PAKISTAN NAVY ENGINEERING COLLEGE,

NATIONAL UNIVERSITY OF SCIENCES AND TECHNOLOGY

NUST PNEC

Project – Research Report

Taxation in Pakistan
Engineering Economics
ME – 325
Semester V

M. Murtaza Magsi ME – 1736

Okasha Zafar ME – 1706
Niranjan Lal ME – 1732

Instructor: Madam Eliya

Dated: 24th Dec 2021

PNEC, PNS JAUHER, HABIB REHMATULLAH ROAD, KARACHI 75350

 Table of Contents
Abstract 1

1. Introduction 2

1.1. Problem Statement 2

1.2. Background 2

2. Literature Review 4

3. Methodology 6

3.1. IOT Based Smart Agriculture system 6

3.2. Plants Health Monitor using Machine Learning 6

3.3. Block diagram of proposed system 7

3.4. Required Components 7

3.5. Proposed Outcomes 12

3.6. References 13

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4. Tax reform and latest amendments

4.1. Tax reforms in Pakistan

4.2. Corruption

4.3. Proposed reforms

4.4. Tax laws (third amendment) ordinance, 2021 [amendment ordinance]

5. Glossary

6. Citations and Bibliography

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Grammarly Anti-Plagiarism Proof

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Pre-Post SEO Anti-Plagiarism Proof

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 Defining Taxation
Taxation is the process or means by which the sovereign, through its
lawmaking body, raises income to defray the necessary expenses of the
government.

The Purpose of Taxation

Primary purpose

To provide funds or property with which to promote the general welfare of its
citizens and to enable it to finance its multifarious activities.

Secondary purposes

 To strengthen anemic enterprises by giving tax exemptions.

 To protect local industries against foreign competition through imposition of

high customs duties on imported goods.

 To reduce inequalities in wealth and income by imposing progressively

higher taxes.

 To prevent inflation by increasing taxes or ward off depression by

decreasing taxes.

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 The Theory and Basis of Taxation
Theory

 The existence of a government is necessary

 The government cannot function without a means to pay its expenses

 The government has the right to compel within reason its citizens and
property within its protection to contribute.

Basis

 Taxation is based on the reciprocal duties of protection and support

between the government and its people.

 Government receives taxes from the people which is used to perform

functions of government and other benefits.

 Benefit-received theory.

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 Basic principles of sound tax system
Fiscal adequacy

Equality or theoretical justice

Administrative feasibility

1. Fiscal adequacy

The source of government revenue should be efficient to demand the needs of

public expenditure.

Creating new taxes or new tax machinery or by merely changing the rates applicable to
existing taxes.

2. Equality or theoretical justice

The tax burden should be proportionate to the taxpayer's ability to pay.

Ability-to-pay principle

3. Administrative feasibility

The tax laws should be capable of convenient, just and effective administration.

Each tax should be:

- Clear and plain to the taxpayer.

- Capable of uniform enforcement

- Convenient as to time, place and manner of payment.

- Not unduly burdensome upon or discouraging to business activity.

8
 Politico-Legal Nature of taxation

To tax (from the Latin taxo; "I estimate")

Word Origin: 1250—1300;

To impose a financial charge or other levy upon Taxpayer (an individual or

legal entity) by a state or the functional equivalent of a state such that failure to
pay is punishable by law.

This shows that:

lt is inherent in sovereignty. Legislative

in character.

Subject to constitutional and inherent limitations.

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 The limitations of taxation

Inherent limitations - restrictions on the power exists from the very nature
of the power of taxation itself.

Constitutional limitations - restrictions in the exercise of the power of

taxation as expressly provided in the Constitution.

Constitutional limitations
 Due process

 Equal protection of the laws

 Rule of uniformity and equity in taxation

 Non-imprisonment for non payment of poll tax.

 Non-impairment of the obligations and contrcts

 Non-infringement of fundamental human rights and principal civil

liberties.

 Exemption for certain special bodies and establishments for example

religious charitable or educational entities, non-profits and NGOs
etcetera.

 Exemption of revenues and assets of non-stock, non-profit educational

institutions and donations for educational purposes from taxation.

 Concurrence by a majority of all members of the parliament for the

passage of a law granting any tax exemption.

 Power of the President to veto any particular item or items in a

revenue or tariff bill.

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 Inherent limitations
- Requirement that levy must be for a public purpose.

- Non-delegation of the legislative power to tax, except:

o Delegation to the President

o Delegation to local governments

o Delegation to administrative bodies

- Exemption from taxation of government entities.

- International comity and Territorial jurisdiction

Aspects of taxation
Levy - deals with the provisions of law which determines:
- The person or property to be taxed
- The sum or sums to be raised
- The rate of the tax
- The time and manner of levying, receiving and collecting the tax.

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 History of Taxation:
An ancient concept
Personal income taxation is amongst the oldest and one of the commonly
used instruments of fiscal policy. Besides partly fulfilling the government
expenditure needs, income tax is also aimed at reducing the inequality gap
in the society.

EGYPT

- Tax collectors were known as scribes

- Tax on cooking oil

GREECE
- War of Athenians imposed a tax referred to as eisphora
- No one was exempted

ROMAN EMPIRE 60 A.D.

- Tax on imports and exports called portoria

GREAT BRITAIN

- First tax assessed in England was during occupation by the

Roman Empire.

- Lady Godiva mainly remembered for a legend dating back to at least

the 13th century, in which she rode naked – covered only in her long
hair – through the streets of Coventry to gain a remission of the
oppressive taxation that her husband, Leofric, imposed on his tenants.

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13
History and Evolution of Tax Laws in Pakistan
In 1947, immediately after independence, Pakistan adopted the Income Tax
Act 1922 of the pre-partition sub-continent. This Act was in fact introduced by
the British in this region, who had a version called the general income tax
introduced through Income Tax Act 1860.

The Act of 1922 was based on the recommendations of All India Income Tax
Committee which had been given the task of studying the income tax
collections since the introduction of first general income tax in India. This
general tax was only imposed for a period of 5 years in order to compensate for
the mutiny of 1875.

However, after the great famine of 1876, this tax was revived the next year.
The Act II of 1886 then gave a scheme for income tax levy that continued in
later reforms. As the new forms of incomes emerged, Pakistan had to adopt a
new set of recommendations given by the then Central Board of Revenue in
the form of Income Tax Ordinance, 1979.

The promulgation of this Ordinance widened the tax net and expanded the tax
base. Similar need for revision was felt 21 years later when Income Tax
Ordinance, 2001 was introduced which is still in operation subject to annual
amendments through Finance Bill.

Under the present structure of income taxation, incomes are classified into:
(a) salary,
(b) income from property,
(c) income from business,
(d) capital gains, and
(e) income from other sources.

The salary category encompasses: wages and remuneration, including any

fringe benefits in money terms such as leave pay, commission, and
gratuity/work condition supplements. Deduction is allowed if salary
constitutes more than 50 percent of a person's overall earnings.

Zakat is deducted from the tax base. Zakat is a mandatory tax on all Muslim
citizens if they had any earnings during the year. It is charged at
2.5 percent on income (and specified asset holdings). See Zakat and Ushr
Ordinance, 1980.

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Agricultural incomes have been exempt from taxation. This exemption is also
applicable to any rent from agricultural land. However, more recently this type
of exemption has become a controversial issue and has been debated on various
occasions in the lower and upper houses of parliament.

Apart from the income tax there are four other types of direct taxes
namely: wealth tax, capital value tax, worker's welfare fund, and
corporate assets tax.

The main income tax parameters have been derived from the Income Tax
Ordinance, 2001. There are three different income categories general
income, salaried income and agriculture income, each having five different
bands where incomes are being taxed according to the prescribed schedule.

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 Our Journey: At a Glance
The Income Tax Act of 1922

The Income Tax Act of 1922 was prevalent during the British Raj
and was inherited by both the governments of India and Pakistan
upon independence and partition in 1947. This act initially formed
the basis of both countries' Income Tax codes.

The Income Tax Ordinance (1979)

The Income Tax Ordinance was the first law on Income Tax which
was promulgated in Pakistan from 28 June 1979 by the Government
of Pakistan.

The Income Tax Ordinance, 2001

To update the tax laws and bring the country's tax laws into line
with international standards, the Income Tax Ordinance 2001 was
promulgated on 13 September 2001. It became
effective from 1 July 2002.

IT rules 2002

IT (Income Tax) rules 2002 were promulgated by the Federal Board

of Revenue (FBR) on 1 July 2002 in exercise its powers granted
under section 237 of the Ordinance.

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 All Acts/Ordinances/Rules
A COMPREHENSIVE ENUMERATION OF ALL PAST AND
PRESENT TAX ACTS/ORDINANCES/POLICY

ACTS

 Customs Act, 1969

 The Sales Tax Act, 1990

 The Federal Excise Act, 2005

 The Tax Laws (Amendment) Act, 2020

 Finance Acts

 Benami Transactions (Prohibition) Act, 2017

 Anti-Money Laundering (Second Amendment) Act, 2020

 Anti-Terrorism (Third Amendment) Act, 2020

 Public Finance Management Act, 2019

 The Pakistan Single Window Act, 2021

 Right of Access to Information Act, 2017

 The Federal Board of Revenue Act, 2007 (Amended up to

30th June 2012)

 Voluntary Declaration of Domestic Assets Act, 2018

 Foreign Assets (Declaration and Repatriation) Act, 2018

 Income Tax Amendment Act, 2016

 Income Tax (Second Amendment) Act, 2016

 Income Tax (Third Amendment) Act, 2016

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ORDINANCES

 Income Tax Ordinance, 2001

 The Islamabad Capital Territory (Tax on Services)

Ordinance, 2001

 Tax Laws (Third Amendment) Ordinance, 2021

 Tax Laws (Second Amendment) Ordinance, 2021

 Tax Laws (Amendment) Ordinance, 2021

 The Tax Laws (Amendment) Ordinance No.1 of 2020

 Tax Laws (Second Amendment) Ordinance, 2019

 Tax Laws (Amendment) Ordinance, 2019

 Income Tax (Amendment) Ordinance, 2021

 Assets Declaration Ordinance, 2019

 Assets Declaration (Amendment) Ordinance 2019

 Voluntary Declaration of Domestic Assets Ordinance,

2018

 Foreign Assets (Declaration and Repatriation) Ordinance, 2018

 Income Tax (Amendment) Ordinance, 2018

 Income Tax Ordinance, 1979 - Old Laws

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RULES

 Income Tax Rules, 2002

 Customs Rules, 2001 (Updated Up to 09.03.2016)

 Sales Tax Rules 2006

 Federal Excise Rules 2005

 Benami Transactions (Prohibition) Rules, 2019

 FBR AML/CFT Regulations

 AML/CFT Sanction Rules, 2020

 Counter-Measures for High Risk Jurisdiction Rules, 2020

 Asset Declaration (Procedure and Conditions) Rules, 2019

 Sales Tax Special Procedures Rules, 2007

 Sales Tax Special Procedure (Withholding) Rules, 2007

 Recruitment Rules

 The Inland Revenue Reward Rules, 2021

 Inland Revenue Uniform Rules, 2021

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20
 Current Tax Regime

Taxation in Pakistan is a complex system of more than 70

unique taxes administered by at least 37 agencies of
the Government of Pakistan

Pakistan's current Taxation system is defined by Income Tax

Ordinance 2001 (for direct taxes) and Sales Tax Act 1990 (for
indirect taxes) and administrated by Federal Board of Revenue
(FBR).

Direct taxes / Income Taxes

Federal income taxes are administered by the Federal Board of

Revenue. The period from July 1 to June 30 is considered as a
normal tax year for Pakistan tax law purposes.

Corporate Income tax rates

Currently, the Corporate Income tax rate is 29% for tax year 2019
and onwards whereas the corporate tax rate is 35% for Banking
Industry for TY 2019.
In addition to Corporate Tax, there are other applicable income taxes
including Super Tax, Minimum Tax, and Tax on Undistributed
reserves.

Generally, manufacturing business is taxable at Corporate

Tax rate whereas trading business and commercial imports business
is taxable as "minimum tax". For example, 5.5% withholding
income tax is applicable on commercial imports and is payable at
the import stage. This 5.5% withholding tax will be considered as
minimum tax and Corporate Tax is also applicable, whichever is
higher will be the tax liability, on this business.
[3]

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Indirect taxes/ Sales Taxes
Indirect tax or more commonly knows as sales tax is also applicable
on supply of goods and provision of services. Under the 18th
amendment to the Constitution of Pakistan, the right to charge sales
tax on services has been given to the provincial governments where
as the right to charge sales tax on goods has been given to the federal
government.
Consequently, provincial revenue authorities were created to
manage and collect provincial sales tax in their respective
provinces.

Below is a summary of the applicable sales tax rates in

Pakistan:

- Sales tax on goods: 17%

- Sindh Sales tax on services: 13%
- Punjab Sales tax on services: 16%
- Baluchistan Sales tax on services: 15%
- Khyber Pakhtunkhwa (KPK) Sales tax on services: 15%
- Islamabad Capital Territory (Tax on Services): 16%

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Federal Government Taxes
» Income Tax
» Super Tax
» Wealth Tax
» Gift tax
» Turnover Tax
» Corporate Asset Tax
» Corporate Income Tax (A)
» Import Duties
» Import Surcharge
» Export Duties
» Iqra Surcharge
» Income Tax on imports
» Import Licence Fee
» Import Registration Fee
» Export Registration Fee
» Central Excise Duty
» Sales Tax on Manufactured goods
» Capital Value Tax
» Export development Surcharge
» Development Surcharge on Petroleum
» Gas Development Surcharge
» General Sales Tax Federal Education Cess
» Workers Participation Fund
» Workers Welfare Fund
» Estate Duty
» Zakat
» Ushr
» Oilseeds Development Cess on Companies
» Tobacco Cess
» Cotton Cess
» Development Surcharge on Electricity
» Textile Technology Cess
» Airport Tax
» Cargo throughout @ 2% charges freight charges and an
additional three 3% for immediate clearance at Quaid-e-
Azam Airport, according to an advertisement in daily,
Business Recorder, February 12, 1998.
» Capital Gain Tax

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Provincial Taxes
» Professional Tax
» Property Tax
» Vehicle Tax
» Stamp Duty
» Entertainment Tax
» Betterment Tax
» Social Security Contribution
» Explosive Licence Fee
» Provincial Education Cess
» Capital Gain Tax
» Punjab Airport Tax
» Provincial Excise Duty
» Karachi Dock Labor Board Cess
» Cess on Hotels
» Cotton Fees
» Paddy Development Cess
» Provincial Excise Duty
» Land Revenue Tax
» Employee Old Age Benefit Contribution
» Trade Tax on Jewelers, Garment shops imposed by
Baluchistan govt. in 1997-98 budget

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 PAKISTAN’S TAXATION SYSTEM
VARIOUS TYPES OF TAXES IN PAKISTAN

Federal taxes in Pakistan like most of the taxation systems in the

world are classified into two broad categories, viz., direct and indirect
taxes.

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 Direct Taxes

Direct taxes primarily comprise income tax, along with

supplementary role of wealth tax. For the purpose of the charge of tax
and the computation of total income, all income is classified under the
following heads:

» Salaries
» Interest on securities
» Income from property
» Income from business or professions
» Capital gains
» Income from other sources

Personal Tax

All individuals, unregistered firms, associations of persons, etc.,

are liable to tax, at the rates rending from 10 to 35 percent.

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27
 Tax on Companies

All public companies (other than banking companies) incorporated in Pakistan

are assessed for tax at corporate rate of 39%. However, the effective rate is
likely to differ on account of allowances and exemptions related to industry,
location, exports, etc.

Inter-Corporate Dividend Tax

Tax on the dividends received by a public company from a Pakistan

company is payable at the rate of 5% and at the rate of 15% in case
dividends are received by a foreign company.
Inter-corporate dividends declared or distributed by power generation
companies is subject to reduced rate of tax i.e., 7.5%.

Other companies are taxed at the rate of 20%. Dividends paid to all non-
company shareholders by the companies are subject to with holding tax of 10%
which is treated as a full and final discharge of tax liability in respect of this
source of income

Unilateral Relief
A person resident in Pakistan is entitled to a relief in tax on any income earned
abroad, if such income has already been subjected to tax outside Pakistan.
Proportionate relief is allowed on such income at an average rate of tax in
Pakistan or abroad, whichever is lower.

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 Customs

Goods imported and exported from Pakistan are liable to rates of

Customs duties as prescribed in Pakistan Customs Tariff.

Customs duties in the form of import duties and export duties

constitute about 37% of the total tax receipts.

The rate structure of customs duty is determined by a large

number of socio-economic factors.

However, the general scheme envisages higher rates on luxury items

as well as on less essential goods.

The import tariff has been given an industrial bias by keeping the
duties on industrial plants and machinery and raw material lower
than those on consumer goods.

Central Excise

Central Excise duties are leviable on a limited number of goods

produced or manufactured, and services provided or rendered in
Pakistan.

On most of the items Central Excise duty is charged on the basis

of value or retail price.

Some items are, however, chargeable to duty on the basis of

weight or quantity.

Classification of goods is done in accordance with the

Harmonized Commodity Description and Coding system
which is being used all over the world.

All exports are exempted from Central Excise Duty.

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31
 Heads of Income in Pakistan

Under the Ordinance, income is classified into the following five heads:

• Salary
• Income from property
• Income from business
• Capital gains
• Income from other sources

 Pakistan Taxation System consists of various heads and sub divisions with a
complex structure

 Understanding the system is essential in order to avoid any illegal act

 Business can also benefit in certain ways e.g. Subsidies and Refunds

 Understanding the system can help to reduce expenses

 Due to this complex structure many individuals avoid enrolling in Tax

system

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 Summary of Pakistan’s Tax Regime

SALIENT FEATURES OF PAKISTAN’S TAX SYSTEM

FEDERAL

Income Tax - Income Tax Ordinance, 2001

• Heavy Reliance (53%) on Withholding Tax
• Progressive Personal Income Tax (max rate: 20-25%)
• Corporate Income Tax (35% rate)
• Universal Self-Assessment Scheme

General Sales Tax - Sales Tax Act, 1990

• On Goods only
• VAT features
• Zero Rating, also of domestic sales of exporters
• Standard Rate of 17%
• Exemption to basic food items, agricultural inputs, medicines,
newsprint etc.

Custom Duty - Customs Act 1969

• Cascaded Tariff Structure (max rate: 25%; six slabs)
• Tariff Peaks in Automobiles and other luxury goods
• Share of Dutiable Imports (51%)

Excise Duties - Federal Excise Act 2005

• On few industries like cigarettes, beverages and cement
• On Services in VAT mode
• 1% Excise Duty across-the-board on manufacturing and
imports

PROVINCIAL

• AIT, Land Revenue, Stamp Duty, Motor Vehicle Tax, Property Tax,
Excises
• Sales Tax on Services

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34
 Tax Reforms in Pakistan

Taxes matter. Taxes affect citizens, economy of the country,

businesses, and delivery of public services. If a government is unable
to collect adequate taxes and use them effectively then the result is
economic instability and poor service delivery to the public.

Problems

According to the International Development Committee, in 2013

Pakistan had a lower-than-average tax take. Only 0.57% of Pakistanis,
or 768,000 people out of a population of 190 million pay income tax.

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 Corruption

According to a 2002 study, 99% of 256 respondents reported facing

corruption with regard to taxation. Furthermore, 32% of respondents
reported paying bribes to have their tax assessment lowered, and nearly
14% reported receiving fictitious tax assessments until a bribe was
paid.

Pakistan's taxation system has been receiving increased attention due

to its inability to collect enough revenues required for improving
lives of Pakistanis.

Pakistani government spends around 0.7 percent of GDP on health.

This is less than half of what other governments in lower middle-
income countries spend on health. On elementary education, Pakistan
spends less than 2 percent of GDP. This is also low when compared
with other regional countries.

One of the main reasons for low investment in social services is low
revenue collection. Total revenue collected by the Pakistani
Government, using tax and other measures, is around 13 percent of
GDP, which is the lowest among all emerging economies. No country
can afford basic government services with such low levels of revenue.

The revenue collected is not nearly sufficient to meet public

expenditure, which has averaged 20 percent of GDP over the past five
years. The result is high government borrowing that has led the country
into a 'debt-trap' (in 2012-13 the Federal Government paid over 60% of
its revenue as interest on loans). Expenditure beyond revenue has also
created economic imbalances, forcing Pakistan to repeatedly seek
assistance from the IMF. In its latest programme, the IMF has advised
the Pakistani government to reduce its budget deficit. Without radical
increases in revenue, this must mean spending cuts and further
deterioration in public service delivery.

The Government collects more than 80 percent of total revenue by

imposing taxes. This is around 10 percent of GDP, of which 9 percent
of GDP is collected through Federal Board of Revenue

36
(FBR). This is amongst the lowest rates of tax collection by Federal
Government in the World - excluding oil-producing countries. The tax
to GDP ratio has decreased from around 14 percent in the mid-eighties
to 10 percent. By contrast, China has increased its tax to GDP ratio
from 10 percent to over 20 percent since the early nineties.

The Constitution of Pakistan specifies the type of taxes that the

Federal and Provincial Governments can collect. For example, taxes
on individual incomes and on company profits are Federal taxes, while
taxes on property and agriculture are provincial taxes. At the
provincial level taxes are collected by provincial Excise and Taxation
departments (that collect taxes from urban areas), Boards of Revenue
(that largely collect taxes from rural areas), and Revenue Authority /
Boards in Sindh and Punjab (that were recently established to collect
sales tax on services).

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Provinces have struggled to increase their own tax revenue in recent
years. On average 0.4 percent of GDP is collected through provincial
taxes. The three main reasons for low revenue generation are:

1) Politicians find it difficult to justify increase in taxes to their

constituencies, primarily because of poor public services, and hence
there is lack of political will;

2) Provincial tax collection machinery - especially in rural areas -

lacks administrative skills; and

3) The 7th NFC Award increased the provinces' share of FBR's taxes
from 47 to 57.5 percent, with the rather mild condition that
provinces should work with Federal government to enhance
national taxes. This condition was never taken seriously.

Proposed Reforms
To achieve the targets, fundamental shifts in tax policy and tax
administration will be required. We highlight three key issues:

1. Exemptions, Concessions and Preferential treatment

For many years, different governments have allowed extensive tax

exemptions, concessions and preferential treatments.
Exemptions are provided in the tax laws, and through a legal
instrument called ‘Statutory Regulatory Order’ (SRO) issued by the
Federal Board of Revenue. To date FBR has issued 1,920 SROs.
Independent studies estimate revenue leakage at 3-4 percent of GDP
due to:

1) the amount of tax liability faced by taxpayers that is not paid on time;
and

2) revenue loss resulting from preferential treatment. Losses in 2012

are estimated at between Rs.600 and Rs.800 billion. If tax evasion
(also estimated at 3-4 percent of GDP) is added to this, the total loss
in the present taxation system is roughly equal to total government
borrowing each year.

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 As per Article 77 of the Constitution, Federal taxes will be levied by
an Act of Parliament. However, the tax laws grant the government
power to give exemptions, concessions and preferential treatment
without Parliamentary approval.

This is almost unheard of in other parliamentary systems, meaning

parliament can be over-ruled by bureaucrats and Ministers. There is not
even a requirement in the law to report the total value of these
exemptions to Parliament.

What is needed is a phasing out of these exemptions and

concessions. A number of exemptions were removed in the Budget
2013-14 and the government has agreed to review and remove all
exemptions through SROs within three years.

An exemption phase-out plan to be designed by the Government,

including necessary amendments in taxation laws. We also recommend
that that any proposed future exemptions and concessions should be
subject to Parliamentary approval so that public representatives have a
say in matters that affect tax revenue.

The value of exemptions and concessions should be calculated using

internationally recognised methods and reported in the budget each
year so that Parliament and the public am aware of the resulting
revenue losses.

2. Weak and Inefficient Tax Administration

Tax collection in Pakistan remains non-transparent with substantial

instances of rent- seeking. A 2004 World Bank study found that the
FBR suffered from deep institutional and management weaknesses. The
2005 ’Tax Administration Reform Project had largely failed to achieve
its objectives by 2012. Tax administration organisations (both federal
and provincial) have suffered from inefficient and fragmented
management, weak human resources, lack of supporting systems, and
excessive scope for discretion and rent seeking behaviour. Weak tax
administration results in high tax avoidance and opens avenues for
corruption as indicated in the figure below.

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 SDPI's Household Survey conducted in May 2013 reveals
taxpayers' lack of trust and perceived corruption in tax
administration as major reasons for not paying taxes.

1) Consideration should be given to full autonomy of FBR along

the lines of State Bank of Pakistan - having its own human
resource structure and management to create a professional
workforce - independent from the direct influence of the
Government,

2) FBR should be restructured to create functional expertise,

3) FBR should upload its medium-term strategic plans on its

website and monitor and report key performance indicators on a
regular basis, and

4) At the provincial level, newly formed provincial revenue

authorities should take over the functions of existing excise,
revenue and board of revenue departments and focus on
enhancing collection of agriculture tax and property taxes.

3. Narrow Tax Base

Very few Pakistanis pay income taxes. Out of a total workforce of 58

million less than 2 million are registered taxpayers, and last year only
0.7 million people actually paid income tax. This is roughly 2 people in
100 employed.

Of all the lawmakers in the National and Provincial Assemblies 61

percent did not pay taxes in the year they contested the elections. 51
percent of Senators did not pay tax. 62 percent of Cabinet Ministers
did not file tax returns.

Of the total income tax collected, more than 60 percent is collected

through 'withholding taxes'. Withholding tax is not a good
international practice. Pakistan's exceptionally high dependence on
the tax signifies an unusually high proportion of 'hard-to-tax’
individuals. Only 28 percent of income tax is collected through
deduction at source, or through voluntary

40
payments by taxpayers. The remaining 12 percent is collected
through tax inquiries by the tax officials.
Withholding tax - A system in which advance tax is collected at the time of a
transaction - e.g. when paying a mobile phone bill - and it is assumed that the person
paying has an income of more than Rs.400,000 per annum – the minimum amount above
which income tax is applicable

Pakistan ranks 162nd in the global 'paying taxes’ index compiled by

the World Bank. There are many reasons why people do not pay
income taxes. As per the survey, it takes an average of 560 hours
(highest in South-Asia) to comply with tax. Another reason is rent-
seeking behaviour of tax officials. SDPl's survey of informal sector
businesses in 2013 found that almost 22 percent do not intend to
register with the tax authorities, with a large proportion afraid of
intrusion by tax officials.

Another reason is weak enforcement. Hardly anyone gets convicted

for tax crimes. In 2011 the FBR announced that it had access to a list
of around 3 million people who do not pay taxes yet enjoy a lavish
lifestyle including frequent foreign visits, more than one bank
account, and number’ of vehicles and property registrations.

The lack of convictions, discretion for tax officials and lack of

documentation together make it easy for people to evade taxes.
Independent studies point to losses due to tax evasion of between 3-4
percent of GDP each year.

It is essential that Pakistan’s tax system should be seen as fair,

adequate, simple, transparent, and administratively easy to comply
with. People’s perceptions regarding revenue collecting authorities and
the Government that provides them with services are also important.
Tax avoidance must be made costly and compliance cheap.

If tax leakages (as identified above) are removed, an extra 6 - 8

percent of GDP of revenue can be realised. But Pakistan has a long
way to go to improve its tax system and until this is accomplished one
cannot expect much improvement in poverty and welfare at grassroots
level.

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Tax Laws (Third Amendment) Ordinance, 2021
[Amendment Ordinance]

PREAMBLE
On 15th September 2021, the Tax Laws (Third Amendment)
Ordinance, 2021 [Amendment Ordinance] was promulgated with
a view to bring in certain enforcement measures to broaden the tax
base, enforce tax compliance and enhance documentation of economy
by making it mandatory for companies to make payment through
digital means only. The Amendment Ordinance further provides
certain powers to NADRA to support FBR in achieving these ends,
though the probability of litigation of some of these powers cannot be
ruled out.

The main features of the Amendment Ordinance are the

enforcement measures including enhanced penalties and disconnection
of utilities for non-filers of income tax return as well as Tier-I retailers
who are not integrated with FBR's real time computerized system. The
Amendment Ordinance also makes it mandatory for all companies,
irrespective of their size, to make payment through 'digital means' only
in order for their expenses to qualify for tax admissibility. This implies
that it will no more suffice to pay through a cheque or pay-order. This
provision raised alarm in corporate circles as no time had been provided
to adapt to this amendment. However, in a recent press release issued
by FBR, we understand that 40 days grace period will be allowed to
companies to adopt digital means.

In principle, the Amendment Ordinance is effective from 15th

September 2021. Amendments brought through Amendment Ordinance
are required to be approved by the Parliament within 120 days unless it
is passed by the Parliament before that period or is extended only once
for a similar period by parliament otherwise it will expire. It will die
even before the end of its 120 days or 240 days' life the moment it will
be disapproved by either House.

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SPECIFIC PROVISIONS

Certain business expenditure payments through digital means made

mandatory for claiming deductibility in case of companies

The Amendment Ordinance has restricted the above provision of

law to non-corporate taxpayers only. For companies, a new section
21(1a) has been inserted in the Ordinance, 2001 whereby it has been
made mandatory to make payments through 'digital means' through the
'business bank account notified to FBR under section 114A of the
Ordinance and not just through banking channels.

It is pertinent to mention that Finance Act, 2021 had inserted a

new definition of "business bank account" to mean a bank account
utilized by the taxpayer for business transactions and which is
declared to the Commissioner through registration form prescribed
under section 181.

The term "digital means" has not been defined and can be
considered to exclude all traditional paper-based means including cross
cheques, pay orders etc., which may lead to litigation. As a result, there
is a need to clarify the term "digital means".

Option provided for Salary payments by all persons through

digital means

Salary payments exceeding Rs. 25,000 per month were required

to be paid through cross cheque or direct transfer to the employees'
bank account in order to be considered as tax admissible.

The Amendment Ordinance has inserted the term "digital means"

in section 21(m) to align the said section with section 21(1a) and
providing additional option to all persons for making

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salary payment through digital means apart from cross cheque or direct
transfer as stated above

Incoming foreign remittances other than through schedule banks

clarified to also enjoy immunity

In terms of section 111(4) of the Ordinance, 2001, any amount of

foreign exchange remitted from outside Pakistan through normal
banking channels not exceeding Rs. 5 million in a tax year that is
encashed into rupees by a scheduled bank and a certificate from such
bank is produced to that effect, enjoys immunity from income tax probe
with the added benefit of non- obligation to disclose the source.

Powers to enforce filing of return by blocking certain amenities

The Amendment Ordinance has introduced section 114B in the

Ordinance, 2001 empowering FBR to block any or all of the following
amenities by issuing Income Tax General Order in respect of persons
who are not appearing on ATL but are liable to file return of income:

(a) Disabling of Mobile Phones or Mobile Phone Sims;

(b) Discontinuance of electricity connection; and

(c) Discontinuance of gas connection.

Tax Broadening measures through National Database and

Registration Authority [NADRA]

The Amendment Ordinance has inserted a new section 175B,

whereby, NADRA shall share the records and any other information
with FBR for broadening of the tax base or carrying out the purpose
of Amendment Ordinance on its own motion or upon application by
FBR.

44
 The purpose of enacting section 175B is to enhance the tax base.
However, it appears that NADRA will step into FBR's shoes in terms of
determination of indicative taxable income and tax thereon.

Certain offences and penalties amended

The Amendment Ordinance has certain following changes in

provisions of section 182 relating to penalties.

Collection of additional tax through electricity bills from non-filer

professionals using domestic electricity connection

Section 235 of the Ordinance, 2001 deals with collection of tax

on electricity bills of an industrial, commercial or domestic consumer.
However, no tax shall be collected on electricity bill of domestic
consumer if appearing in ATL.

The Amendment Ordinance, in addition to above, has now

provided for collection of additional tax from professionals not
appearing on ATL and operating from residential premises having
domestic connection

Prosecution for unauthorized disclosure of information by public

servant

The Amendment Ordinance has omitted section 198

dealing with penalties in case of unauthorized disclosure of
information by a public servant.

Tax credit allowed to donors for donation to specified entities

Presently, a person is entitled to claim tax credit on

donation paid or property given as donation to entities as

45
mentioned in section 61 and the Thirteen Schedule to the
Ordinance, 2001.

Entities mentioned in Table 1 of clause (66) of Part I of the

Second Schedule to the Ordinance, 2001 are now being included in the
Thirteen Schedule, enabling the donor to claim tax credit on donation to
these entities as well.

Further, Pakistan mortgage refinance company limited has also

now been added to clause (66) exempting it from income tax.

Reduced rate of withholding tax and minimum tax extended to steel

sector distributors and retailers

A reduced rate of withholding tax and minimum tax of 0.25% is

prescribed for distributors and retailers of various sectors under clause
(24C) and 24(D) respectively of Part II of the Second Schedule to the
Ordinance, 2001; whereby, steel sector distributors and retailers are now
also eligible to reduced rate.

Exemption from levy of minimum tax for mobile phone

manufacturers

Clause (11 A) of Part IV to the Second Schedule to the

Ordinance, 2001 provides for exemption from payment of minimum tax
to certain taxpayers / businesses. The Amendment Ordinance has
inserted "mobile phone manufacturers engaged in the local
manufacturing of mobile phones" in the exemption list.

46
 Glossary
A brief explanation is required here to highlight the tax-related definitions

ALLOWANCE

That limit of income which is not taxed.

DEDUCTION

It is in fact reduction in tax liability allowed for salary earners.

EXEMPTIONS

Include incomes from agricultural activities and credit includes the special
provisions stated in Ordinance/tax rules

INCOME TAX BASICS

Before Registration and Filing of your Income Tax Return, it is recommended

that one should establish basic understanding regarding these processes.
Knowledge of basic concepts would not only ensure that the tasks are performed
easily but also in the prescribed manner.

TAXABLE INCOME

Taxable Income means Total Income reduced by donations qualifying

straight for deductions and certain deductible allowances.

TOTAL INCOME

Total Income is the aggregate of Income chargeable to Tax under each head of
Income.

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HEAD OF INCOME

Under the Income Tax Ordinance, 2001, all Income are broadly divided into
following five heads of Income:
 Salary;
 Income from property;
 Income from business;
 Capital gains; and
 Income from Other Sources

RESIDENT

 An individual is Resident for a Tax Year if the individual:

o Is present in Pakistan for a period of, or periods amounting in

aggregate to, one hundred and [eighty-three] days or more in the
tax year;

o Is present in Pakistan for a period of, or periods amounting in

aggregate to, one hundred and twenty days or more in the tax year
and, in the four years preceding the tax year, has been in Pakistan
for a period of, or periods amounting in aggregate to, three hundred
and sixty-five days or more; or

o Is an employee or official of the Federal Government or a

Provincial Government posted abroad in the Tax Year.

 An Association of Persons is Resident for a Tax Year if the control and

management of its affairs is situated wholly or partly in Pakistan at any
time in that year;

 A Company is Resident for a Tax Year if :

o It is incorporated or formed by or under any law in force in

Pakistan;

o The control and management of its affairs is situated wholly in

Pakistan at any time in the year; or

o It is a Provincial Government or a local Government in

Pakistan. 48
NON-RESIDENT

An Association of Persons, a Company and an Individual are Non-

Resident for a Tax Year if they are not Resident for that year.

PAKISTAN SOURCE INCOME

Is defined in section 101 of the Income Tax Ordinance, 2001, which caters for
Incomes under different heads and situations. Some of the common Pakistan
source Incomes are as under: -

 Salary received or receivable from any employment exercised in

Pakistan wherever paid;

 Salary paid by, or on behalf of, the Federal Government, a Provincial

Government, or a local Government in Pakistan, wherever the employment
is exercised;

 Dividend paid by Resident Company;

 Profit on debt paid by a Resident Person;

 Property or rental Income from the lease of immovable property in

Pakistan;

 Pension or annuity paid or payable by a Resident or permanent

establishment of a Non-Resident;.

FOREIGN SOURCE INCOME

Is any Income, which is not a Pakistan source Income.

PERSON

 An Individual;

 A Company or Association of Persons incorporated, formed,

organized or established in Pakistan or elsewhere;

 The Federal Government, a foreign government, a political

subdivision of a foreign government, or public international
organization

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COMPANY

 A Company as defined in the Companies Ordinance, 1984 (XLVII of

1984);

 A body corporate formed by or under any law in force in Pakistan;

 A modaraba;

 A body incorporated by or under the law of a country outside

Pakistan relating to incorporation of Companies;

 An amendment has been made through Finance Act, 2013 to enlarge the
scope of definition of a Company. Now as per Income Tax Ordinance, 2001
a company includes:

i. A co-operative society, a finance society or any other society;

ii. A non-profit organization;

iii. A trust, an entity or a body of persons established or constituted by or

under any law for the time being in force.

 A foreign association, whether incorporated or not, which the Board has,

by general or special order, declared to be a company for the purposes of
this Ordinance;

 A Provincial Government;

 A Local Government in Pakistan;

 A Small Company

ASSOCIATION OF PERSONS

Includes a 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), a Hindu
undivided family, any artificial juridical person and any body of persons
formed under a foreign law, but does not include a Company.

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TAX YEAR

Is a period of twelve months ending on 30th day of June i.e. the financial year
and is denoted by the calendar year in which the said date falls. For example,
tax year for the period of twelve months from July 01, 2017 to June 30, 2018
shall be denoted by calendar year 2018 and the period of twelve months from
July 01, 2018 to June 30, 2019 shall be denoted by calendar year 2019. It is
called Normal Tax Year.

SPECIAL TAX YEAR

Means any period of twelve months and is denoted by the calendar year
relevant to the Normal Tax Year in which closing date of the Special Tax Year
falls. For example, Tax Year for the period of twelve months from January 01,
2017 to December 31, 2017 shall be denoted by calendar year 2018 and the
period of twelve months from October 01, 2017 to September 30, 2018 shall be
denoted by calendar year 2019.

WEALTH STATEMENT

Wealth Statement as per law is compulsory, where declared income is based on

person's total assets and liabilities, total assets and liabilities of the person's
spouse, minor children and other dependents, assets transferred by the person to
any other person, the total expenditure incurred by the person, and the person's
spouse, minor children and other dependents along with the reconciliation
statement of wealth.

Every resident taxpayer being an individual having foreign income of not less
than ten thousand US dollars or having foreign assets with a value of not less
than one hundred thousand US dollars shall furnish a statement, known as
foreign income and assets statement.

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Citations and Bibliography
 Citations & Bibliography

Citations & Bibliography:

1. https://fbr.gov.pk/income-tax-basics/51147/61148

2. https://zallp.com/practice/domestic_tax_law/

3. https://en.wikipedia.org/wiki/Taxation_in_Pakistan

4. https://sdpi.org/

5. The World Bank, 2017, Pakistan Development Update: A Shared

Responsibility.

6. International Monetary Fund, 2016, Pakistan, Selected Issues Paper.

7. The World Bank, 2014, Study on Tax Expenditures in Pakistan.

8. International Monetary Fund, 2017, Fiscal Monitor: Tackling Inequality.

9. Ilzetzki, Ethan, and David Lagakos (2017). The Macroeconomic Benefits of

Tax Enforcement in Pakistan. MPRA Paper No. id: 12130.

10. Pakistan Economic and Social Review Volume 47, No. 1 (Summer
2009), pp. 1- 17 Vaqar Ahmed and Cathal O’Donoghue

44