 000 Gross Profit 50, 000, 000 Business Expenses 17, 000, 000 Net Profit 33, 000, 000 Personal expenditure (13, 000, 000) Net increase in the assets over the year 20, 000, 000 =================================================== Under the present scheme, the person is required to pay tax at the rate of 1 percent of turnover being 1, 500, 000 (1 percent of Rs 150, 000, 000). ‘Imputed income’ in this case is the ‘income’ which would have been there under the normal tax regime when Rs 1, 500, 000 is paid as tax. If the tax rate is say 35 percent the imputed income will be 4, 285, 714 (1, 500, 000×100/35). What does the scheme tell about the imputed income? The scheme is silent about the treatment of imputed income. However, the return form shows that there will be a calculation of imputed income by the system. This means that if any person files a return with the tax liability of Rs 1, 500, 000, the imputed income will be taken at Rs 4, 285, 714. There is no further discussion or clarification about the amount so calculated. The silence has a purpose; however, for all practical purposes there would be a need to explain. Income statement and balance sheet The return form includes the income statement and the balance sheet. If the facts of a case would have been as given in the illustration the net profit will be shown at Rs 33, 000, 000 and the balance sheet will be drawn where an increase on account of business undertaken will be taken at Rs 33, 000, 000. If it is so then the following two questions will arise: a. Is there any relevance of ‘imputed income’ as calculated by the system? b. If the answer is in the affirmative then what will be the consequences? Is the scheme an amnesty? The author considers that there is no intention to provide an amnesty scheme. The blanket cover to the taxpayer has been given to the extent of imputed income. This means that in this case if the actual income is less than Rs 4, 285, 714 no tax consequence will arise and the amount of 1 percent tax paid is the final tax liability for all purposes. However, if the profit is more than Rs 4, 285, 714 then for any income above that amount the taxpayer will be required to explain through evidence the validity of that amount. If no explanation would be available then such income would be chargeable to tax at the rate of 35 percent. If an explanation is available then there is no tax even if the income is more than Rs 4, 285, 714. This appears to be simple however it is not so simple in practical sense. It appears that the procedure has been drawn with the intention that the taxpayer is not voluntarily required to pay the tax on the difference between actual income and imputed income (33, 000, 000 and 4, 285, 714), and it would be deemed that such income is explainable. Any other interpretation or application is not treated as valid as there would be no rationale for the scheme if it is considered that the difference between 33, 000, 000 and 4, 285, 714 is necessarily and voluntarily required to be explained. This means that no tax is required to be paid on actual income, say Rs 33, 000, 000, in this case. If it is so then it is an effective amnesty regime. There is a clear incentive to show turnover and pay tax at the rate of 1 percent and show the highest possible income. The simple way is not to claim an expenditure. This aspect in our view has not been fully taken into account in the scheme. An answer to this issue has been given in the Ordinance which has been explained below; however, if that procedure is applied for the ‘retailers’ then the whole scheme would flop as that process requires complete books of accounts and drawing auditable financial statements. The problem is genuine and not-soluble The issue identified is genuine and not a new one. Whenever the income tax liability is taken on another sum, there will always be a question of the amount that can be taken as income for explaining concealed or untaxed income. This problem arose in the case of repealed section 80C(5) of the Income Tax Ordinance 197, and subsequent final tax regimes. For this reason a special provision has been inserted in Section 111 relating to unexplained income. It states: (4A) Where a taxpayer, while explaining the nature and source of any amount referred to in sub-section (1), takes into account any source of income which is subject to final tax under any provision of the Ordinance, the taxpayer shall not be entitled to take credit of any sum as is in excess of imputable income, unless the excess amount is reasonably attributed to the business activities subject to final tax and the taxpayer furnishes financial statements and accounts duly audited by a chartered accountant. This section provides the amnesty for any income declared under the proposed regime; however, the catch lies in the sentence ‘unless the excess amount is reasonably attributed to the business activities subject to final tax and the taxpayer furnishes financial statements and accounts duly audited by a chartered accountant’. This means that the Ordinance calls for maintaining the auditable books of account for the said income. As against that the scheme has in principle been designed with a clear understanding that there are no books of accounts and the financial statements and ‘audit’ can only be undertaken in a restricted manner. If so many gates have been opened. Solution and conclusion There is no immediate and perfect solution to the issues raised in the aforesaid paragraphs. The answer lies in having a win-win situation for both sides. Though not being a perfect solution, the FBR is to prescribe the margins for the respective retail sector and those having any income above that margin be necessarily required to pay that under the normal system. If not this will erode the tax base and documentation in the country where an implied amnesty is available at the rate of 1 percent for retail business against the high tax rate of 36 percent for normal business income. The moral of the story is to dispense with the fixed tax and introduce a very low rate, say 5 percent, on net income basis. Anything other than net income basis will erode the tax base and documentation in the country. Copyright Business Recorder, 2026

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