TAXATION – CAF 6

OBJECTIVE, SYSTEM AND HISTORICAL BACKGROUND, CONSTITUTIONAL PROVISIONS AND ETHICS

CHAPTER 1 – SYSTEM OF TAXATION IN PAKISTAN

REFERENCE TOPIC DESCRIPTION EXPLANATION

Chapter 1 & 3 Definition of taxation It is a process for

➢ raising revenue, increasing revenue, collection of share of income by the Govt.
➢ uses for Govt. expenses, promotion of welfare and protection of its citizen

Chapter 1 & 3 Revenue / Primary objectives Primary objective of taxation system is collection of revenue:
i. to run and administer Government
ii. to implement its policies
iii. for fair distribution of wealth

Non-revenue objectives / National
objectives of social and economic
development
(Q1, Q5, Q7, Q8(b), Q11)
National objectives of social and economic development / Non-revenue objectives of taxation system are:
i. To strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives for growth; (agriculture,
NPOs, universities, institutions, power sector, IT sector etc.)
ii. To protect local industries against foreign competition by increasing local import taxes;
iii. As a bargaining tool in trade negotiations with other countries; (GSP Plus)
iv. To counter the effect of inflation or depression;
v. To reduce inequalities in the distribution of wealth;
vi. to promote science and invention, finance educational activities or maintain and improve the efficiency of local forces; (Tax
credits and rebates)
vii. To implement laws which eliminate discrimination among various elements in the markets/businesses; (Small company)
viii. To discourage certain undesirable sectors and activities; (Tobacco)
ix. To documentation of the economy;
x. To promote exports of the country;
xi. To promote investment in listed companies;
xii. To promote information technology specially software houses; and
xiii. To promote culture of payment of donation to only organized and regulated institutions.

Chapter 1 & 3 Taxes used as development of Following are the different ways by which taxes can be used for the development of country:
country i. The Government can declare some areas as free zone, industrial zone, and economic zone and provide tax incentives to such
areas. Such incentives could attract businessman/industrialist who may opt to establish business concerns/industrial units that
would bring employment, opportunities and overall prosperity in these under developed areas.
(Q2, Q10) ii. Taxing the rich at higher rates while taxing the low income groups at lower tax rates.
iii. Imposition of high custom duty rates on luxury items or items which are also manufactured in Pakistan. This promotes local
manufacturers and industry.
iv. Tax credits on charity/donations to promote welfare activities.
v. Tax exemptions to charity organization /educational institutions to promote these activities.
vi. Tax incentives for agro based projects to promote agriculture.

Chapter 1 & 3 Basics of tax laws / Canons of taxation i. Equity / Equality: proportional to income / applied equally to all areas
ii. Certainty: clear and certain / how much / what time / what form both taxpayer and government
iii. Convenience: of payment in time and manner e.g. collected at the time of generation of income
(Q4) iv. Economy: of collection & tax administration and should not discourage business i.e. cost of collection should be minimum
v. Productivity/ fiscal adequacy: yield enough revenue so that no fiscal / budgetary deficit
vi. Elasticity: in nature, capable of increase / decrease as per country’s requirements
vii. Flexibility: revise the tax structure, both in coverage and rates as per country’s requirements
viii. Simplicity: tax system should be simple, easy to understand and administer, not resulted in interpretations/ disputes
ix. Diversity: collect taxes from different sources, single source is uncertain & risky for Govt. and also unjust for a certain section
Chapter 1 Principles of levy of tax ➢ Benefit Principle: taxed in benefit proportion and directly paid by those who benefits from govt. projects / programs
[Q9(a)] ➢ Ability to pay Principle: based on ability / affordability in proportion to income / wealth (proportional/ progressive)
➢ Equal-distribution Principle: taxed at fixed % rate
Chapter 1 Structure of taxes ➢ Proportional tax/ flat tax: same % rate to all incomes
➢ Regressive tax: higher % for low income and vice versa
➢ Progressive tax: higher % for higher income and vice versa
Chapter 1 Characteristics of tax laws ➢ Enforced contribution / not voluntary
➢ Payable in cash / bank
➢ Proportionate in nature: higher income higher tax
➢ Levied on incomes, transactions or property
➢ Levied by the state of jurisdiction over the taxpayer
➢ Levied / enacted by law making body
➢ Levied for public purposes
➢ Fiscal adequacy (meet budgetary targets)
➢ Ability to pay principle (affordability)
➢ Administrative feasibility: clear, plain, capable of enforcement, convenient
➢ Consistent / compatible with Economic goals
Chapter 1 Forms of escape from taxation ➢ Shifting: passing burden from one person to another
i. Forward shifting: burden of tax transferred from seller to buyer
ii. Backward shifting: burden of tax transferred from buyer/ consumer to seller/ manufacturer
iii. Onward shifting: when tax is shifted multiple times either forward or backward
➢ Capitalization: reduction in the price of the tax object which the purchaser expects to be called upon to pay
➢ Transformation: the manufacturer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax
to the price of product, pays the tax and endeavors to recoup himself by improving his production process thereby turning out
his units at a lower cost.
➢ Tax exemptions: granting of immunity / freedom from obligation e.g. meet conditions, contract with Govt., public policy,
reciprocity
Chapter 1 Strategies of taxation management ➢ Tax avoidance: minimize tax liability via legal means & without violating law e.g. offshore companies, termination benefits
(Q6) ➢ Tax evasion: minimize tax liability via illegal means e.g. concealment of income
Chapter 1 Different types of taxation laws of ➢ Direct taxes
Pakistan i. Income tax: tax is paid by applying tax rate on the taxable income of the taxpayer. All income of the taxpayer is classified
under following heads: Salary, property, business, capital gains & other sources.
[Q3,Q8(a),Q9(b)] ii. Worker Welfare Fund: established for providing low cost housing and other amenities to the industrial labour.
iii. Capital value tax: Capital value tax on different transaction such as transfer of immoveable property, transfer of rights etc.
➢ Indirect taxes
i. Custom duty: Goods imported and exported from Pakistan are liable to rates of customs duties as prescribed in Pakistan
Custom Tariff.
ii. Federal excise duty: Generally, federal excise duty is charged on the basis of excise value or retail price. However, some
items are chargeable to duty on the basis of weight or quantity. All exports are liable to Zero per cent Federal Excise Duty.
iii. Sales tax: Sales tax is levied on
• Import of goods into Pakistan, payable by the importers;
• Supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him;
A registered person can make adjustment of tax paid at earlier stages against the tax payable by him on his supplies.
Chapter 1 Tax relief in cross border transactions ➢ Unilateral Relief (foreign tax credit on salary and other foreign incomes)
➢ Agreement for avoidance of double taxation and fiscal evasion with respect to taxes
Chapter 1 History of (Federal income) tax laws *1860 / *1886 / *1918 / *1922 / *1979 / *2001
in Pakistan