Income Tax Law

Lecture 1
“Tax is a compulsory contribution by the people to the State to enable it discharge its obligations to the
society”

“... And they ask thee what they ought to spend? Say, which is superfluous...” Al-Baqra:219

• Purpose – Redistribution of wealth through PROGRESSIVE TAXATION

• Powers of Federal Government - SRO
• Precedents – role of
• In case of difference of opinion between two high courts, the ITAT working under the territorial
jurisdiction of high court shall follow the decision of that high court unless the issue is finally resolved by
the Supreme Court of Pakistan
• The law does not make any distinction between the income accrued or arisen from a legal source and
income obtained from an illegal source, both are taxable. Furthermore, there’s no distinction between
temporary or permanent income
• Income received in lump sum or in installments, is liable to tax
• Reimbursement is not treated as income. Similarly, gifts of a personal nature does not fall under the
definition of income hence, donee is not liable to pay income tax on the gifts, he received
• “Income cannot be taxed twice” - A fundamental rule of the law of taxation
• The new income tax law brings a complete change in the philosophy of income tax proceedings and makes
the life easier. The SALIENT FEATURES are:
o No assessing officer will determine the income and compute tax liability
o Income tax return shall be accepted without any conditions. There will be no compulsory
enhancement of tax liability over previous year to qualify for acceptance. Even your loss return
shall also qualify for acceptance
o Filing of income tax return itself will be an assessment order and your eligibility for refund will
flow from your tax return
o A certain percentage of returns filed shall be selected for tax audit on the basis of risk assessment
to verify the accuracy and correctness of your income tax return
o Tax audit will not necessarily mean an amendment of the assessment originally made based by you
in your return of income
o The original assessment can only be amended on the basis of information acquired during tax audit
or any other source
o If selected for audit, there will be no pre-designated auditors to carry out audit. The officials
making selection for audit will be different from those who do actual audit. In other words you
have no designated Income Tax Officer holding jurisdiction on you
o Only minimum books of account, documents and records have been prescribed

EQUITY & JUSTICE IN TAXATION

• The burden of tax should fall on those who can fully bear it – “The equal treatment of the equals”
o The Cost of Service Theory
o Benefit Theory (Quid Pro Quo Theory)
o Ability to Pay Theory
o Social Justice Theory

CLASSIFICATION OF TAXES
• Specific - Levied on the basis of weight, length, volume or other specific characteristics
• Ad Valorem - Levied on the value of goods as measured by the price
• Proportional - Where the rate of tax remains the same despite changes in its base
• Progressive - Where the rate of tax increases as the base increases
• Direct - Primarily taxes on persons. It is called direct because the relation between the taxpayer and
revenue authorities is direct and personal, there being no agency in between
• Indirect - The person, who pays the tax, can shift it whole or in part to the others. These taxes are taxes
on goods or services, etc. Assumption behind an indirect tax is that the tax will be shifted to the ultimate
consumer of the goods, who presumably has the ability to bear it. Consumers in fact, are the taxpayers
while the taxes are collected through producers, importers, wholesalers, etc.

Lecture by Faisal Javed

Advocate High Court
Income Tax Law
Lecture 2

DEFINITIONS

INCOME TAX APPELLATE TRIBUNAL (ITAT) – Section 130

• A Chairperson and other Judicial and Accountant members as per the needs of the Tribunal
• Qualification of a Judicial Member:
o He has exercised the powers of a District Judge and is qualified to be a Judge of a High Court, OR
o He is or has been an Advocate of a High Court and is qualified to be a Judge of the High Court
• Qualification of an Accountant Member:
o He is an Officer of the Income Tax Group equivalent in rank to that of a Regional Commissioner
• All the appointments shall be made by the Federal Government and the Chairperson must be a Judicial
Member except in some special circumstances
• The powers and function of the Tribunal shall be discharged by the Benches, constituted by the
Chairperson
• A Bench shall consist of not less than 2 members. The number of the members of one class does not
exceed the number of members of the other class by more than one
• In case of difference, the matter shall be resolved according to the opinion of the majority
• If the members are equally divided on a point, the case shall be referred by the Chairperson to the other
members of the Tribunal and the case shall be decided according to the opinion of the majority
• In case of equal number of members in the Tribunal, the Federal Government may appoint an additional
member

PERSON – Section 80
• An individual
• A company or association of persons incorporated, formed, organized or established in Pakistan or
elsewhere
• The Federal Government, foreign government, public international organization
• Association of persons includes, a firm, any artificial judicial person but does not include a company
• Company means :
o As defined in the Companies Ordinance, 1984
o A body corporate formed by or under any law in force in Pakistan or outside Pakistan
o A Modaraba
o A trust, a co-operative society or a finance society
o A foreign association which the FBR has, by general or special order, declared to be a company
o A Provincial Government
o A local authority in Pakistan
• Firm - The relation between persons who have agreed to share the profits of a business carried on by all or
any of them, acting for all
• Trust - An obligation annexed to the ownership of property and arising out of the confidence reposed in
and accepted by the owner or declared and accepted by the owner for the benefit of another or of
another and the owner
• Unit Trust - A trust under which beneficial interests are divided into units such that the entitlements of
the beneficiaries to income or capital are determined by the number of units held
• Finance Society includes, a co-operative society which accepts money on deposit or otherwise for the
purposes of advancing loans or making investments in the ordinary course of business

RESIDENT & NON RESIDENT PERSONS – Section 81

• The following persons shall be resident persons for a tax year
o A Resident Individual – Sec. 82
 Present in Pakistan for a period of 182 days or more, in aggregate, in the tax year
 Employee or official of the Federal Government or a Provincial Government posted abroad
o Resident Company – Sec. 83
 Incorporated or formed by or under any law in force in Pakistan
 The control & management of the affairs is situated wholly in Pakistan at any time in the
year
 Provincial Government or local authority in Pakistan
o Resident Association of Persons – Sec. 84
 The control & management of the affairs of the association is situated wholly or partly in
Pakistan at any time in the year
 o The Federal Government

BUSINESS
• Includes, any trade, commerce, manufacture, profession, vocation but does not include employment

PAKISTAN SOURCE INCOME – Section 101

• Where the salary is received from any employment exercised in Pakistan
• Where the salary is paid on behalf of the Federal Government, Provincial Government or a local authority
in Pakistan, wherever the employment is exercised
• Business income of a resident person – If the income is derived from any business carried on in Pakistan
• Business income of a non-resident person – If the income is directly or indirectly attributable to:
o A permanent establishment in Pakistan
o Sale of goods through permanent establishment in Pakistan
o Any business connection in Pakistan
• Where the business of a non resident person comprises the rendering of independent services, the Pakistan
source income shall include any remuneration derived by the person where the remuneration is paid by a
resident person
• Profit on debt – If it is paid by a resident person
• A royalty – If paid by a resident person
• Rent income – If it is derived from the lease of immovable property in Pakistan
• A pension or annuity – Paid by a resident
• Technical fee – Paid by a resident

FOREIGN SOURCE INCOME – Section 101 (16)

• An amount to the extent to which it is not Pakistan source income

PERMANENT ESTABLISHMENT
• A place of business through which the business is wholly or partly carried on
• A place of management, branch, office, factory or workshop
• A mine, oil or gas well or any other place of extraction of natural resources
• An agricultural or forestry property
• A building site, construction, or installation project or supervisory activities connected with such site or
project
• The furnishing of services, including consultancy services by any person through employees

PUBLIC COMPANY
• Where not less than 50% shares are held by the Federal or Provincial Government
• Where shares are held by a foreign government
• A company whose shares were traded on a registered stock exchange in Pakistan at any time in the tax
year and which remain listed on that exchange

INCOME YEAR
• The financial year next preceding the assessment year
• Such period as the FBR may specify by notification in the Official Gazette
• Any period in respect of which a return of total income is required to be furnished or any tax is payable

ROYALTY
• An amount paid or payable, whether periodical or lump sum, as consideration for:
o The use of any patent, invention, design or model, secret formula or process, trademark or other
like property
o The use of any copyright of a literary, artistic, or scientific work including films or video tapes
o The receipt of or right to receive and visual images or sounds, transmitted by satellite, cable,
optic fiber or similar technology in connection with television, radio or internet broadcasting
o The supply of any technical, industrial, commercial or scientific knowledge, experience or skill
o The use of any industrial, commercial or scientific equipment

Lecture by Faisal Javed

Advocate High Court