OO, ll CHAPTER 1 BASIC CONCEPTS OF TAXATION 1. DEFINITION AND OBJECTIVES OF TAX Definition of tax Tax is defined as follows: Taxation is a way by which entities. Taxation is used by Government as a means of increasing revenue to promote welfare and protection for its citizens. Non-revenue objectives of taxation ‘Though the main purpose of taxation is to collect revenue for the Government, but in addi certain non-revenue objectives which are listed below: 1. Government can discourage use of harmful goods by levying heavy rates of tax on certain sectors. 2. Government can encourage the production of certain goods by introducing exemptions. 3. By charging high tax rates on imports the Government can encourage local purchase. 4. Taxes can be used to reduce inequalities in distribution of wealth. 5. Tax prevents wealth being concentrated in a few hands of the rich. 6 Government can promote savings and investments in listed companies by introducing tax credits on Bovernment finances its spending by imposing some charges on its citizens and business mn the Government has investments. ‘Through tax Government can encounter the effect of inflation and depression To promote education systems, since and invention, health care sysfems, energy system and military defence, It can be used to discourage investment abroad. }0. Tax can be used as a bargaining tool in trade negotiation with other countries. 1. Tax laws can be used for documentation of economy(Any amount transferred otherwise than banking channel will be deemed as income) Government can encourage research & developments by introducing tax credits. Government can promote software Industry by giving Tax exemptions to software exports. 2, BASIC CONCEPTS 2.1 Tax as means for development Tax helps in the development of economy as follows: By introducing exemptions, certain businesses can be promoted e.g. exemy i 2. Investment in new shares can be encouraged through introducing tax credits. Investment in new plant and machinery can be encouraged through introduction of tax credits. 3. 4. Charities can be encouraged by providing tax credits on them. 5. Government can mark areas as tax free zones, industrial zone and economic zone to provide tax incent such areas, It will encourage business man to establish business units that will bring employment opportunities. 1 on export of computer software. 2.2 Structure of taxes Proportional tax/ Flat tax aoe Thea tax where the rate of tax is fixed. A fixed rate is applied on person's income whether the income is high or low, Under this system people who earn more are not charged at a higher percentage as compared to progressive tax. Progressive tax ; ; Tee tax in which the tax rate increases as the income base increases. A progressive tax takes a larger amount of tax from the high-income group as compared to low-income group. This tax proportionately equal to a person's status in the society. Regressive tax pee ; ji jount of income increases. The higher income group pays less in taxes It is a tax where tax rate decreases as the am than the lower income group. Regressive taxes impose greater tax burden on the poor.Chapter 7 = 7 a remeansthae those WhO TEECVE the es for I ts Yor levy of &% ss received: Ne principle is commonly used ‘orbits, { 2.3 Prins rinciples £0" bene ‘pen 7 the Pt the "The \ otye most axes | Following are pie sas aes i income should seaming more in PRY Morey io i Jerson W! ce people who are earning more. a yeans that Jt me : icxinion coe Tiskeni Ds — .s should be taxe ‘ that incomes and ‘transactions ’ al ‘but not at higher rat te. shall pay more tox m. waractristios of tx Jaws od tax yt 1. Administration and ies jon to the ability of the + Les it shout ould be understandable U in proportio! : i through chea’ progressive in character. sans tat payed ue amt ete ams ad be collected a i are er ie. it should be j Hath eeleeste comet m2 POT pps 0 FROM a Tax should be imposed by state which has i is by Parliament in Pakistan. , pport Government to implement projects. 8 Its levied for public purpose i. taxes are imposed 0 SURO 9. Taxes should be charged on incomes, transactions oF property. ("55 Tax relief in cross border transactions : ee In cross border transactions, Pakistan tax system provides the following typ heer by country to minimize effect of double taxation where the relief is not available through i, Pa dit is allowed to a resident person who has earned foreign source income at lower of aha In Pakistani law, a tax tr ce income {foreign tax paid of Pakistan tax payable in respect of foreign source income. The credit is available if person hs paid the tax in the foreign country. | agreements foravoidance of double taxation | Many countries have agreed with other countries in treaties to mitigate the effects of double taxation. In such ace the tax is charged only by one country. Currently Pakistan has made agreements for avoidance of double taxa \ with 50 countries. These agreements provide a ceiling on tax rates applicable to various incomes. 2.6 Forms of escape from taxation Shifting Itis a process by which tax burden is shifted from one cess by to another. Fi i « be added inthe price ofa product to shift Pere ‘ot example, tax paid by manufacture Kinds of suite shift burden to the ‘customer, 1 Forward shifting- Here the be is arden of taxis shi ultimately to the consumer, an 3 : Onvard shifting. Here the taxis shifted two or mo, om consumer to the manufacturer; i ‘on in the price of, Which the Purchased ite [irene BY The ers ed PP) eal tothe cape value ofthe fame n of future t setae by yer FOF example, price of realestate i eduel™!‘Tax Exemption ‘J tax exemption is a relief from tax provided by the Government to the taxp: . 0 ayer. In case of exemption, no tax is payable by the taxpayer. A tax exemption is usually provided to a business that government Raa asa ‘economically. 3. IYPES OF TAXES IN PAKISTAN Taxes in Pakistan are classified as follows: 1, Direct taxes 2. Indirect taxes Direct Taxes income Tax Income tax is imposed for each tax year, at specified rates on every pi as taxable income Tazable income for charge of taxis Gvided under the following heals ramee a) Salary; b) Income from Property; ©) Income from Business; d) Capital Gains; and e) Income from Other Sources. Income Support Levy Act, 2013 jon will pay this tax at An ial whose net moveable wealth as per wealth statement is greater than Rs. 1 the rate of 0.50% of net moveable wealth. Capital Value Tax ‘A Capital value tax is charged on purchase, gift, exchange, surrender of certain residential and commercial properties. Indirect Taxes Sales Tax Act, 1990 Sales tax is charged and paid at the rate of 17% of the a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and ‘b) ° goods imported into Pakistan. For determining tax liability input paid at the time of purchase or import is deducted from output tax charged on value of sales. Customs Act, 1990 ‘ecifies certain import and export duties on goods. A major portion of Government's ‘The rate of custom duty is determined by socio-economic factors. Under this Customs Act in Pakistan sp .d to others. The import tariff on industrial plant and machinery revenue is collected through this tax. ‘Act high, rate is applied on luxury items as compare is lower than that of consumer goods. Federal Excise Act, 1990 Under Federal Excise Act tax is charged at specified rate on: © Goods produced or manufactured in Pakistan * Goods imported in Pakistan * Services provided in Pakistan The base on which tax is charged may zero percent. s are charged to tax at the rate of be value or retail price or weight. All exportCONSTITUTIONAL PROVISIONS Federal Consolidated Fund and Public Account [78] a All +All revenues roeived/oans aise bythe Fedral Ooverinen Amount received in repayment of loan, ne Shatibe credited to Federal Consolidated Fund 2 Allother moneys: 6) tered) fe Fete Goveromen (8) deposited withthe Supreme Courdany exer cour; Shall be credited tothe Public Account ofthe Federation Custody, ete of Federal Consolidated Fund and Public Account 79] The custody of the Federal Consolidated Fund and Public Account ic withdrawal from the Funds, a eam a, ‘« allother connected matters shall be regulated by Act of Mailis-e-Shoora (Parliament) or provisions made by President, Annual Budget Statement [80] In each financial year, the Federal Government shall lay before the National Assembly a statement of the a estimated.receipts and expenditures of the Government. It will be called as Annual Budget Fi rival Budget Statement. The Annual Budget Statement shall show separately- “ @) (@) amounts required to mect expenses charged by Constitution on Federal Consolidated Pund; (b) amounts required to meet other expenses proposed to be made from Federal Consolidated Fund; and shall distinguish expenditure on revenue account from other. Expenditure charged upon Federal Consolidated Fund [81] ‘The following expenditures shall be charged upon the Federal Consolidated Fund:- (@) the remuneration of President and other expenses of his office, and the remuneration of- @ the Judges of the Supreme Court and the Islamabad High Court; the Chief Election Commissioner; (iil) the Chairman and the Deputy Chairman; (iv) the Speaker and the Deputy Speaker of the National Assembly; (v) __ the Auditor-General; (b) The admin expenses, including the remuneration of officers and servants of Supreme Court, the Islamabad High Court, the department of the Auditor-General, the Office of the Chief Election Commissioner and the Secretariats of the Senate and the National Assembly. including interest, sinking fund charges, the repayment of capital, and (©) Debt charges of the Federal Government, ‘mption of debt on the security of Federal Consolidated Fund; other expenses for raising loans, and reder /order against Pakistan by any court or tribunal; and (@) amount required to satisfy any judgment! b (6) any other amount declared by the Constitution or by Act of Majlis-e- Shoora (Parliament) Procedure relating to Annual Budget Statement [82] : (1) Expenses charged on Federal Consolidated Fund in Annual Budget Statement shall be discussed in the National Assembly. A voting will not be required. : i (2) Other expenses in Annual Budget Statement shall be submitted to National Assembly for raising grant. The “Assembly may or may not agree to demand. It may also reduce the demand, (3) The demand can be made with recommendation of Federal Government. Authentication of schedule of authorised expenditure [83] (1) The Prime Minister shall sign a schedule specify’ ng eo sional Assembly (under Article 82), an () the grants mae yt Nn idated Fund. It shall not exceed the i Consol (b) amounts required for expenses charged on the Federal Con: amount mentioned in statement National Assembly. previously laid before the