Definition of taxation and objectives of

the taxation laws

Taxation is defined in many ways, common definition is as under:
It is the process by which the state, through its law making body,
raises revenues in order to use it for expenses of government.
It is a means for the government in increasing its revenue under the
authority of the law, purposely used to promote welfare and
protection of its citizenry.
It is the collection of the share of individual and organizational
income by a government under the authority of the law.
Purpose of Taxation

A Tax is required payment to local, state, or national government.

Government uses taxes to:
To fund public goods and servicesTaxes are the main sources of
income for the government. Most of the Federal Governments
revenues come from your taxes.
To influence behavior (tobacco)Taxes on alcohol and cigarettes are
to discourage people from using them.
To stabilize the economy. The government uses the raising and
lowering of taxes to help stabilize the business cycle.
To redistribute incometaxes taken from the wealthy can be used to
help the needy.
objectives

Taxes are primary revenue yielding tools of the Government of modern

ages. The government levies taxes in order to achieve following
objectives:
For collection of revenue to run and administer the Government;
To use as a tool for implementation of its policies; and For fair
distribution of wealth.
Aside from purely financing government operational expenditures,
taxation is also utilized as a tool to carry out the national objective
of social and economic development.
objectives
To strengthen week enterprises by granting them tax exemptions or
other conditions or incentives for growth;
To protect local industries against foreign competition by increasing
local import taxes.
To counter the effects of inflation or depression;
To reduce inequalities in the distribution of wealth;
To promote science and invention, finance educational activities o
To discourage certain undesirable sectors and activities.
Developmental role of taxes

Taxes are one of the main sources for

development. This is because revenue
collected by the state is used on
developmental projects in many
different ways for development of the
country. Some examples are:
Developmental role of taxes

The Government can declare some areas as free zone, industrial zone,
and economic zone and provide tax incentives to such areas. Such
incentives could attract businessman/industrialist who may opt to
establish business concerns/industrial units that would bring
employment, opportunities and overall prosperity in these under
developed areas.
Special economic zone is an area in which business and trade laws
differ from the rest of the country. SEZs are located within a country's
national borders, and their aims include: increased trade, increased
investment, job creation and effective administration. To encourage
businesses to set up in the zone, financial policies are introduced. These
policies typically regard investing, taxation, trading,
quotas, customs and labour regulations. Additionally, companies may
be offered tax holidays, where upon establishing in a zone they are
granted a period of lower taxation.
Special economic zones (SEZs)

The creation of special economic zones by the host country may be

motivated by the desire to attract foreign direct
investment (FDI). The benefits a company gains by being in a
special economic zone may mean it can produce and
trade goods at a lower price, aimed at being globally competitive.
Examples: Karachi export processing zone (KEPZ), Sialkot and
Gujranwala SEZs, Hattar and Risalpur SEZs and Gwadar SEZ.
Under the China Pakistan Economic Corridor (CPEC) Pakistan is
aiming at establishing 29 SEZs all across the country.
News report

ISLAMABAD: Chairman Federal Board of Revenue, Tariq Bajwa,

Tuesday, said that machinery import was tax free for mineral sector,
coal mining, and energy as well as infrastructure development at
Gawadar Port.
Special package of tax exemptions is available for those companies
which want to set up food and fruit processing units in Balochistan
and Gilgit-Baltistan to promote exports of fruits.
Similarly, special offers of tax incentives are also present for those
foreign companies which tend to indulge in exploration of oil and
gas in Pakistan to make the country self reliant in energy sector.
Moreover, new attractive policy for foreign investment has been
announced for new entrants in motorcycle industry because car
manufacturing sector has failed to cater the requirements of
countrys automobile sector.
News report
Under the FBRs tax incentive package the companies working in
Special Economic Zones for developments and establishing
industries enjoyed special privileges.
The FBR allowed corporate income tax holiday for a period of 10
years for the developers of Special Economic Zones (SEZs) in
Pakistan and corporate income tax holiday for 5 years for the
industrial projects to be established in such zones.

machinery import was tax free for mineral sector, coal mining, and
energy as well as infrastructure development at Gawadar Port.
News report

In order to attract Foreign Direct Investment in manufacturing,

construction and housing sectors, corporate tax rate be reduced to
20% if the investment is in a new industrial undertaking or a
construction or housing project to be set up by 30th June 2017 and
at least 50% of the total project cost in the form of equity through
FDI. This will also generate employment, which is one of our major
challenges.
Why Special economic zones
Incentives for investors:

Full Repatriation of capital & profits.

No minimum or maximum limit for investment.
Duty free imports of machinery, equipment and material.
Obsolete/old machinery can be sold in domestic market of Pakistan
Freedom from National import restrictions.
Foreign Exchange control regulations of Pakistan not applicable.
One window service and simplified procedure.
All infrastructural facilities like water, electricity, gas, and telephone are
made available by EPZA.
Skilled & un-skilled labour available in abundance.
Peaceful, secure and environmentally protected pollution free work
area.
Developmental role of taxes

Taxing the rich at higher rates while taxing the low income groups at
lower tax rates.
Imposition of high custom duty rates on luxury items. This promotes
local manufacturers and industry.
Tax credits on charity/donations to promote welfare activities.
Tax exemptions to charity organization /educational institutions to
promote these activities.
Tax incentives for agro based projects to promote agriculture.
Basics of Tax Laws
Adam Smiths in his famous book Wealth of Nations has elaborated following
canons of Taxation:
Equality
Tax payments should be proportional to income and applied equally to all
concerned areas.
Certainty
Tax liabilities should be clear and certain.
Convenience of payment
Taxes should be collected at a time and in a manner convenient for taxpayer.
Economy of collection
Taxes should not be expensive to collect and should not discourage business.
Principles of Levy of Tax

The Benefit Principle.

This principle holds that the individuals
should be taxed in proportion to the
benefits they receive from the
governments and that taxes should be
paid by those people who receive the
direct benefit of government programs
and projects out of the taxes paid.
Principles of Levy of Tax

The Ability-to-Pay Principle.

This principle holds that taxes should
relate with the persons income or the
ability to pay, that is, those with greater
income or wealth who can afford to
pay should be taxed. Similarly, even
rate of tax could increase with higher
income.
Principles of Levy of Tax

The Equal-Distribution Principle.

Income, wealth, and transaction may
be taxed at a fixed percentage; that is,
people who earn more and spend
more should pay more taxes, but Sales
Tax rates should be the same for
everyone regardless of their level of
income.
Structure of Taxes

Proportional tax.
A tax system that requires the same percentage of income from all
taxpayers, regardless of their earnings. A proportional tax applies the
same tax rate across low-, middle- and high-income taxpayers. The
proportional tax is in contrast to a progressive tax, where taxpayers
with higher incomes pay higher tax rates than taxpayers with lower
incomes. It is also known as flat tax.
Proportional tax - example
For example, in a proportional tax system, all taxpayers may be required to pay 10% of
income in taxes. A sales tax can be considered a type of proportional tax since all
consumers, regardless of earnings, are required to pay the same fixed rate.

Supporters claim that proportional tax systems are fair and that they may encourage
people to earn more money because they would not have to pay higher tax rates.
Opponents believe that proportional taxes are similar to regressive tax (where the tax
rate drops as the amount subject to taxation rises), placing a greater tax burden on low-
income individuals. For a $1,000 purchase, for instance, consumers might pay $80 in sales
tax (assuming an 8% sales tax rate). This $80 tax burden would be a higher percentage of
income for low-income earners than it would be for high-income earners.
Regressive Tax

Regressive tax.
A tax that takes a larger percentage from a persons low-income than
from another persons high-income. A regressive tax is generally a tax
that is applied uniformly. This means that it hits lower-income individuals
harder.
Regressive tax - example

Some examples include gas tax and cigarette tax. For example, if a person has $10 of income
and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income.
However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.

Sales taxes that apply to essentials are generally considered to be regressive as well because
expenses for food, clothing and shelter tend to make up a higher percentage of a lower income
consumer's overall budget. In this case, even though the tax may be uniform (such as 7% sales
tax), lower income consumers are more affected by it because they are less able to afford it.
Progressive Tax

Progressive tax.
A tax that takes a larger percentage from high-income earners than it
does from low-income earners. In other words, the more one earns, the
more tax he would have to pay. The tax amount is proportionately
equal to someones status in the society. A rich man should pay more
than a poor man.
Progressive tax - example

A progressive tax is a tax that takes a larger percentage from the

income of high-income earners than it does from low-income
individuals. The United States income tax is considered progressive:
in 2010, individuals who earned up to $8,375 fell into the 10% tax
bracket, while individuals earning $373,650 or more fell into the 35%
tax bracket. Basically, taxpayers are broken down into categories
based on taxable income; the more one earns, the more taxes they
will have to pay once they cross the benchmark cut-off points
between the different tax bracket levels.
History of IncomeTax Law-Pakistan

1) Promulgation of Income Tax Act, 1922:

When Pakistan came into being, the Government of Pakistan
promulgated the Income Tax Act, 1922, as amended upto the date
for regulating the taxation system in Pakistan.
2) An Applicability of the Income Tax Act, 1922:
The provisions of the Act were extended to the whole of Pakistan
except the specified areas. (Fata, Pata and some areas of
Baluchistan)
3) Formation of the Taxation Inquiry Committee:
"A Taxation Inquiry Committee", was introduced in 1958 which
consisted of officials and the representatives of trade and
commerce.
History of IncomeTax Law-Pakistan

4) Recommendations of Taxation Inquiry Committee:

"Taxation Inquiry Committee" submitted a report after keen analysis of
prevailing tax system and suggested some recommendations. Some of
the recommendations were accommodated which resulted in the
amendment of Income Tax Act, 1922.
5) Abolishment of Super Tax:
Before 1959, super tax was imposed on the incomes of all the persons
but in registered firm and companies.
6) Expression of Rate Slab as a Percentage of Income:
In 1959, the rates of each slab were expressed as a percentage of
income considering the recommendations of "Taxation Inquiry
committee".
History of IncomeTax Law-Pakistan

7) Change in Financial Year:

Before 1960, the financial year was considered from 1st April to
31st March but in 1960, it was changed from 1st July to 30th June.
8) Introduction of Income Tax Committee:
In 1961, FBR introduced an "Income Tax Committee". Main purpose
of introduction of such committee was to make recommendations
for simplification of the Income Tax Act, 1922 and procedure of
taxation.
9) Introduction of Self Assessment Scheme:
Before 1965, an assessment officer would assess the income and
determine the tax liability of the person but in 1965, "Self Assessment
Scheme" was introduced.
History of IncomeTax Law-Pakistan

10) Promulgation and Enforcement of the Income Tax Ordinance, 1979:

Till 1979, lot of amendments were made in the context of the
Income Tax Act, 1922. As a result of these amendments, the Act
became a complicated law and difficulties arose in its working.
Keeping these difficulties in view, the Government promulgated a
new income tax law namely "The Income Tax Ordinance, 1979"
through the Finance Ordinance on June 28, 1979 and included all
the basic concept of the repealed Act, so that the benefit of the
whole case law built up over the last 57 years is not rendered
useless.
History of IncomeTax Law-Pakistan

11) Formation of National Tax Reform Commission:

In 1985, the Federal Government formed a National Tax Reform
Commission. It consisted of members of Senate and National
Assembly, high government officials and renowned industrialist.
Major purpose of such commission was to suggest way and means
to improve the existing structure of tax laws in Pakistan.
12) Income Tax Survey 1999-2000:
In 1999-2000, under the Income Tax Ordinance, 1979, an income tax
survey was conducted to analyze the prevailing taxation structure
and to procure the suggestions and recommendations from
surveyors.
13) Introduction of Tax Amnesty Schemes:
Many tax amnesty schemes were introduced under
the Income Tax Ordinance, 1979. These schemes First scheme was presented in 1958, under which 71,289
were introduced to provide a chance to black declaration filed.
money holders, so that they could change their In 1969 scheme was offered in which 19,600 declaration
black money into white money. filed.
In 1976 scheme was offered, however, not data is available.
In 1997 another scheme was offered but not data available
about the declaration filed. However, Rs 141 million tax
collected. Against it Constitution Petition 2251 of 1997
dated 08-11-1997 Rawalpindi Bench admitted but not
decided.
Tax Amnesty Scheme 2000 under which 79,411 declaration
were filed, overseas assets could be declared.
Income Tax Scheme 2008: About Rs2.8 billion were collected
at the rate of tax at 2 percent.
April 2012: amnesty for funds invested in stock exchange.
2013 Amnesty Scheme for non duty paid cars: about 50,000
Non-Customs Duty Paid cars took advantage.
2013 Amnesty for Traders (investment in green field
industries etc).
History of IncomeTax Law-Pakistan

14) Promulgation of the Income Tax Ordinance, 2001:

In 2001 promulgation of the Income Tax Ordinance, 2001, to
modernize the taxation system, a government of Pakistan
introduced a new income tax law namely, "The Income Tax
Ordinance, 2001" which was promulgated on September 13, 2001.
15) Applicability of the Income Tax Ordinance, 2001:
Under section 1, the Ordinance specifies that the Income Tax
Ordinance, 2001 shall extend to the whole of Pakistan.
History of IncomeTax Law-Pakistan

16) Status of the Income Tax Ordinance, 2001:

According to section 3 "The Income Tax Ordinance, 2001" overrides
other laws enforceable in Pakistan. It means, in case of any
contradiction between the provisions of the Income Tax Ordinance,
2001 and any other law of the country, the provisions of the Income
Tax Ordinance, 2001 shall prevail.