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NED PGD Procurement & Contract Concepts of Taxation Direct, Indirect, ST, FED, WHT Jan 2021
NED PGD Procurement & Contract Concepts of Taxation Direct, Indirect, ST, FED, WHT Jan 2021
Taxation
Razi Ahsan
Advocate High Court & Tax Consultant
Foundation Of Taxation
The history of taxation evolved from ancient Egypt, pharaohs used tax collectors called
"Scribes" to collect money from their citizens to meet government expenditures.
The Romans introduced the concept of customs duties on imports and exports. These
duties were called "Portoria". They introduced the concept of "Publicani" a public
contractor to whom tax collection from a particular area of jurisdiction was assigned.
They are agents of the central government who traveled across the Roman Empire to
collect taxes from public and pay to the government.
Great Britain inherited taxation from Romans empires. After the fall of Rome, Saxon
kings imposed their own taxes on the people of Great Britain. These taxes were called
“Danegeld”, and they were assessed based on the value of land and property.
Foundation Of Taxation
During (Middle age) 1800s in France and Great Britain Taxes and Wars was
a common theme.
The invention of world first income Tax was typically attributed to the Great
Britain.
In the 1800s, England was best known for introducing its own Income Tax to
help deal with Napoleon. That tax would later be repealed after 1816. One
year after Napoleon was finally defeated at the Battle of Waterloo.
Taxes and World Wars
World Wars have been the most expensive wars ever in the history. To finance the war, the United
States introduced Revenue Act 1916 and War Revenue Act of 1917. The same strategy was followed
by Great Britain and other European Allies. But after the First World War, taxes were gradually rolled
back.
However the Second World War has a profound impact in the history of taxation. Hitler
destroyed the economies of colonial powers, of Great Britain and France to an extent that they
are no longer capable to maintain their military presence in colonies outside their home land.
Tax (emergency) adjustment from war economy to civil economy was quite difficult because the
goods (Weapons) over produced in war times were no more required in peace. Britain incurred huge
debt to finance the war against Germany. There was a complete economic recession after the war was
ended that resulted political turmoil in the British occupied territories.
Britain had to retreat from occupied territories, (in 1947 from the Subcontinent, 1946 from
Jordan, 1948 from Sri Lanka and Myanmar and 1952 from Egypt) purely on financial reasons.
Thanks to Hilter otherwise the people of these countries would have to wait for independence.
History Of Taxation
Income Tax Act 1860:
To overcome the financial difficulties in undivided India, Income Tax was introduced
through Income Tax Act 1860. In this Act, same pattern was followed as that was
prevailing in those day in the United Kingdom. The Act was enforced effective from
July 1, 1860 and was continued for a period of five years up to 1 st August 1865. Then
it was withdrawn in 1865.
The main features is that agricultural income from land, above the value of Rs. 690
per annum was taxable. Tax was levied on persons earning annual income from Rs.
200 to Rs. 500 @ 2% and from Rs. 500 and above @ 4%..Exemption was available to
persons having annual income below Rs. 200 including agriculture income.
Income Tax Act 1886:
Income Act 1886 was an important landmark in the history of taxation of the Subcontinent. This was the first
systematic tax legislation in the subcontinent which brought remarkable improvements to the tax system.
A proper definition of agricultural income for the first time was made in the Act and complete exemption and
Concession in payment of tax was granted to a person.
Income Tax Act, 1886, itself continued up to 1918 and during its life of 32 years, only one Major
amendment was made in it in the year 1903.
There were only four heads of income:
Income From Salaries & Pensions
Profit of Companies
Interest on securities
Income From other sources including property income
Tax was levied on individual different sources of income separately not on aggregate basis (Total income). Flat
rate of 2.6% was applied on income above Rs. 2,000. Rate of 2.083% on salary income between Rs. 500 and
Rs.2,000 was applied. Basic exemption was Rs. 500. Interest on securities was taxed on the same rate.
Exemption was raised to Rs. 1000 in 1903.
Later on enhanced rates of taxation by gradation and graduation were introduced in 1916. Eight different tax
rates were introduced for different income brackets. The increase in tax rates was caused due to the first World
War 1914. Additional income tax was also introduced in 1917 for the first time in the form of super tax.
Till 1916 there was no penalty for late filing of return except companies but in 1917 it was made obligatory
for all taxpayers whose income exceeds Rs. 2,000.
Super Tax on income over Rs. 50,000 on undistributed profit of corporation and other entities was introduced
through Super Tax Act 1917 which was subsequently modified into super tax Act 1920.
Taxation Before Partition:
The new Income Tax Ordinance which was written by an Australian Law practitioner and
Assistant Professor Mr. Lee Burns there have been so many criticism from different quarters of
Government, legal and professional experts, court of laws including the Supreme Court of Pakistan for
the poor drafting and typographical errors, inconsistencies and conceptual fallacies & contradictions
dichotomies. More than 2000 amendments so far have been made since inception.
Taxation Post / IRIS System
The income tax ordinance has therefore been enacted for the following three purposes
1. Levy and collection of tax on income
2. Redistribution of wealth through progressive taxation as it corrects excessive
inequality
3. As an instrument of fiscal policy i.e. by granting exemption to a particular income or
class of persons the intension is to promote a specific economic activity
For convenience and discovering the intention of legislature The Ordinance is divided into:
13 (Thirteen) Chapters.,
241 Sections, and
Twelve Schedules {which actually are details, has categories and tabulated policies}
How to Compare Budget In A Glance
The Tax-to-GDP Ratio is a ratio of a nation's tax revenue relative to its gross domestic
product (GDP), or the market value of goods and services a country produces. Some
countries aim to increase the tax-to-GDP ratio to address deficiencies in their budgets
A Budget Deficit occurs when expenses exceed revenue and indicate the financial
health of a country. The government generally uses the term budget deficit when
referring to spending rather than businesses or individuals. Accrued deficits form
national debt.
Revenue is the income generated from normal business operations and includes
discounts and deductions for returned merchandise. It is the top line or gross income
figure from which costs are subtracted to determine net income.
Sales Revenue formula. Revenue is also known as sales on the income statement.
Foreign exchange reserves are assets held on reserve by a central bank in foreign
currencies, which can include bonds, treasury bills and other government securities.
... Economists suggest that it's best to hold foreign exchange reserves in
a currency that is not directly connected to the country's own currency
A receipt that results in either reduction in government assets (sale of share,
disinvestment) or increase in some liability (government borrowings) is a capital
receipt. ... Most of the capital receipts of the government are debt receipts and are
shown as liabilities of the Government's balance sheet.
Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. ... Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a
nation's currency.
Public Debt It is debt issued by the national government in a foreign currency in order to
finance the issuing country's growth and development. ... Sovereign debt is also called
government debt, public debt, and national debt.
The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic
product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP
ratio reliably indicates that particular country’s ability to pay back its debts. Often
expressed as a percentage, this ratio can also be interpreted as the number of years
needed to pay back debt, if GDP is dedicated entirely to debt repayment.
A deficit is an amount by which a resource, especially money, falls short of what is
required. A deficit occurs when expenses exceed revenues, imports exceed exports, or
liabilities exceed assets. ... In other words, the outflow of money exceeds the inflow of
funds
An expenditure represents a payment with either cash or credit to purchase goods or
services. An expenditure is recorded at a single point in time (the time of purchase),
compared to an expense which is allocated or accrued over a period of time. This guide will
review the different types of expenditures used in accounting and finance.
Capital Expenditure. A company incurs a capital expenditure.
Revenue Expenditure. A revenue expenditure occurs when a company spends money on a
short-term benefit (i.e., less than 1 year).
Types of invoices may include a receipt, a bill of sale, debit note, or sales ... the invoice
number that is useful for internal and external reference.
A depositary receipt (DR) is a negotiable financial instrument issued by a bank to represent
a foreign company's publicly traded securities.
Difference
Between
Direct & Indirect Tax
.
Comparison Between Direct and Indirect Taxes
Basic of Direct Tax Indirect Tax
Comparison
Meaning Direct Tax is referred to as the Tax which is paid by Indirect tax is referred to as the tax
the person to the government to whom it is levied which is paid by Third Person on
and charged on the income and wealth of person behalf of Taxpayer to the
government i.e. charged indirectly
on Goods and Services
Burden The person on whom it is levied bears the burden The burden of tax is passed on/
shifted, and finally the End
consumer bears the burden
Types Income tax, Wealth tax, Property tax, Corporate Sales tax, VAT, Excise duty, Custom
tax, duties
Evasion Tax Evasion is possible Tax evasion is hardly possible
because it is included in the price of
Goods & Services
Inflation Direct tax helps in reducing inflation Indirect tax increase inflation
Levied On Person, Individuals, Companies, Firms etc Consumers of Goods & Services
Nature Progressive (More you earn more you pay the Tax) Regressive (Cause Inflation)
Direct & Indirect Tax – Concept & Approach
Direct Tax : Is paid at the end (i.e. it is the Last/ Final Tax ) the taxpayer after reconciling his Turnover / Expenses
calculates his Gross Income and pay IT accordingly it’s a direct contact between Tax Payer and Government . The
wealth is reconciled as per declared Net Income
In-direct Tax : Transitional tax or indirect tax is paid by a THIRD PERSON/ Indirectly it has different types (i)
Sales Tax (ii) FED (iii) Advance Transitional Withholding Taxes eg U/s 236 of the I.T O 2001
Sale Tax are of two categories GOODS and SERVICES: ST is subject to sales calculated on Gross eg A factory
after production pays / deposit sales tax at the time of shifting goods from factory to warehouse / wholesalers etc .
Sales Tax on Services after 18th Amendment rest with provinces
FED is subject to Manufacturing and Services as defined in Schedule-II of the FED Act 2005 it has narrow scope
then Sales Tax applicable on specified Goods and Services as per Act 2005 and collected ST mode No separate
Registration Number were issued ST No is used and ST return form is used
Production AND Manufacturing: Mfg is a process of converting raw material into finished product by using
various processes, machines and energy. it is a narrow term. Production is a process of converting inputs in to
outputs. It is a brooder term. every type of Manufacturing can be Production, but every Production is not a
Manufacturing.
Where indirect taxes are involved the authorities use to audit the Withholding Agents to reconcile and verify are they
depositing the taxes in government treasury or not in even in Sales Tax concept of withholding Agent prevail to
control fake invoices etc. FED is also collected / recovered and deposited indirectly
Income Tax
.
Income Tax Ordinance 2001 – Glance
Chapter Description Section
1 Preliminary 1–3
2 Charge To Tax 4–8
3 Tax on Taxable Income (Part-I To Part-X ) 9 -- 65E
Fifth Part-I Rules for the computation of the Profit and Gains from the Exploration and Production of
Petroleum
Part-II Rules for the computation of the profits and gains from the exploration and extraction of the
mineral deposits (other then petroleum)
Sixth Part-I Recognized Provident Funds
Seven Rules for the computation of the Profits & Gains of a Banking Company and Tax Payable thereon
Ninth Part-I Rules for the computation of the Tax payable on Profit and Gains of a Trader falling under
Sub-Section(1) of Section 99A
Part-II Rules for the computation of the Tax payable on Profit and Gains of a Traders falling under
Sub-Section(2) of Section 99A
Part-III General Provisions for the Traders under Part-I and Part-II
Tenth Rules for persons not Appearing in the Active Taxpayer List
Eleven Rules for computation of Profits & Gains of Builders & Developers & Taxpayers thereon
WHT Regime was introduced with a claims that it would simplify the taxation system,
taxpayers would be facilitated, discretionary powers of taxation officers would be removed to
curtail corruption. But neither The Mind set of Tax Officers nor any other objective was
achieved.
At present the taxation statute, strategy and system of Pakistan are short of international
standards, inequitable and not confirmative with the requirement of the country
Schedule Description
The First Schedule Omitted
The Second Schedule Omitted
{See{Clause (a)of sub section(2) of Section 3} Scope of Tax/ MRP on
The Third Schedule
Product/ Cosmetics
The Fourth Schedule Omitted
The Fifth Schedule {See Section 4} Zero Rating
The Sixth Schedule {See Section 13(1)} Exemption
The Seventh Schedule {Omitted}
The Eight Schedule {See Clause (aa) of Sub Section (2)of section 3} Scope of Tax
The Ninth Schedule {See Sub Section(3B) of section 3} Scope of Tax
The Tenth Schedule {See sub-section(1B) of section 3} Scope of Tax
The Eleventh
{See sub-section(7) of section 3} Scope of Tax
Schedule
{see Sub-section(2) of section 7A} Levy & Condition of tax on
The Twelfth Schedule
specified goods on value addition
Sales Tax Forms STR 1 To 27
Form Descrition
STR-1 Taxpayer Registration Form
STR-2 Omitted
STR-3 Taxpayer De-Registration Form
STR-4 Stock Declaaration Form
STR-5 Taxpayer Registration Certificate
STR-6 Compulsory Registration
Sales Tax and Federal Excise
STR-7 Return
1 Annex-A Domestic Purchase Invoices (DPI)
2 Annex-B Goods Declaration Imports (GDI)
3 Annex-C Domestic Sales Invoices (DSI)
4 Annex-D Goods Declaration - Exports (GDE)
5 Annex-E Federal Excises
6 Annex-E-1 Federal Excise Duty on Natural Gas
7 Annex-F Carry Forward Summary
8 Annex -G Sales Tax Arrears
9 Annex-H Stock Statement
10 Annex-I Debit & Credit Notes (DCN)
11 Annex-J Production Data
12 Annex-P Breakup Of Services Provided
Sales Tax Forms STR 1 To 27
Form Descrition
STR-8 Omitted
STR-9 Omitted
STR-10 Annual Sales Tax Return
STR-11 Part-I Sales Tax Payment Challan
Part-II Federal Excise Payment Challan
STR-12 Authorization for Zero Rated Supply
STR-13 Letter of Authorization
STR-14 Form of Demand Note
STR-15 Form of Master Register
Form of Notice to Sales Tax, Customs, Federal Excise and
STR-16 Income Tax Authorities
STR-17 Form of Notice of Recovery
STR-18 Form of Notice for Attachment and Recovery
STR-19 Form of Warrant of Attachment
STR-20 Application for Appointment as e-Intermediary
STR-21 Authorization for Exempt Supply
STR-22 Exempt Order for Exempt Supplies under grant in Aid
STR-23 Form of Appeal
STR-24 Format of Registers
STR-25 MPR (Appeals) for the month of (CIR Appeals)
STR-26 Stay Application Disposal Report
Application for Alternate Dispute Resolution under Section
STR-27 47A of the Sales Tax Act 1990
Sales Tax – Terminologies
Terminology Explanation
Input tax is the tax paid by registered person on the taxable goods and services purchased or acquired by him. This
Input Tax . includes the sales tax paid on imports. [Purchase Locally / Import/ Goods and on Services]
It is the sales tax charged and levied on the sale or supply of goods or services on which sales tax is livable. At the time
Output Tax of Sale @ 17%/ Reduce/ High Rate as well , Sales Tax (Liability ) = Output ST - Input ST
Further Tax Further tax at 3% is chargeable on all supplies made to unregistered persons under section 3 (1A) of the Sales Tax Act,
1990. If Reg then Charge ST @ 17% if not Reg then additionally Charge Further Tax 3%
Extra Tax
5% extra tax is chargeable on electricity and gas bills from all unregistered industrial and commercial consumers
Tax Fraction
If Know Total Value / 117 X 17 to find Sales Tax value from Total
Residual input tax is input tax on purchases used to make both Taxable and Exempt supplies. Basically the input
Residual Input Tax tax claimed in each period is only provisional. This is reviewed at the end of a longer period (which is normally
a tax year) eg If are buying Paper(Table) and making Books (Exempted ) and Calendar (Subject to ST )
Apportionment of input tax A taxpayer is not allowed to claim the input tax relating to exempt supplies.
Apportionment Of
Consequently, input tax needs to be apportioned between taxable and exempt. supplies in accordance with following
Input Tax
formula: [value of taxable supplies / (value of taxable + exempt supplies)] x residual. input tax
Monthly adjustment of input tax claimed by a registered person through above formula shall be treated as provisional
Provisional
adjustment and at the end of each financial year, the registered person shall make final adjustment on the basis of
Adjustment
taxable and exempt supplies made during the course of that year
Final Adjustment At the end of each financial year, the registered person shall make final adjustment on the basis of taxable and
exempt supplies made during the course of that year
3 % minimum value addition sales tax on all sorts of imported goods, from July 1, 2019, including raw materials and
Minimum Value
intermediary goods meant for use in an industrial process, which are subject to customs duty except duty slabs of 16
Addition
or 20 percent.
List Of Key Terms
2(5AB) “Cottage Industry” 2(25) Registered Person
Difference Between Wholesaler 2(27) Retail Price
and Distributor 2(28) Retailer
2(7) Distributor 2 (29)(A) Sales Tax
2(47) Wholesaler 2 (29) (AA) Sales Tax Account
2(48) Zero Rated Supply 2(33) Supply
2(8) Documents 2(33) (A) Supply Chain
2(9) Due Date 2(35) Taxable Activity
2(9)(A) e-Intermediary 2(36) Tax Fraction
2(11) Exempt Supply 2(37) Tax Fraud
2(12) Goods 2(40) Tax Invoice
2(13) Importer 2(41) Taxable Supply
2(14) Input Tax 2(43)(A) Tier-1 Retailer
2(20) Output Tax 2(46) Value Of Supply
2(21) Person
2(22) Prescribed
2(24) Registration Number
Basics
Of Finance
.
.
1 General Ledger A general Ledger is a Book or file that Bookkeepers use to record all
relevant account. Each account is two-columned T-shaped table
3 Trail Balance A Trail Balance is the accounting equating of the business laid out in
details
4 Cash Flow Cash flow is a financial statement that shows how changes in balance
sheet account and income affect cash and cash equivalents and breaks
the analysis down to operating investing and financing activities
5 Profit & Loss The main objective of P&L is to achieve the operating results of a
company at the end of accounting period P&l is a nominal accounting
having debit side and credit side
6 Trading Account Trading account is prepared mainly to know the profitability of Goods
bought or manufactured and sold by the business
7 Balance Sheet The purpose of Balance Sheet is to reveal the Financial Status of a
businesses as of a specific point in time.
.
Example
Registered &
Unregistered
.
Sales Tax
.
EXAMPLE OF Transactions (Not For Input Tax Output Tax ST Payable
S.No Pakistan) PKR ST ST to FBR
Importer has imported the goods and
1 submitted the Sales Tax at the time of
clearance paid @ 17% 65,000.00 11,050.00 11,050.00
at margin Rs 5000/-
3
Manufacturer Sells to FG Wholesaler 100,000.00 13,600.00 17,000.00 3,400.00
1
Importer's import Value 9,200.00 1,564.00 1,564.00
1,840.00
A Commercial Importer is require to Pay 17%
Normal ST Plus 3% Further Tax at Import Value
and NO Refund can be claimed by him of this
amount (Refere special procedure for commerial
importers)
Importer Sells to a Wholesaler of Raw Material 11,000.00 1,800.00 1,840.00 1,870.00 30.00
20%
5%
{Rs 11600+1972+348}
The additional manufacturing expenses are Rs
9000
22%
{13920+3000}
Profit 400.00
2%
FT @ 3% 789.60
Sales Tax – IF Supply Chain has Un-Registered Link
32,184.
Retailer Sells to End Consumer 00
2%
3% Further Tax
5% Extra Tax
Sales Tax
Zero Rated Supply Exempt Supply
Input Tax Input tax or zero rated supplies is Input tax on exempt
Credit refundable from FBR supplies is not adjustable
nor refundable
Registration ST Registration is required where a ST Registration is not
person wants to claim Refund required where a person
is engaged exclusively in
exempt supplies
THANK YOU
.