Business Taxation

Course # Com 463

Institute of Commerce, University of Sindh, Jamshoro

HISTORY OF TAX

• The first known system of taxation was in

Ancient Egypt around 2800 BC.
• The earliest and most widespread form of
taxation was the Corvée and Tithe.
• “Corvée” was forced labor provided to the
state by peasants too poor to pay other
forms of taxation.
• For example, construction of pyramids in
ancient Egypt, construction of Great Wall
of China, Germans used prisoners of war
and Jews as forced labor during World
War 2.
HISTORY OF TAX
HISTORY OF TAX
HISTORY OF TAX
HISTORY OF TAX
HISTORY OF TAX

• “Tithe” is a one-tenth part of something,

paid as a contribution to a religious
organization or compulsory tax to
government.
• In undivided India, income tax was
introduced for the first time in the year
1860.
• After Independence from British rule on
14th August 1947, the Pakistan
Government adopted the Income Tax
Act, 1922.
DEFINITION OF TAX
• Tax is a word which is taken from the Latin
word “Taxo” which means “I estimate”.
• Tax is a financial charge or other levy imposed
upon a taxpayer (an individual or legal entity)
by a state or the functional equivalent of a
state such that failure to pay is punishable by
law.
• Tax is a financial burden laid upon individuals
or property owners to support the
government.
• A means by which governments finance their
expenditure by imposing charges on citizens &
corporate entities.
DEFINITION OF TAX

• An involuntary fee levied on corporations or individuals that is

enforced by a level of government.
• Tax is a charge usually of money imposed by authority on persons or
property for public purposes.
IMPORTANCE OF TAX

Revenue

Representation
TAX Reprising

Redistribution
IMPORTANCE OF TAX
1. Revenue.
• The main objective of every functional government is
to generate maximum amount of revenue for its various
needs & wants.
• Governments utilize that revenue in various
development & non-development projects.
• Money provided by taxation has been used by states
and their functional equivalents throughout history to
carry out many functions. Some of these include
expenditures on war, the enforcement of law and public
order, protection of property, economic
infrastructure, public works, social engineering,
subsidies, and the operation of government itself.
IMPORTANCE OF TAX

Sources of
Revenue

Internal Sources External Sources

of Revenue of Revenue

Printing Foreign Foreign

Taxes Exports
of notes loans aids
IMPORTANCE OF TAX

2. Reprising.
• Taxes are also use by the government to
control the flow of various consumer
products in the economy.
• Taxes are used to change the buying
behavior of the purchasers.
• Taxes are some times imposed to
discourage the use of products (Tobacco,
Vine, Whisky).
• Taxes are used to protect the locally
produced goods or to protect the local
industry.
IMPORTANCE OF TAX

3. Redistribution.
• Taxation can help reduce poverty and inequality, and spread the
benefits of development more widely.
• Normally, this means transferring wealth from the richer sections of
society to poorer sections.
IMPORTANCE OF TAX

4. Representation.
• Representation is a concept in which the functional government is
accountable in front of its tax payers.
• Functional government has the responsibility to protect the interests of
its tax payers.
IMPORTANCE OF TAX
CANNONS OF TAXATION
• Every citizen of a country has some rights and duties. One of such
duty is to pay tax.
• There must be a sovereign authority, i.e., Government.
• Government must stand on the concept of “effectiveness and stability”.
• Government can function effectively only if it has the funds for its
operation. The only way to rise such funds is to impose the tax on its
citizens.
• “Taxes are the price for civilization”. Government has to make tax
collection simple that citizens shall not feel burdensome.
• Government has to build the structure that can make tax collection
simple and effective.
IMPORTANCE OF TAX

• Adam Smith gave four canons in his famous bool named “Wealth of
Nations”.
• The four canons are known as the Adam Smith's canons of taxations.
• They define numerous rules and principles upon which a good
taxation system should be build.

Canons of taxation
Canon of Canon of Canon of
Equality Certainty Convenience
 Canon
of
Econom
y
IMPORTANCE OF TAX
1. Canon of Equality / Equity.
• Canon of equality means treating everyone equal, the term equality is
used with regard to the ability to pay.
• While taxing the person, the government must know which person
belongs to which income group and then the individual must be taxed.
• Person should pay the taxes in proportion to the revenue which they
respectively enjoy under the protection of State.
• This reduces the gap between the rich and poor.
• Taxing the person according to his ability to pay results into the equal
distribution of wealth in the economy.
• Government has made the different tax slabs to estimate the ability to
pay of a person.
IMPORTANCE OF TAX
2. Canon of Certainty.
• Canon of certainty explains that the amount of tax, the manner of
payment, and the person to whom it is to be paid shall be certain.
• Its is the way through which a person shall be informed well in
advance about the amount that is to be levied as a tax.
• It also ensures that the government is also certain about the amount
that will be collected by the way of tax.
3. Canon of Convenience.
• Every tax ought to be levied at the time, or in the manner, in which it
is most likely to be convenient for the contributor to pay it.
• The timing, as well as the method of payment should be convenient
for a person.
IMPORTANCE OF TAX
4. Canon of Economy.
• Canon of economy states that there should be economy in tax
administration.
• The cost of tax collection should be lower than the amount of tax
collected.
• Government has to ensure that the collection of taxes only requires the
least possible expenditure.
• Most of the money collected through taxes should be used to fund
projects that, in turn, benefit the taxpayers.
KINDS OF TAX

TAX
Capital Corporate Property Excise Custom
Income Tax Sales Tax
Gain Tax Tax Tax Duties Duties
KINDS OF TAX

• Income Tax: Tax imposed on the income generated by the person

during a tax year.
• Capital Gain Tax: Capital gain is know as the profit in which the
person buy asset at one price and sell it at higher price. Capital Gain
Tax is the tax payable on the profit earned on investments.
• Sales Tax: Sales Tax is charge on the consumer. It’s a % added to the
price of a product.
• Corporate Tax: Corporate Income Tax or Corporation Tax or Company
Tax is a levy that government collect on the profits of companies.
• Property Tax: Tax paid on property owned by an individual or other
legal entity.
KINDS OF TAX

• Excise Duty: Taxes levied on the goods that and produced within the
domestic territory. It is also known as Per Unit Tax.
• Customs Duty: Duty imposed on the imported and exported goods.
INCOME TAX LAW IN PAKISTAN

Income Tax Act

1922

Income Tax Law in Income Tax

Pakistan Ordinance 1979

Income Tax
Ordinance 2001

Currently Pakistan has Income Tax Ordinance 2001 (Direct Taxes) &
Sales Tax Act 1990 (Indirect Taxes).
INCOME TAX AUTHORITIES

• Government needs qualified persons who ensure that tax collection machinery
should work in an efficient manner & proper amount of revenue is received.
• In Pakistan, there are some specific tax collection authorities under the Income
Tax Ordinance, 2001.
a. Board.
b. Chief Commissioner Inland Revenue.
c. Commissioner Inland Revenue.
d. Commissioner Inland Revenue (Appeals).
e. Additional Commissioner Inland Revenue.
f. Deputy Commissioner Inland Revenue.
g. Assistant Commissioner Inland Revenue.
INCOME TAX AUTHORITIES
a. Federal Board of Revenue.
• The old name of Federal Board of Revenue (FBR) was Central Board
of Revenue (CBR).
• Board is the highest tax authority in Pakistan.
• All other tax authorities are appointed by board & are subordinate to
it.
• The Central Board of Revenue (CBR) was created on April 01, 1924.
• Under the FBR Act 2007 in July 2007 the Central Board of Revenue
(CBR) has now become Federal Board of Revenue (FBR).
INCOME TAX AUTHORITIES

• The Federal Board of Revenue presently comprises Chairman & 11

members, appointed by Federal Government.
1. 3 line members which include Member (Direct Taxes), Member
(Sales Tax & Federal Excise), & Member (Customs).
2. 4 functional members are Member Fiscal (Research & Statistics),
Member (Human Resources Management), Member (Audit), and
Member (Administration).
3. Support members include Member (Legal), Member (Tax Policy &
Reforms), Member (Information Management Systems) & Member
(Facilitation & Tax Education).
INCOME TAX AUTHORITIES

b. Chief Commissioner Inland Revenue.

• The Chief Commissioner Inland Revenue is the highest tax collection
officer in FBR.
• Chief Commissioner Inland Revenue has the administrative & judicial
powers.
• Chief Commissioner Inland Revenue has the responsibility to collect
the tax from their region.
c. Commissioner Inland Revenue.
• The Commissioner Inland Revenue is the authority which is appointed
by the FBR for the collection of taxes in a particular zone.
• Commissioner Inland Revenue has the administrative & judicial
powers.
INCOME TAX AUTHORITIES
d. Commissioner Inland Revenue (Appeals).
• The Commissioner Inland Revenue (Appeals) is the authority which is
appointed by the FBR for the Tax Appeals.
• The Commissioner Inland Revenue (Appeals) has an administrative &
judicial powers.
e. Additional Commissioner Inland Revenue.
• The Additional Commissioner Inland Revenue is the authority which
is appointed by the board in particular zone.
• He has administrative & judicial powers.
f. Deputy Commissioner Inland Revenue.
• The Deputy Commissioner Inland Revenue is the authority which is
appointed by the board in a particular circle.
INCOME TAX AUTHORITIES
g. Assistant Commissioner Inland Revenue.
• The Assistant Commissioner Inland Revenue is the authority which is
appointed by the board in a particular division.
ASSESSMENT OF SALARIED PERSON

RESIDENT & NON-RESIDENT

• Income Tax Ordinance, 2001, does not make any distinction on
nationality or domicile basis.
• Tax liability of a person is determined on the basis of the fact that
whether he is a resident of non-resident person.
1. Resident Individual
• An individual will be resident of Pakistan in a tax year if he/she
fulfills any one of the following three conditions.
i. He is in Pakistan for a period or periods amounting, in all, to 183
days or more. Continuous stay is not necessary.
ii. He is an employee of official of the Federal or Provincial
Government posted abroad in the tax year.
ASSESSMENT OF SALARIED PERSON

2. Resident Company
• A company shall be resident company for a tax year if it fulfills any
one of the following conditions.
i. It is incorporated or formed by or under any law in Pakistan.
ii. The control and management of the company is situated wholly in
Pakistan at any time in the year.
iii. It is a provincial Government or local authority in Pakistan.
ASSESSMENT
Cycle of Assessment

Person
furnishes
the return
of income

Assessment
of return is
Refund of
made & tax
tax
is
determined
Assessment

Recovery of Payment of
tax from tax tax by
defaulter person
ASSESSMENT
Types of Assessment
• The word “assess” comes from the Latin word “assidere” which
means “to sit with”.
• Is the process of documenting, usually in measurable terms.

ASSESSMENT
Regular Emergency
Spot Assessment Self Assessment
Assessment Assessment
ASSESSMENT

1. Regular Assessment.
• Regular assessment is the process of investigating the total income of
a person.
• Regular assessment is conducted by the tax collection authorities.
• Regular assessment is initiated at the end of tax year.
2. Emergency Assessment.
• Emergency assessment is conducted by the tax collection authorities.
• Emergency assessment is initiated due to any special event.
3. Spot Assessment.
• Spot assessment is conducted by the tax collection authorities.
• Spot assessment is initiated by the income tax authorities for the
verification of return.
ASSESSMENT

4. Self Assessment.
• Self assessment is the procedure in which the person calculates their
own income.
• It is the most common and important type of assessment in our
country.
• The self assessment scheme was introduced in Pakistan in 1964.
• Self assessment means that all the assesses must voluntarily abide by
the income tax rules and fulfill all the requirements of Income Tax
Law.
• They must fill their returns of income honestly and in these returns
they should disclose true and correct particulars of their income.
ASSESSMENT

• The objectives of self assessment scheme.

a. To create mutual confidence between the taxpayers and the Income
Tax Department.
b. Relieve taxpayers of procedural problems.
c. Save the time and energy of department’s officials.
d. Increase the total number of assesses and thus the total revenue
collected by the government.
e. Reduce litigation in respect of tax disputes.
ASSESSMENT OF SALARIED PERSON

Heads of Income

1. Income from salary.

2. Income from property.

3. Income from business.

4. Income from capital gains.

5. Income from other sources.

ASSESSMENT OF SALARIED PERSON

1. Income from salary.

a. Minimum of Time Scale (MTS) of Basic Salary.

• Amount from where the salary scale of the employee starts.

b. Basic Salary.
• Amount payable on monthly basis.
• It does not include dearness allowance, employee contribution to
provident fund, special allowance, conveyance allowance,
entertainment allowance, accommodation allowance, medical
allowance, entertainment allowance, utilities allowance.
ASSESSMENT OF SALARIED PERSON
ASSESSMENT OF SALARIED PERSON

c. Salary.
• Includes basic salary, overseas allowance, dearness allowance, cost of
living allowance, bonus, commission.
• Does not include employee contribution to provident fund, gratuity
fund.
• A part from items mentioned above, other amount paid by employer
will be included in the salary, if it enters into the computation of
pension and retirement benefits.