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Income Tax in Afghanistan


A tax is imposed on the income from Afghan sources of all persons, corporations, limited liability companies, and other legal entities whether in Afghanistan or abroad, and on the foreign income of residents of Afghanistan in accordance with provisions of this Law.

Resident Rules:

A natural or legal person is considered a resident of Afghanistan if:

(1) The person has his or her principal home in Afghanistan at any time during the fiscal year; or

(2) The person is present in Afghanistan for a period or periods amounting to one hundred eighty-three days in the fiscal year; or

(3) The person is an employee or official of the Government of Afghanistan assigned abroad at any time during the fiscal year.

(4) Any other entity is resident in Afghanistan for a taxation year if it was established, formed, or created in Afghanistan or has the centre of its administrative management in Afghanistan at any time during the year.

Tax Rate:

(1) The income tax of legal persons, corporations, limited liability companies, and general partnerships is 20 percent of its taxable income in the fiscal year.

(2) Income in foreign money shall be converted to afghanis for purposes of taxation.

The rate of conversion shall be the average of free rates used by Da Afghanistan Bank to purchase such foreign money at the end of each month.

(3) The income tax of a natural person is the amount calculated in accordance with the following schedule:

Taxable Income
Amount
From 1 afghani upto afs 12,500 p.m.
Exempted
afs 12,501 upto afs 100,000 p.m.
10%
afs 100,000 above
afs 8,750 + 20%


Tax on Income of Resident:

Tax on income of resident natural persons in Afghanistan shall be calculated as follows:

1. A natural person who is a resident of Afghanistan is subject to annual income tax on his taxable income including income from sources outside Afghanistan.

2. Any income tax paid to the government of a foreign country by a resident natural person of Afghanistan may be taken as credit only against that part of his annual income tax attributable to his foreign income.

3. If the income of an Afghan resident is derived from more than one foreign country, the income tax credit shall be in proportion to the income from each country as provided in the Income Tax Manual established by the Ministry of Finance.

Tax on Income of Non Resident:

Non-resident persons are exempt from income tax provided that the foreign country grants a similar exemption to residents of Afghanistan.

A non-resident not engaged in trade or business in Afghanistan is subject to income tax on the amount received from sources within Afghanistan as interest, dividends, rents, royalties, and gain or profit of any kind according to the provisions of this Law.

Deductions allowed to legal non-residents under this Law are only allowed in respect of income other than interest, dividends, rents and royalties to those legal non-residents which file a true and accurate return including all information required by this Law and the Income Tax Manual established by the Ministry of Finance.

Non-resident natural persons, companies and other organizations engaged in economic, service or business activities in Afghanistan are subject to income tax on all taxable income from sources within Afghanistan.

Deductions are allowable only if and to the extent that they are connected with income from sources within Afghanistan.

Earnings derived from the operation of aircraft under the flag of a foreign country are exempt from taxation, provided that the foreign country grants a similar exemption to residents of Afghanistan.

A correct apportionment of expenses with respect to sources of income within Afghanistan shall be determined as provided by this Law and the Income Tax Manual.

Organizations which are Exempt from Taxation:

Contributions received and income from the necessary operations of organizations that meet the qualifications and conditions stated in this Article are exempt from taxation under this Law. The qualifications that must be met are the following:

a. The organization must be formally and legally organized under the laws of Afghanistan.

b. The organization must be organized and operated exclusively for educational, cultural, literary, scientific, or charitable purposes.

c. The organization must be so organized and operated that no profit or gain except those services rendered to anyone else goes to or accrues in the account of any contributor, shareholder, member or officer either during its operation or upon its dissolution.




Determination Of Taxable Income:

Taxable Income is the total of all receipts less those exemptions and deductions authorized in this Chapter.

Exemptions are allowances, such as personal exemptions, authorized by provision of this Law.

Deductions are expenses of production, collection, and preservation of income, which are allowed, by provisions of this Chapter, to be deducted from receipts.

Expenditures and costs not specifically defined as exemptions or deductions are not to be allowed.

Gain Or Loss From The Sale, Exchange, Or Transfer Of Assets:

1.      Gain from the sale or exchange of assets is subject to the tax on income as specified in this Chapter.

2.      Gain from the sale or exchange of any asset of a corporation or limited liability company is taxable income in the taxable year the asset was transferred.

3.      Gain from the sale, exchange, or transfer, except by inheritance, of an asset, belonging to an individual and specified below is taxable income:

·        a trade or business, including goodwill;
·        a factory including equipment, machinery, buildings and land, or any part of such assets;
·        equipment used in the business of transporting persons and property; and
·        shares of stock in corporations or limited liability companies. 

4.      Proceeds from sale, exchange, and transfer of assets, except by inheritance, shall be reported in full. The following deductions from proceeds of sale or exchange are allowed in determination of taxable gain:

·        Cost to the taxpayer of the asset and investment sold, less the total amount allowable for its depreciation since it was acquired.
·        Expenses of sale including sales commissions, advertising expense, legal expense, transaction and document taxes, and other expenses of selling and transferring the asset.

5.      The market value of the asset at the time it was transferred or exchanged (except inheritance), other than by sale, shall be the basis for computing the gain.

6.      The nature of the transfer shall not affect taxability of gain from the transfer, except by inheritance, which is not taxable. 

7.      Losses from the sale or exchange of fixed assets used in trade or business are deductible from the taxable income of the taxpayer in the taxable year in which the sale or exchange took place, provided that the gain from such sale or exchange would have been actually taxable.

8.      Loss from sale or exchange of shares of stock is not deductible except from gain from sale or exchange of shares of stock in the same year. For any such gain, if in excess of loss from such transactions, the excess is taxable, but if any such loss is in excess of gain, the excess loss is not deductible.




Method of Determining and Computing Tax on Capital Gains:

a. Gain, taxable under Article 27, from sale or exchange of an asset owned by an individual eighteen months or more is subject to the provisions of this Article if one or more of the following criteria and conditions is met:

1. the transfer (except by inheritance) of property was not a sale;
2. the asset transferred was a capital asset;
3. the asset was transferred in the sale or liquidation of a business

b. The income tax of any individual in any taxable year during which fixed assets and investments owned by him eighteen months or more were transferred under any of the circumstances described above, should be the product of his taxable income from all sources multiplied by the special rate imposed by paragraph “c” of this Article.

The special rate imposed by this Article shall be determined as follows:

1. the gain from transfer of any assets (except by inheritance) subject to the provisions of this Article is divided by the number of years (to the nearest year) it was owned;
2. the average annual gain or gains so determined are added to all other taxable income;
3. a tentative tax is computed on this total by applying the rate schedule in Article 3;
4. the tentative tax so obtained, divided by the amount in which it was computed, is the special rate referred to above, except that if the resulting rate is less than four per cent the special rate shall be four percent.

Special Provisions Relating To Corporations And Limited Liability Companies:

A net operating loss is defined as the amount by which deductions allowed under this Law exceed receipts. A corporation or limited liability company incurring a net operating loss in a taxable year should deduct this loss from its taxable income of three succeeding years, deducting each year one-third of the loss.

Distribution of Property not Dividends, by Corporations and Limited Liability Companies:

Except payments of dividend, and except when made in connection with liquidation of a corporation or a limited liability company, the distribution of the assets of the corporation or limited liability company to its shareholders or partners shall be treated by the shareholder or partner as a reduction in the cost of his stock or capital share.

Liquidation of a Corporation or a Limited Liability Company:

A distribution of assets among shareholders or partners in connection with liquidation of a corporation or a limited liability company shall be treated by the shareholder or partner as proceeds from sale or exchange of assets as provided in Chapter III of this Law. In such cases, the amount distributed in money plus the market value of any other assets distributed less the shareholder’s cost of the stock or the amount of partner’s capital on which distribution is made, is taxable income of the shareholder or partner. No gain or loss shall be recognized to the corporation or limited liability company on the distribution of its assets in partial or complete liquidation.

Dividends in Money and Securities:

 A dividend is any distribution of money or assets made by a corporation or a limited liability company to its shareholders or partners out of earnings. Dividends are subject to the following provisions:

·        Dividends paid by a corporation which is organized under the laws of Afghanistan and a wholly owned affiliate which cannot be consolidated may be excluded from the income of the corporation receiving such dividends if it is organized under the laws of Afghanistan and whose income is subject to income tax.

·        Dividends paid in the form of securities of any kind are not deductible from income of the corporation or limited liability company.

·        Dividends in money are taxable income of the recipient at the time received, but dividends in the form of securities of any kind are not considered taxable income of the recipient at the time received.

Income Tax Administration:

Tax return:

(1) Persons who are subject to Income Tax are required to file a detailed return to report income, deductions, and other necessary information required by this Law and its regulations, as prescribed by the Ministry of Finance and submit it to the relevant tax office.

(2) An individual who derives wage income that is subject to income tax withholding in accordance with the provisions of Articles 51 and 64 shall not make a return unless the person receives wages from two or more employers or the person has other income in addition to his wage income. Withholding tax from salaries and wages withheld according to this Law is not refundable.

(3) Persons who are required to complete a tax return must submit their tax return by the end of Jawza (the third month) of the next year to the relevant tax office.

(4) Residents and non-residents who will leave Afghanistan before the due date for payment of their tax are required to submit their return form and pay the tax due two weeks before leaving the country.

(5) Individuals, companies and organizations which are, according to the Income Tax Law and the Customs Law, required to pay taxes or customs duties, social, non profit and welfare organizations which are withholding taxes from the salaries or wages of their employees, and individuals who have or open an account with a bank or other financial institution, are required to have a Tax Identification Number. The Ministry of Finance will issue rulings on how to apply for and use a Tax Identification Number.

Employees and contracted employees of the State and employees of State agencies whose income is salary or wages only are excluded from this provision.

Tax Payment:
(1) Persons who are, according to the provisions of this Law, required to pay income tax and submit a return form, shall pay their tax no later than the end of Saratan (fourth month) of the next year.

(2) Persons who are required to pay business receipts tax on services shall pay their tax quarterly no later than the fifteenth day of next month.

(3) Persons who carry on business from fixed business establishments are required to pay their tax quarterly.

(4) Persons who own moveable and immovable property shall pay tax due when the ownership of such property is transferred.

(5) Tax on contracts signed with the government agencies, according to provisions of Article 84 of this Law, shall be withheld at the time the payment is made by the relevant government agency.

(6) Income tax on gains by brokers shall be paid no later than the end of the fiscal year.

(7) Income tax on exhibitions, theaters, cinemas, shows, sports, and concerts shall be paid no later than the fifteenth day of the next month. If the mentioned shows are not continuous, tax shall be paid at the end of each show.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.




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This blog is Created by CA Anil Kumar Jain.