SYSTEM OF TAXATION

IN PAKISTAN
Chapter # 1
Contents
◦ Definition of taxation
◦ Objectives of Taxation Laws
◦ Basics of tax laws
◦ Principles for levy of tax
◦ Forms of escape from taxation
◦ Strategies of taxation management
◦ Examples
◦ Different Taxation Laws of Pakistan
◦ History of Tax Laws in Pakistan
Learning Outcomes
By the end of unit, the students will be able:
◦ To comprehend the main objectives of Taxation

◦ To understand the implication of direct and indirect taxation

◦ To state the history of taxation in the sub-continent

Definition of taxation
Taxation is defined in many ways, common definition is as under:

 It is the process by which the sovereign, through its law making body, raises revenues in order to use it
for expenses of government.

 It is a means for the government in increasing its revenue under the authority of the law, purposely used
to promote welfare and protection of its citizenry.

 It is the collection of the share of individual and organizational income by a government under the
authority of the law.
Objectives of Taxation Laws
Tax Law Objective
Tax on salary income Revenue Collection
Any amount transferred otherwise than banking channel Documentation of economy
will be deemed as income
Tax on moveable assets of the taxpayers Fair distribution of wealth
Higher taxes on import of luxury goods Reduction in imports of unnecessary goods and create
good balance of trade
Allowability of expenditure of research & Promotion of research &
developments developments

Zero rating on Exports, reduced rates of taxes on imports Promotion of Exports

Tax credit on Donations to approved institutions To promote culture of payment of donation to only
organized and regulated institutions

Tax credit on investments Promote investments in listed companies

Tax exemptions to software exports Promote software Industry
Basics of tax laws
 Adam Smith’s in his famous book “Wealth of Nations” has elaborated following canons of Taxation:
 Equality:
Tax payments should be proportional to income and applied equally to all concerned areas
 Certainty:
Tax liabilities should be clear and certain
 Convenience of payment:
Taxes should be collected at a time and in a manner convenient for taxpayer
 Economy of collection:
Taxes should not be expensive to collect and should not discourage business.
Principles for levy of tax
 The Benefit Principle

 The Ability-to-Pay Principle

 The Equal-Distribution Principle

Forms of escape from taxation
 
Shifting
It is one way of passing the burden of tax from one person to another.
For example: Taxes paid by the manufacturer may be shifted to the consumer by adding the amount of the tax paid to the price of the
product.
Kinds of Shifting
Forward shifting occurs when the burden of the tax is transferred from a factor of the production to the factor of distribution.
Backward shifting occurs when the burden of tax is transferred from the consumer to the producer or manufacturer.
Onward shifting occurs when tax is shifted two or more times either forward or backward.
Capitalization
This refers to the reduction in the price of the tax object to the capitalized value of future taxes which the purchaser expects to be called upon
to pay.
For example: A reduction made by the seller on the price of the real estate, in anticipation of the future tax to be shouldered by the future
buyer.
Tax Exemption is the granting of immunity or freedom from a financial charge or obligation or burden to which others are subjected.
Grounds for tax exemption:
Contract, wherein the government is the contracting party.
Public policy
Reciprocity
Strategies of taxation management
◦ Tax practitioners and taxpayer normally adopts any of the following technique to lessen tax burden:
◦  Tax avoidance is generally the legal exploitation of the tax regime to one's own advantage, to
attempt to reduce the amount of tax that is payable by means that are within the law whilst making a full
disclosure of the material information to the tax authorities. Examples of tax avoidance involve using tax
deductions, changing one's business structure through incorporation or establishing an offshore company
in a tax haven.
◦  By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities
to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately
misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax
liability, and includes, in particular, dishonest tax reporting (such as under declaring income, profits or
gains; or overstating deductions).
Examples:
Case:
Mr. A earned Turnover of Rs 10 M. However, he
kept it as cash in his bank locker and hid it from tax
authorities. He paid all related expenses from this cash.
Tax Strategy used & its legal Consequences:
Tax evasion , Criminal Act, he cannot buy any
asset or settle liabilities unless he declares this
income and also pays tax due on it

Mr. B earned income of Rs 10 M. However, he This too is tax evasion, a understatement is also
declared only so much of income which is verifiable an offence.
from the banks i.e. 6M, remaining amount he has
hidden in a separate bank account.
Mr. C earned Rs 10 M. However, he recorded 7M Tax avoidance, which is legally permissible
expenses employing legal tactics to reduce his net
income and offering the remaining income of Rs 3
Million for Taxes
DIFFERENT TAXATION LAWS OF
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. A broad description regarding the nature of administration of these taxes is explained below:
DIRECT TAXES
◦ Income Tax
 Salary
 Income from property
 Income from business
 Capital gains; and
 Income from other sources
◦ Capital Value Tax
INDIRECT TAXES
◦ Custom Duty
◦ Federal Excise Duty
◦ Sales Tax
HISTORY OF TAX LAWS IN
PAKISTAN
◦ Income Tax Act of 1860
◦ Income Tax Act of 1886
◦ 1918 Act
◦ Super Tax Act of 1920
◦ Income Tax Act of 1922
◦ Income Tax Ordinance, 1979
◦ Income Tax Ordinance, 2001