TYPES OF CONVENTIONAL TAXES

INTRODUCTION:

The word tax has two meanings: first, the financial duty or levy contributed to the entity (be it a
government or any other organization) a person or group of persons (say, a business) is part of.
The second definition is "a very heavy burden" and can essentially summarize the first definition.
It is easy to maintain the idea that tax—the cumbersome, "unrequited" payment made
periodically, that is, and not the abstract idea of burden—is something people would rather do
without. After all, governments can spend as much as for income tax collection.

While there are opposing views on imposing tax, the general idea is that taxes are used to fund
projects that can benefit society as a whole, or at least the majority of it. Businesses are taxed by
the state because they use government-owned infrastructures and services. Individuals are taxed
as part of their social contract, i.e., their rights and responsibilities as citizens of the state. Tax is
what John F. Kennedy called "the annual price of citizenship."

PURPOSE OF TAXES:

Taxes are typically spent on public works, military defense, protection of property, economic
infrastructures, and public services—education, health care, pensions, energy/water/waste
management, and public transport. The government uses different types of taxes to redistribute
wealth and resources especially to the poor, to improve the economy (although there are
arguments on this that it distorts the market, resulting in inefficiency instead), or alter consumer
behavior or employment (i.e., making some transactions or purchases less attractive).

TYPES OF TAXES:

What are the different types of taxes you'll be encountering? Taxes can be characterized as
proportional (constant rate of percentage of income for all income levels), progressive
(percentage of income increases as income increases), or regressive (percentage of income
increases as income decreases). Taxes can also be either direct or indirect, and their meanings
vary depending on which field you're using them.

There are various types of taxes

DIRECT TAXES ON LABOUR:

 taxes payable on income from work

 taxes on income related to work (such as sickness benefits, pensions and parental
benefits)
 basic pension contributions
INDIRECT TAXES ON LABOUR:

 social security contributions (employers contributions and self-employed contributions

for self-employed persons)
 general payroll taxes
 special employers contributions payable on certain types of compensation and employee
benefits

TAXES ON INCOME FROM CAPITAL:

 taxes payable on income from capital assets (such as interest, dividends and rent)
 capital gains tax

TAXES ON PROPERTY:

 Personal Property Tax – collected periodically from residents who own property in a certain
area. Examples include vehicle and boat fees, as well as artworks that may have been lent in
other areas

 Property Tax – applied to property owned, like real estate. Includes stamp duty,
inheritance tax, which are event-driven property taxes.

CORPORATE TAXATION:

 tax on income from business activities

TAXES ON GOODS AND SERVICES:

 value-added tax (VAT)

 excise duties on alcohol and tobacco, oil, petrol, etc.

Other taxes are as under

 Tariff – collected for goods that cross a political border, either during import or export.
Percentages of tariffs can be allocated to the protective bodies that manage those borders.
 Excise – computed independently of the value of the product being taxed, and instead
are based on the quantity of the product that is being purchased. Gasoline is a prime
example, which has about 8-28 excise tax cents per gallon. Sales tax is a kind of excise
tax.
 Poll Tax – collected at a fixed amount per individual. Also called per capita
tax/capitation tax.
 Retirement Tax – used to fund social security systems, which in turn give income to
retired workers.
 Wealth Tax – exacted from the percentage of one's net worth (computed by
subtracting one's liabilities from the assets).
 Motor Tax:

This tax has to be paid on all vehicles before they can be driven on a public road.

The rate of tax, will depend on the engine strength of the vehicle.

 DIRT (Deposit Interest Retention Tax):

 This is the tax one pays on the interest gained on savings.

 Collected by banks and other financial institutions, before the saver gets the interest.
DIRT
Deposit Interest Retention Tax
 Charities are exempt from paying DIRT.

 CAPITAL ACQUISITIONS TAX:

 This is the tax one pays on inheritance or gifts.
 The closer the family relationship between the donor and the receiver the less the tax.
 This is an accumulated tax, in that what you receive from another person is taken into
account, when the tax is being calculated on an inheritance or gift from a consecutive
people.
 Stamp Duty:

This is the tax payable, when property changes ownership

Pay Related Social Insurance (PRSI):

 Disincentive effect, choose leisure rather than overtime.

 Companies can move elsewhere.
 Decrease the spending power and hence reduce jobs.
 Rich might live out of the country for a at least half of the year.
 Prevent savings for house, emergencies etc.

 Environmental Taxes:

 This is a type of tax levied to encourage consumers to be environmental friendly.

Sometimes known as Green Taxes.
An example of this type of tax is the plastic bag levy. Based on the polluter pays
principle. Thus acting as a deterrent for those that would potentially damage the
environment.
  Also raises money to help pay for the damage caused by the polluter.
 Governments have to be careful with these types of taxes, as over taxation can
lead to tax evasion. For example dumping rubbish rather than pay domestic refuse
tax.
 These taxes can also effect the poor in society more harshly. For example the
plastic bag tax is the same for the rich, as the poor.

TAX STRUCTURE IN PAKISTAN:

Taxation System:

Federal taxes in Pakistan like most of the taxation systems in the world are classified into two
broad categories, viz., direct and indirect taxes. A broad description regarding the nature of
administration of these taxes is explained below:

Direct Taxes:

Direct taxes primarily comprise income tax, along with supplementary role of wealth tax
For the purpose of the charge of tax and the computation of total income, all income is classified
under the following heads.

1. Salaries
2. Interest on securities
3. Income from property
4. Income from business or professions
5. Capital gains
6. Income from other sources

Personal Tax:

All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the
rates randing from 10 to 35 per cent.

Tax on Companies:

All public companies (other than banking companies) incorporated in Pakistan are assessed
for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of
allowances and exemptions related to industry, location, exports, etc.

Inter-Corporate Dividend Tax:

 Tax on the dividends received by a public company from a Pakistan company is payable at the
rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inetr-
corporate dividends declared or distributed by power generation companies is subject to reduced
rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-
company shareholders by the companies are subject to with holding tax of 10% which is treated
as a full and final discharge of tax liability in respect of this source of income.

Treatment of Dividend Income:

Dividend income received as below enjoys tax exemption, provided it does not exceed Rs.
10,000/-.

1. Dividend received by non-resident from the state enterprises Mutual Fund set by the
Investment Corporation of Pakistan.
2. Dividends received from a domestic company out of income earned abroad provided it
is engaged abroad exclusively in rendering technical services in accordance with an
agreement approved by the Central Board of Revenue

Unilateral Relief:

A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such
income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on
such income at an average rate of tax in Pakistan or abroad, whichever is lower.

Agreement for avoidance of double taxation:

The Government of Pakistan has so far signed agreements to avoid double taxation with 39
countries including almost all the developed countries of the world. These agreements lay down
the ceilings on tax rates applicable to different types of income arising in Pakistan. They also lay
down some basic principles of taxation which cannot be modified unilaterally.

Customs:

Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in
Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute
about 37% of the total tax receipts. The rate structure of customs duty is determined by a large
number of socio-economic factors. However, the general scheme envisages higher rates on
luxury items as well as on less essential goods. The import tariff has been given an industrial bias
by keeping the duties on industrial plants and machinery and raw material lower than those on
consumer goods.

Central Excise:

Central Excise duties are leviable on a limited number of goods produced or manufactured, and
services provided or rendered in Pakistan. On most of the items Central Excise duty is charged
on the basis of value or retail price. Some items are, however, chargeable to duty on the basis of
weight or quantity. Classification of goods is done in accordance with the Harmonized
Commodity Description and Coding system which is being used all over the world. All exports
are exempted from Central Excise Duty.

Sales Tax:

· Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on:

·All goods imported into Pakistan, payable by the importers;

· All supplies made in Pakistan by a registered person in the course of furtherance of any
business carried on by him;
· There ia an in-built system of input tax adjustment and a registered person can make adjustment
of tax paid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at
any stage does not exceed 15% of the total sales price of the supplies;