TAX

Definition A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes.

Taxation System
Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below: 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: 1. Salaries 2. Interest on securities; 3. Income from property; 4. Income from business or professions 5. Capital gains; and 6. Income from other sources. Personal Tax All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates ranking from 10 to 35 per cent. 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.

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Treatment of Dividend Income Dividend income received as below enjoys tax exemption. Unilateral Relief A person resident in Pakistan is entitled to a relief in tax on any income earned abroad. 2 . These agreements lay down the ceilings on tax rates applicable to different types of income arising in Pakistan.5%. Other companies are taxed at the rate of 20%. if such income has already been subjected to tax outside Pakistan. 2. whichever is lower. They also lay down some basic principles of taxation which cannot be modified unilaterally 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.e. 10. 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. However. provided it does not exceed Rs. The rate structure of customs duty is determined by a large number of socio-economic factors.. Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue. Agreement for avoidance of double taxation The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countries including almost all the developed countries of the world. 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. 1. 7.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. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad. the general scheme envisages higher rates on luxury items as well as on less essential goods. Dividend received by non-resident from the state enterprises Mutual Fund set by the Investment Corporation of Pakistan.000/-. Inetr-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.

however. it permits the adjustment of input charged in acquisition of fixed assets in twelve 3 .000 in any period during the last twelve month. Retailer Supplies will be exempted under Sr. and services provided or rendered in Pakistan. Person is liable to be Registered.000 in any period during the last twelve month or whose annual utility bills do not exceed Rs 600. payable by the importers. Value of supplies does not exceed Rs. · there is an in-built system of input tax adjustment and a registered person can make adjustment of tax paid at earlier stages against the tax payable by him on his supplies. 42 of the Sixth Schedule. All exports are exempted from Central Excise Duty Sales Tax · Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on: · all goods imported into Pakistan. LIABILITY EXEMPTION Supplies will be exempted under Sr. 42 of the Sixth Schedule. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding system which is being used all over the world. Some items are. 5. Further. PERSON Manufacturer CONDITION Value of Taxable supplies does not exceed Rs. Importer Wholesaler / Supplier including Dealer and Distributor As per newly inserted Section 8B of the Act. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies.000. On most of the items Central Excise duty is charged on the basis of value or retail price. Person is liable to be Registered. 5.000. chargeable to duty on the basis of weight or quantity.000 during the last 12 months. · all supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him. a registered person is restricted to claim adjustment of input tax to the extent of ninety percent of output tax for that tax period.Central Excise Central Excise duties are legible on a limited number of goods produced or manufactured.

In other cases. reporting. In case of a registered person whose accounts are subject to audit under the Companies Ordinance. Performing a High Quality Audit In today's ever changing global economy. incorporation. Our range of services includes:  Advice on analyzing investment prospects and mode of doing business in Pakistan including advising on the form of legal entity. executing. Feasibility studies including preparation of projected financial statements and project. Our audit approach focuses on understanding the clients’ business and control issues from the inside out. and audit testing procedures as well as a continuous assessment of our clients’ service performance. adjustment may be allowed as per specific notification issued by the Board. It combines a rigorous risk assessment. may be allowed on yearly basis in the second month following the end of the financial year of the registered person subject to the following condition namely: 1. the input tax inadmissible in excess of 90% of the output tax. competition and macro economic forces and designing strategies to manage it to your advantage. audit tool. Our Investment Advisory Service professionals specialize in identifying risks arising from regulation.equal monthly installments after the start of production of a new unit. Our audit specialists take the time to understand your business as well as the industry in which you operate. Audit System supports all phases of the audit process including planning. businesses need trusted advisers. Identification of suitable business partners and conducting due diligence. 2. Our state of the art. Sensitivity analysis Tariff and pricing studies      4 . The Board is empowered to exclude any person from the above purview. Investment Advisory Services All investment carries some risk and thus needs careful analysis and expert advice. diagnostic processes. Payback and DCF analysis including cost assessment and revenue projections. However. IRR. 1984 upon furnishing a statement along with annual audited accounts duly certified. whether it is in Pakistan and/or abroad. The key to be a successful investor is to achieve appropriate risk/return trade off by identification of risks that exist and their proactive management. Appraisal through NPV. obtaining of necessary permissions and help in dealing with local regulators.

In the United States. an earnings tax may be a financial hardship. prior to payment. while allowing employers to receive tax deductions for contributions to plan funds. Governments establish the tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.    5 . In order to reduce the burden on such schemes. by statute. tax-deferred. tax advantages may put pressure on pension schemes. People paid “under the table” may be able to evade paying any income taxes. many governments give privately funded retirement plans a tax advantaged status in order to encourage more people to contribute to such arrangements. or tax-free. regardless of the amount. the benefits paid to those receiving a pension come directly from the contributions of those of working age. For the in the middle class and lower classes. the contributions needed from working people will also rise proportionately. the rapid onset of Baby Boomer retirement is currently causing such a problem. If the proportion of pensioners to working-age people rises. For example. governments typically enact restrictions to discourage access to a pension fund's assets before retirement. Investment earnings in pension funds are almost universally excluded from income tax while accumulating. Some believe that income tax is a violation of a citizen's individual freedom. Governments often exclude such contributions from an employee's taxable income. Disadvantages of a tax  The collection of a tax on earnings is generally thought to more difficult than a consumption tax which would be levied at the point of sale. In countries in which average age of the population is increasing. tax-reduced.Tax advantage Tax advantage refers to the economic bonus which applies to certain accounts or investments that are. In return for a pension schemes tax advantaged status. Especially Libertarians argue that tax on earnings violates the individual’s right to decide how to use the money he earns. where benefits are funded on a pay-as-you-go basis. Payments to retirees and their beneficiaries also sometimes receive favorable tax treatment.

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