Tax Management

Muhammad Hussain
FCMA, FPA, MS(Fin)

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 Tax Management –
AN OVERVIEW OF TAXATION
Before moving on to Tax Management, we must know what taxes are:
General Understanding of Tax: Literal meanings ----- Burden, Strain The long
journey would be too much of a tax on my father’s strength. I found they were
taxing my patience by asking irrelevant questions. Such a long rough journey
would be very taxing for old man.
General Definition of Tax: General compulsory contributions of wealth levied
upon persons by the state, to meet the expenses incurred in providing common
benefits upon the residents.
Statutory Definition of Tax: Tax means any tax imposed includes a penalty, fee
or other charge or any sum or amount levy able or payable under this ordinance.
Taxes Vs Fees: Taxes are compulsory levy and it is the legal obligation of the
person to pay the amount of tax which is required to pay under the law, where
as payment of fee is the discretion of any person and when a fee is paid, the
person becomes an entitled to claim counter benefits. Taxes are important
instrument of Fiscal Policy

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 AN OVERVIEW OF TAXATION (CONTD…)

• Fiscal policy is a discipline that deals with arrangements which are adopted by
government to collect the revenue and make the expenditures so that social and
economic stability could be attained / maintained.
• Objectives of Fiscal Policy: Economic Development Raising level of employment
(Achieving full employment level) Influencing consumption patterns, Price
stability Redistribution of income Removal of deficit in Balance of Payments
Instruments of Fiscal Policy Government Expenditures Taxes Deficit Financing
Subsidies Transfer Payments—like Unemployment Allowances etc. Sources for
Revenue Generation for State Taxes, Tariffs Internal & External Borrowing
Penalties & Fines Aids & Grants Canons of Taxation:
• Simplicity: This principle implies that taxation system should be plain, and easily
understandable by the tax payer.
• Convenience: The convenience of tax payer as well as tax collector must be the
bottom line of any taxation system. The time of payment of tax, mode of
collection of tax, should be convenient for the tax payers. Certainty This cannon
suggest that the amount of payment should be certain and there should not be
any arbitrariness or ambiguity with respect to the amount of tax to be paid by
the tax payer.

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Judicious: The taxation system should be based on the principles of equity,
fair play, and all known principles of natural justice.

Capacity to Pay: This principle suggests that taxation system must be based
keeping in view the capacity to sacrifice by the person on whom the tax is
levied, those who have more income should pay taxes at high rates/
proportions, where as those who have low income, they should pay taxes at
lower rates or proportion.

Benefit principle: This principle suggests that taxes should be levied

according to the benefits derived by the person from the state. Since more
benefits are derived by lower income groups, hence according to this
principle, those who derive more income but enjoy less benefits from the
state should be taxed at the lower rates and those persons who derives less
income but more benefits from State should be taxed at high rates.

Business Friendly: According to this principle, the taxation policy should be

such as to boost business atmosphere and not discouraging the investment
environment.
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 Historical Background
• Tax
– To tax (from the Latin taxo; "I estimate")
– Word Origin: 1250–1300;
– To impose a financial charge or other levy
– Upon 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
 Historical Background
• EGYPT
• Tax collectors were known as scribes  Tax on cooking oil
• GREECE
• War of the Athenians imposed a tax referred to as eisphora
• No one was exempted
• ROMAN EMPIRE 60 A.D
• Tax on imports and exports called portoria
• GREAT BRITAIN
• First tax assessed in England was during occupation by the
Roman Empire
• Lady Godiva - 11th century
 Background/ History of Tax Laws in
Pakistan
• Income Tax Act of 1860: The British Empire introduced first formal
Income Tax Act after war on independence of 1857. It was repealed in
1865.
• The Income Tax Act 1886: This Act was imposed on traders by some of
the provinces. It was first ever act that survives till today where
Agriculture Income was defined that is almost same in the latest laws.
• The 1918 Act with some amendments was further amended in Super
Tax Act of 1920
• Income Tax Act of 1922: The Income Tax Act and the Super Tax Act were
consolidated in the Income Tax of 1922. At the time of independence,
this Act prevalent in undivided India was adopted by the Government of
Pakistan as its Income Tax Law till 30th June 1979.

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 Background/ History of Tax Laws in
Pakistan
• Income Tax Ordinance, 1979: First law on Income Tax was promulgated
in Pakistan from 1st July, 1979.
• Income Tax Ordinance, 2001: To updates the tax laws and brings our
law in accordance with international standards, this ordinance was
promulgated on 13th September, 2001, which became effective from
1st July, 2002.
• Income Tax Rules 2002: These were promulgated by CBR on 1st July
2002 in exercise of powers granted under section 237 of the Ordinance.
Rules are integral part of the main enactment / Law. I.T Ordinance 1979
stands repealed vide section 238 of the Ordinance. The Ordinance
overrules all other laws for the time being in force (Sec 3).

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 Sources of Income Tax Law
• The following are the main sources of the Income tax
Law in Pakistan:
– The Legislative Law, i.e. the Income Tax Ordinance, 2001
(the Ordinance). The Ordinance is a Central statute and is,
therefore, applicable to the whole Pakistan.
– The Procedural Law, i.e., The Income Tax Rules, 2002 (the
Rules).
– The Notifications, Circulars etc., issued by the Board
– The Case Law, i.e., the judgements and interpretations of
the Appellate Tribunal, High Courts and the Supreme Court
of Pakistan
 Characteristics of Tax Laws
• Tax is an enforced contribution
• Tax is generally payable in cash (bank)
• Tax is proportionate in character
• Tax is levied (to impose; collect) on income, transactions or property
• Tax is levied by the state which has jurisdiction over the person or
property
• Tax is levied by the law-making body of the state
• Tax is levied for public purposes
• Fiscal adequacy
• Equality or theoretical justice
• Administrative feasibility
• Consistency or compatibility with economic goals

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 Taxation Facts in Pakistan
• Taxation in Pakistan is a complex system of
more than 70 unique taxes administered by at
least 37 agencies of the Government of
Pakistan.
• The government is seriously indebted -- and
approximately 2.0 million people in a country
of 220 million file tax returns. The majority of
population do not pay tax.
 Taxation Facts in Pakistan
• Pakistani Taxation System consists of various heads and
sub divisions with a complex structure
• Understanding these system is essential in order to
avoid any illegal act
• Business can also benefit in certain ways e.g. Subsidies
and Refunds
• Understanding the system can help to reduce expenses
• Due to this complex structure many individuals avoid
enrolling in Tax system
 Income Tax Law
• Taxable Income
– It is the total income of a person for a tax year reduced by
the total of any deductible allowances, under the
Ordinance, for the year.
• Total Income
– It is the sum of a persons income under each of the heads
of income for the year.
• Resident
– An individual is considered resident for a tax year if he/she
is in Pakistan for more than 182 days in that tax year
 AN OVERVIEW OF TAXATION
(Structure of Taxes)
• Proportional Tax/ Flat Tax: A tax system that requires the same percentage on
tax from all taxpayers regardless of their earnings. For examples Sales @17%,
Income Tax @29% on Companies
• Progressive Taxes: This is based on the “capacity to pay” principle of taxation. In
this type, the rate of tax increase as the income increase. In other words, the
more one earns, the more he would have to pay.
• Regressive taxes: A Regressive tax is the opposite of a Progressive Tax. It is
based on the benefits received principle. A type of tax that takes a larger
percentage from the income of low-income people than the income of high-
income people is called regressive tax. That means that it hits lower-income
individuals harder.
• Federal Taxes: Federal taxes are the taxes which can be levied by the federal
government and include among others the followings: Income tax Corporate tax
Customs duties/Tariffs Sales tax Provincial Taxes: Stamps Duty Registration Tax
Motor vehicle tax
• Value Added Taxes: This type of tax is levied at each stage of value addition. For
example sales tax
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 AN OVERVIEW OF TAXATION
(Types of Taxes in Pakistan)
Type of Taxes:
Different types of taxes are explained below:
• Direct taxes:
Direct taxes are the taxes where incidence of taxation is on the person on
whom levied. For example
Income tax: Direct Taxes primarily comprise of Income Tax. For the purpose of
the charge of tax and the computation of total income, all income is classified
under the following five heads:-
1. Salary
2. Income from Property
3. Income from Business
4. Capital Gains
5. Income from other sources
Capital Value Tax: Capital Value Tax on transfer of immovable Property,
transfer of rights etc
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 AN OVERVIEW OF TAXATION
(Types of Taxes in Pakistan)
• Indirect Taxes:
Indirect taxes are the taxes where incidence of tax can be shifted by the
person on whom levied to other persons. For example:-
Sales Tax: Sales Tax is levied @17% on all goods imported into
Pakistan and supplies made in Pakistan by a registered person.
Federal Excise Duty: Federal Excise Duties are levied on a limited
number of goods produced or manufactured and services provided or
rendered in Pakistan. All exports are liable to Zero % Federal Excise Duty.
Custom Duty: Goods imported and exported from Pakistan are
liable to rates of customs duties as prescribed in Pakistan Customs
Tariff.

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 Types of Taxes
• Following are major taxes levied by the federal
and provincial governments.
• Federal Government Taxes:
– Income Tax Super Tax
– Wealth TaxGift tax
– Turnover Tax Corporate Asset Tax
– Corporate Income Tax (A) Import Duties
– Import Surcharge Export Duties
– Iqra Surcharge Income Tax on imports
– Import Licence Fee Import Registration Fee
 Types
• Export Registration Fee Central Excise Duty
• Sales Tax on Manufactured goods Capital Value Tax
• Export development Surcharge Development Surcharge on Petroleum
• Gas Development Surcharge General Sales Tax
• Federal Education Cess Workers Participation Fund
• Workers Welfare Fund Estate Duty
• Zakat Ushr
• Oilseeds Development Cess on Companies Tobacco Cess
• Cotton Cess Development Surcharge on Electricity
• Textile Technology Cess Airport Tax
• Capital Gain Tax
 Provincial Taxes
• Provincial Taxes:  Professional Tax  Property Tax 
Vehicle Tax  Stamp Duty  Entertainment Tax 
Betterment Tax  Social Security Contribution 
Explosive Licence Fee  Provincial Education Cess 
Capital Gain Tax  Punjab Airport Tax  Provincial Excise
Duty  Karachi Dock Labor Board Cess  Cess on Hotels
 Cotton Fees  Paddy Development Cess  Provincial
Excise Duty  Land Revenue Tax  Employee Old Age
Benefits Contribution  Trade Tax on Jewelers, Garment
shops imposed by Baluchistan govt.
 TAXATION MANAGEMENT
• Taxation Management—Explained Taxation management is a strategy where by
a person manages its business and other transactions/ activities in such a way so
as to make maximum use of tax holidays, exemption, concession, rebates, tax
credits, deductible allowances available under law and as a result is able to
derive the benefit of minimizing his tax liability. To achieve this objective, clear
understanding of respective laws and professional expertise of their application
is of at most importance.
• Scope of taxation management is multi-dimensional, while making choices
among different opportunities available to a person, the tax factor among others
also plays an important role. Taxation management covers a decision regarding
available choice between an employment and self- employment or available
choice of a business as sole proprietorship, partnership, private company or
public company. It is professional strategy to plan tax affairs of a person. It is of
significant importance in business management decision. Person includes a
living person (natural) or artificial person (corporate person).
• Scope of Taxation Management ranges from incorporation of a business to
mergers, amalgamation, winding up, liquidation, dissolution etc. of business

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 TAXATION MANAGEMENT
(Strategies of Tax Management)
Tax Practitioners and taxpayer normally adopts any of the following
techniques to lessen tax burden:
• Tax Avoidance:—
• Tax Evasion

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TAX YEAR: Tax year means a period of 12 months ending on June 30th
which is also called Normal Tax Year
Special Tax Year: In case a person has a different accounting period from
normal tax year or adopted such a period after seeking approval from
commissioner under section 74(3) it is called special tax year.
Classes of taxpayer regarding Special Tax Year:
Companies manufacturing Jute goods Companies manufacturing Sugar;
All persons exporting rice and carrying insurance business
All persons carrying on business of cotton ginning, rice husking and oil
milling
All people carrying on business of manufacturing and dealing in shawls
All Insurance Companies 1st July to 30th June 1st October to 30th
September 1st January to 31st December 1st September to 31st August
1st April to 31st March 1st January to 31st December
Explanation—a tax year can be a period of less than 12 months under
special circumstances for example discontinuance of business u/s 117.

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