Direct & Indirect

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.

Publicani aremore influential group of people they become involved in malpractices,

such as fraudulent activities misuse of power for personal interest and crude
conduct.

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 That tax would later be repealed after 1816.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:

Income Tax Act VII of 1918:

Act VII of 1918 was introduced to recast the entire tax laws of 1886. New
concepts of total income Accrues, arises, or received has been introduced in the
law for the first time in British India to determine the rate. The levy was
imposed in respect of taxable income in the year of assessment based on
income of previous year.
There were six heads of income under the Income Tax Act 1918.
 Salary income
 Interest on securities
 Income from House Property
 Business Income
 Income from professional earning
 Other sources.
Taxation Before Partition:

Income Tax Act of 1922:

 The last Act continue enforce till 1922 which was replaced with The Income
Act XI of 1922 on recommendation of All India Income Tax committee
appointed in 1921. The Income Tax Act 1918 and Super Tax Act 1920 was
consolidated into Income Tax Act 1922.
 In the Income Tax Act 1922, Administration of Income Tax was shifted
from the hands of provincial Governments to the Central Government of
India. Another remarkable feature of this Act was that the rates were to be
enunciated by annual finance Acts instead of Basic enactments.
 This Act like Act of 1918 was applicable to all Incomes except Capital Gain,
Casual income and income in kind not convertible into money except rent free
accommodation. Tax was levied in the year of assessment on the basis of
earning of previous year.
 In Income Act 1922 set of loss against profit or gain under one head of income
against the other one was permitted provided that the loss was relating to the
same assessment year. This Act was amended as many as twenty times between
1922 and 1939
Taxation Before Partition:

Income Tax Act VII of 1939:

 The increasing need to finance the growing annual expenditure and fiscal deficit resulted from
Second World War, the British Government had to take steps to generate more tax revenues to
overcome the financial crisis. In 1935 an expert committee (AIYER) was formulated to
investigate the existing income tax system from all possible angles and to submit a report on
tax incident and efficiency of tax administration. The Act 1939 unleashed a new era in the
history of Indian income tax system. The Act No VII of 1939 was an amended Act
recommended by the committee in their report in 1936.
 In the new tax enactment the basic tax structure was carried from 1922 and ushered into a
new era introducing new concepts and definitions in the law;
 For the first time residential status was defined in the law, receipt basis was converted into
accrual basis. Carried forward of business loss was permitted for six years.
 Slab rates were introduced splitting income into slabs and progressive higher tax rates was
charged on successive slabs of income.
 In 1944, “Pay as You Earn” scheme was introduced. (This scheme which still continues in a
little different. shape requires an early depositing of tax by certain persons.)
 In 1945, distinction between “Earned” and “Unearned” income was made and some
concession was provided on the ‘Earned Income”
 Taxation After Partition Taxation In Pakistan
Promulgation of Income Tax Act, 1922:
 After Independence both the Governments of India and Pakistan in 1947, adopted the Income Tax
Act, 1922 as its official income tax laws. The provisions of the Act were extended to the whole of
Pakistan except the special areas.(eg FATA)

Formation of the Taxation Inquiry Committee:

 In June 1958 a special taxation inquiry committee was formed to review the existing income tax
system and submit recommendation to the CBR for amendments in current tax laws. The
Committee consists of officials and representatives of Trade and Commerce. The recommendations
of the committee were accepted and Income Tax Act, 1922, was amended accordingly.
Abolition of Super Tax:
 In 1959, Super Tax was abolished on income of all persons except registered firms and companies.
The rates of each slab were expressed as a percentage of income.
Change of Fiscal Year:
 In 1960 financial year was changed to commence on 1st July and end on 30 June. Previously, it
used to start on 1st April and end on 31st March.
Income Tax Committee:
 In 1961 the Central Board of Revenue (CBR) Introduction Income Tax Committee for
simplification of Income Tax laws 1922 and procedures.
Self-Assessment Scheme:
 In 1965 “Self-Assessment scheme was introduced”. • Before 1965, an assessment officer was
assessed the income and determined the tax liability of the person.
 Taxation After Partition:
Promulgation of the Income Tax Ordinance, 1979:
 Between 1922 and 1979 as many as 71 amendment were passed by the legislature. As a
result of these amendments the Act become a complicated law and difficulties arose in its
working. Keeping these difficulties in view, the government promulgated a new tax law
namely “Income Tax Ordinance, 1979” through finance ordinance June 28, 1979 and
included all the basic concepts of the repealed Act, so that the benefits of the whole case laws
built over the last 57 years is not rendered useless. The Ordinance replaced the Income Tax
Act 1922 and was enforced it effective from 1st July 1979.
Formation of National Tax Reform Commission:
 In 1985, the Federal Government formed a National Tax Reform Commission consist of
members of Senate and National Assembly, high government officials and renowned
industrialist. In 1985, the government set up a National Tax Reforms Commission to
suggest ways and means to improve the existing tax structure in the country.
Income Tax Survey 1999-2000:
 Under income tax ordinance 1979 the income tax survey was conducted in 1999-2000.
Purpose of the survey to critically review prevailing taxation structure and submit
recommendations to revamp the taxation system in according to the international
standards.
Introduction of Tax Amnesty Scheme:
 Many tax amnesty schemes were introduced under the Income Tax Ordinance, 1979. These
schemes were introduced to provide a chance to undeclared / black money holders, so that
they can change their undeclared/ black money into white money. (Separate Session
Required 1958, 1969, 1976, 1986, 1997, 1999, 2016, 2018 and Now 2019)
 Income Tax Ordinance 2001
Promulgation of Income Tax Ordinance, 2001:
After 22 years of the promulgation of the Income Tax Ordinance, 1979, there was continuous criticism
from the major foreign donors IMF and world Bank that the existing Income Tax laws of the country is
not aligned with the international standards.
The Government of Pakistan on the dictation of IMF introduced a new income tax law namely,
“The Income Tax Ordinance, 2001” as a precondition of the loan program with IMF.
The Ordinance was promulgated on September 13, 2001 by the Government of General Pervez
Musharraf. It was published in the Extraordinary Gazette of Pakistan at pages bearing Nos. 969 to
1217. The Income Tax Ordinance, 2001: to overrides other laws enforceable in Pakistan.
The Federal Government, vide its notification No. S.R.O. 381 (1)/ 2002, dated 15th June, 2002,
announced that the Income Tax Ordinance, 2001 shall came into force on the first day of July,
2002.

Income Tax Rules 2002:

The FBR under the authority of section 237 of the Income Tax Ordinance, 2001 made the Income Tax
Rules, 2002. These rules were published on July 1, 2002 in Extraordinary Gazette of Pakistan at pages
1819 to 1966.

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

(a) Globalization, (b) Emerging markets and (c) Increased regulation

are transforming the Global Tax framework and presenting complex
challenges around the world. Its mandatory to Meet OECD & IRIS
requirements.

The OECD (Organization For Economic Cooperation and Development)

has been active in facilitating automatic exchange of information. So far
116 Countries are signatories and ratified by 99 countries.
Other AEOI (Automatic Exchange Of Information) FATF (Financial
Action Task Force), FATCA (The Foreign Account Tax Compliance Act )
and CRS (Common Reporting Standard), ETR (Exchange on Tax Rulings)
present significant structural changes to Improve Global Tax Compliance.
 Taxation Post / IRIS System
The main purpose of the Income Tax Ordinance is to levy and collect tax on income of a person.
Ifthere be no Finance Act the income tax act remains dormant statute but with the passing of
Finance Act it comes into activity
Every enactment has a purpose. The legislature decides to promulgate and enforce it.
There always remains continuous battle between FBR and Tax payer for determination of its
quantum as well as scope of chargeability.

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

Budget 2018-19 (PKR Bn) Revised 2017-18 (PKR Bn)

Total Revenue 4,888 4,147
Non-Tax Revenue 772 845
Gross Revenue receipts 5,660 4,992
Public Account Net Receipt 127 69
Total Receipts 5,787 5,061
Less: Provincial Share in Federal 2,590 2,316
Taxes
Net Revenue Receipts 3,197 2,745
Expenditure Current 5,023 4,450
Expenditure Development 1.152 1,063
Deficit (2,978) (2,768)
Capital Receipts (559) (678)
Credit From Banking Sector (1,015) (586)
External Receipts (1,118) (1,230)
Privatization Proceeds 0 0
Cash Balance Built up by Provinces (286) (274)
(2,978) (2,768)
Key Pointers To Monitor Budget

Real GDP Growth 6.2%

Tax To GDP Ratio 13.8%
Budget Deficit 4.9%
FBR Revenue PKR 4.4 Tn
Forex Reserves $15 Bn
Inflation < 6%
Net Public Debt to GDP Ratio 63.2%
 The real economic growth, or real GDP growth rate, measures economic growth as it
relates to the gross domestic product (GDP) from one period to another, adjusted for
inflation, and expressed in real terms as opposed to nominal terms.

 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

4 Common Rule (Part-I To Part-III) 66 – 79

5 Provisions Governing Persons (Part-I To Part-VA) 80 -- 98C

6 Special Industries (Part-I To Part-II) 99 -- 100C

7 International (Part-I To Part-IV) 101 – 107

8 Anti Avoidance 108 – 112

9 Minimum Tax 113 -- 113C
10 Procedures (Part-I To Part-XIII) 114 -- 206A

11 Administration (Part-I To Part-III) 206 – 231

12 Transitional Advance Tax Provisions 231A – 236Y

13 Miscellaneous 237 – 241
Income Tax Ordinance 2001 – Schedule [Actually these have
Schedule
details/ categories andPart
have tabulated policies] Description
First Part-I Rate Of Tax

Part-II Rates Of Advance Tax

Part-IIA Collection Of Tax From Distributors, Dealers & Wholesalers

Part-III Deduction of Tax At Source

Part-IV Deduction Or Collection of Advance Tax
Second Part-I Exemption From Total Income
Part-II Reduction In Tax Rates
Part-III Reduction In Tax Liability
Part-IV Exemption From Specific Provisions
Third Part-I Depreciation
Part-II Initial and First Year Allowances
Part-III Pre-Commencement Expenditure
Fourth Rules for the computation of the Profits & Gains of Insurance
Business
Income Tax Ordinance 2001 – Schedule [Actually these have
Partand have tabulated policies]
details/ categories Description

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

Part-II Approved Superannuation Funds

Part-III Approved Gratuity Funds

Seven Rules for the computation of the Profits & Gains of a Banking Company and Tax Payable thereon

Eighth Rules for the computation of capital gains on listed securities

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

Twelfth Part 1-III PCT Codes

Federal Board Of
Revenue (FBR)
fbr.gov.pk
IRIS
Income Tax Return On IRIS
 Impact Of Withholding Regime On Businesses
Modern WHT System was developed by British economist Milton Freidman. In Pakistan it is the major
source of revenue collection. The share of WHT in Direct taxes is around 67.1%. But the Tax authorities
focus generating of revenue from existing taxpayers and collection through Withholding agents
The law of WHT initially Incorporatedin IT Act 1886, there were only two Heads. In ITO 1979 has 25
provisions of WHT. The provisions of WHT are increased through finance bills every year. Now the WHT
Regime raised to 50 Sources/Heads. Out of which only 9 are major they contribute over 85% of the total
WHT collection this may suggest to abolish other WHT provisions for simplicity.
Why WHT ? Governments have written laws which require taxes to be paid before the money can be
spent for any other purpose. This ensures that the taxes will be paid first and on time, rather than taking
the risk and the possibility that the tax-payer might default at the time when tax falls due as Arrears.
Under the ordinance its obligatory to collect and deduct tax at source by the Withholding Agent at the
time when an economic activity take place.
To government WHTs provides revenue regularly throughout the year for its expenditure and operations.
and To the taxpayers it provides an opportunity to discharge their obligations in manageable installments.
The WHT Regime provides Final taxor Adjustable tax against tax liability. In case of Final Tax it provides
immunity from probing of Information and Audits.
WHT Regime has created number of problems it carries substantial compliance cost, requires human
resources, IT infrastructure and other overheads to manage the collection mechanism and deposits to
FBR. Annual Audits is also a concern
WHT regime is getting popularity in revenue generation because it shifts the responsibility for tax
collection on withholding agents (Tax Payers). It is collected/ deducted by cost free machinery i.e. Tax
payers
WHT requires knowledge, systematic study for their compliance. Non compliance shall attract sever
penalties
 Impact Of Withholding Regime On Businesses
In recent years, globalization has forced many countries to alter their economies to harmonize
international tax polices and alignment thereof with new trade and investment policies
embodied in the free trade agreements.
Tax policiescan not be isolated from the international economies. The concept of “Hang
Together” is more relevant today than ever before. Countries can neither close their borders
nor their economies.
In view ofsuch competitive environment there was a need to have an organization to monitor
and manage the system of Withholding Tax Regime, therefore The Directorate General of
Withholding Taxes was created through Finance Act of 2008 under section 230A of the
Income Tax Ordinance 2001.

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

The provisions of WHT has become complicated as a result of introducing extensive

amendments in WHT Regime through SRO’s, Circulars etc it has become very difficult to have
track on the subject.
The SRO culture, discretionary powers of the field officers, protection to the influential tax
evaders and exemptions from tax to influential class are major challenges.
Chapter III Part-II Head Of Income Salary

Section 12, 13 & 14

 Section 12 SALARY (from sub section 1 To 8)
What is SALARY: Any Pay, Wages or Other Remuneration including
Leave pay, Overtime, Bonus, Commission, Fees, Gratuity, Provident
fund, Termination compensation, Work condition
supplements(unpleasant, dangerous working condition), any Perquisite
(whether convertible to money or not), Allowances, Arrears and how it
is calculated (A/B% ), Expenditure incurred by an employee.
 Section 13 Value of Perquisites (from subsection 1 To 14 ):
Motor vehicle, Servants housekeeper, driver, cook, gardener, other
domestic assistant, Utilities, Loan without interest, waived liability/
owing, Property accommodation etc.
 Section 14 Employee Share Schemes (from subsection 1 To 5):
Right to acquire Shares, option to acquire share and the amount
chargeable to tax includes gain made on disposal formula A-B
 Chapter III Part-III
Head Of
Income From Property
Section 15, 15A & 16
 Section 15 (from sub section 1 To 7)
Rent received or receivable, explanation of rent, Rent with plant & machinery
is not Rent, Amenities, utilities or any other services connected with renting of
building falls “Income from other source”, if rent is less than fair market will
be treated as if he derived fair market rent
 Section 15A Deductions in Computing (from subsection 1 To 7 ):
R&M 1/5th allowed, Insurance against risk of damage or destruction, Local Tax,
Property Tax, Ground Rent, Mortgage on borrowed money, House Building
Finance Corporation or any scheduled Bank, Irrecoverable unpaid Rent etc.
 Section 16 Non adjustable amount received in relation to building(from
subsection 1 To 3):
Any amount received which is not adjustable against the rent payable by the
tenant the amount will be charged to Tax, Succeeding Tenant/ Succeeding
Tenant
Chapter III Part-IV Head Of Income: Income From Business
Section 18 to 36
 Section 18 Income From Business (from sub section 1 To 8)
 Section 19 Speculation Business (1 to 2)
 Section 20 Deduction in Computing Income from Business ( 1 to 3)
 Section 21 Deduction Not Allowed
 Section 22 Depreciation (1 to 14)
 Section 23 Initial Allowance (1 to 5)
 Section 23A First Year Allowance
 Section 23 B Accelerated Depreciation to Alternate Energy Projects
 Section 24 Intangibles ( 1 to 11)
 Section 25 Pre-Commencement Expenditure ( 1 to 5)
 Section 26 Scientific Research Expenditure (1 to 2)
 Section 27 Employee Training & Facilities
 Section 28 Profit on Debt, Financial cost & lease payments
 Section 29 Bad debts
 Section 29 A Provision regarding Consumer Loans
 Section 30 Profit on Non-performing debts of Banking Company/ Financial Institution
 Section 31 Transfer to Participatory Reserve
 Section 32 Method of Accounting
 Section 33 Cash Basis Accounting
 Section 34 Accrual Basis Accounting
 Section 35 Stock In Trade
 Section 36 Long Term Contracts
Chapter III Part-V Head Of Income: Income From Capital Gains
Section 37 to 38
 Section 37 : Capital Gains (1 to 5) Gain on disposal of immovable
property subject to holding period from less than one year to four years
where A is the amount of gain
[A (<1)
Ax3/4 (>1 <2)
Ax1/2 (>2<3)
Ax1/4(>3 <4)
Ax0(>4 years]
Section 37A: Capital Gain on Sale of Securities {Share of Public company]
vouchers of Pakistan Telecommunication Corporation, Modaraba
Certificates, Instruments of Redeemable Capital(Debt Securities) eg TFC,
Sukuk (sharia Compliant Bonds), Registered Bonds, Commercial Papers,
Participation Terms Certificates (PTCs), Federal Investment Bonds (FIB),
Pakistan Investment Bonds (PIBs), Foreign Currency Bonds, Government
Papers, Municipal Bonds, Infrastructure Bonds, All Kinds of Debt
Instruments
Section 38: Deduction of losses in Computing the Amount Chargeable under
the head “Capital Gains” (1 to 3) Deduction shall be allowed for any loss
on disposal of capital assets not allowed on Panting, sculpture, drawings,
art work, Jewelry, Manuscripts, Postage Stamp, Coin or Madallion, Antiques
Chapter III Part-IV Head Of Income:
Income From Other Sources
Section 39 to 40
 Section 39: Income from Other Sources: Dividend,
Royalty, Profit on Debt, Additional Payment on
delayed Refund, Ground Rent, Rent From Sub-
Lease, Income from Lease of Building with Plant Or
Machinery, Income from provision off Amenities,
Utilities, Annuity OR Pension, Prize bond, Winning
from Raffle Lottery, Quiz, Fair Market value of any
benefit convertible or not in Money.

 Deduction In Computation of Income Chargeable

Under Income From Other Sources (1 to 6) Zakat,
Depreciation on Plant & Machinery or Building etc
The First Schedule Part-1 Rate of Tax on
Salary
 Sales Tax .

Concepts & Practice

Sales Tax – Concepts
You Need To Understand :
 Sales Tax Act 1990 [Act No III 1951 as Amended by Act VII of 1990]
 Sales Tax Rules 2006 [SRO No 555(I)/2006]
 Important SROs / Notifications
 Forms STR-1 To STR-27
 Exemption Of Supplies Against International Tender For Earthquake Rehabilitation Rules
2006 [SRO 274(1)/2006]
 Export Oriented Units and Small and Medium Enterprises Rules 2008 [SRO 327(1)/2008]
 Appendix 1 To IX {Bond}
 Repayment of Sales Tax to Person Registered in Azad Jammu & Kashmir Rules 2008 [SRO
1295(1)/2008]
 Appellate Tribunal Inland Revenue Rules 2010 [SRO 948(1)/2010]
 Four Schedules 1 to IV
 Four Forms A, B, C and D
 Refund Claims of Recognized Agricultural Tractor Manufacturers Rules 2012 [SRO
363(1)/2012]
 Inland Revenue Reward Rules 2016 [SRO 398(1)/2016]
 Sales Tax Act 1990
10 Chapters, 76 Sections, 12 Schedules Act No III OF 1951 As Amended By Act VII OF
1990, Its An Act to consolidate and amend the law relating to the levy of a Tax on Sales
[Importation, Exportation, Production, Manufacture or Consumption] of Goods

Chapter Description Section

Chapter -I Preliminary 1 -2
Chapter -II Scope & Payment Of Tax 3 - 13
Chapter-III Registration 14 - 21A
Chapter-IV Book Keeping & Invoicing Requirements 22 - 25AA
Chapter-V Returns 26 - 29
Chapter-VI Appointment Of Officers of Sales Tax & Their Powers 30 - 32AA
Chapter-VII Offences & Penalties 33 - 42
Chapter-VIII Appeals 43 - 47A
Chapter VIII-A Settlement of Cases Omitted
Chapter-IX Recovery of Arrears 48
Chapter-X Miscellaneous 49 - 76
 Sales Tax Act 1990 Schedules [Actually these have details/ categories and have tabulated
policies]

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

Excess Input Tax

Possibility that More Purchases and low sales then Input Tax will be high should we claim refund OR Carry Forward C/F

Excess Tax Collection

If collect by mistake (a) Return to FBR (b) Customer

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”
Difference Between Wholesaler
and Distributor
2(7) Distributor
2(47) Wholesaler
2(48) Zero Rated Supply
2(8) Documents
2(9) Due Date
2(9)(A) e-Intermediary
2(11) Exempt Supply
2(12) Goods
2(13) Importer
2(14) Input Tax
2(20) Output Tax
2(21) Person
2(22) Prescribed
2(24) Registration Number
2(25) Registered Person
2(27) Retail Price
2(28) Retailer
2 (29)(A) Sales Tax
2 (29) (AA) Sales Tax Account
2(33) Supply
2(33) (A) Supply Chain
2(35) Taxable Activity
2(36) Tax Fraction
2(37) Tax Fraud
2(40) Tax Invoice
2(41) Taxable Supply
2(43)(A) Tier-1 Retailer
2(46) Value Of Supply
 Basics
Of Finance
.
 .

S.No Accounting Tools Description

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

2 General Journal General Journal is a daybook or Journal Book used to record

transactions

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

Importer Sells to Raw Material Wholesaler 75,000.00 11,050.00 12,750.00 1,700.00

Margin / Profit 10,000.00

2
Raw Material Wholesaler bought 75,000.00 12,750.00

Sells To Manufacturer 80,000.00 12,750.00 13,600.00 850.00

at margin Rs 5000/-
3
Manufacturer Sells to FG Wholesaler 100,000.00 13,600.00 17,000.00 3,400.00

Margin / Profit 20,000.00

4 FG Wholesaler bought Rs 100,000 and
sells at 110,000.00 17,000.00 18,700.00 1,700.00
5 Retailer bought Rs 110,000 and Sells End
Consumer 115,000.00 18,700.00 19,550.00 850.00
TOTAL Sales Tax FBR
Received 19,550
 If Supply Chain has Un-Registered Link
Output Tax
S.No Transactions PKR Profit (PKR) Input Tax (PKR) Payable to FBR

1
Importer's import Value 9,200.00 1,564.00 1,564.00

Furter Tax @3% 276.00

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%

2 Wholesaler of Raw materail buys at Rs 11,000 +

1870 Input Tax and Sells to an Un-Registered Mfg 11,600.00 600.00 1,870.00 1,972.00 102.00

5%

Further Tax @ 3% 348.00

 Sales Tax – IF Supply Chain has Un-Registered Link
Output Tax
S.No Transactions PKR Profit (PKR) Input Tax (PKR) Payable to FBR
3
Manufacturer buys at Rs 13,920.00

{Rs 11600+1972+348}
The additional manufacturing expenses are Rs
9000

Profit 3,000.00 NIL NIL NIL

22%

Mfg Sells to FG Wholesaler 25,920.00

{13920+3000}

Wholesaler of FG buys at Rs 259,20/- and sells to

4
an Un-Registered Retailer 26,320.00 NIL 4,474.40 4,474.40

Profit 400.00

2%

FT @ 3% 789.60
 Sales Tax – IF Supply Chain has Un-Registered Link

Output Tax Payable to

S.No Transactions PKR Profit (PKR) Input Tax (PKR) FBR
5 Retailer buys at

{26320 + 5264 = 31584}

32,184.
Retailer Sells to End Consumer 00

Profit 600.00 NIL NIL NIL

2%

Total ST FBR Received

(If any of the Channel is Un-Registered) 7,584.00
 Sales Tax - Extra Tax
on Electric/ Gas Bills
Registered Person Unregistered Person

Active Inactive 17% Normal ST

3% Further Tax

17% Normal 17% Normal ST 5% Extra Tax

ST

5% Extra Tax
Sales Tax
Zero Rated Supply Exempt Supply

Definition Zero Rated supply means a taxable Exempt supply means a

supply which is chargeable to ST @ 0% supply which is not
chargeable to ST
Goods Goods exported or goods listed in 5th Goods specified by FBR
Schedule through notifications and
goods listed in 6th
Schedule

Invoice Tax invoice shall be raised and the ST No ST invoice is required

shall be charged at 0%

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
.