Income Tax Introduction-11

8/11/2019 Income Tax Introduction-11

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INTRODUCTION TOINCOME TAX

By: Fayaz Hussain Abro,

Deputy Commissioner, Inland

Revenue


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WHAT IS LAW?

Law is a code of conduct for the people in a

given community, which controls their

activities towards each other, with respect to

their private and business lives, and to theirrelationship with the State.


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WHAT IS TAX?

Tax is a compulsory levy by an organ of

government for public purposes.

Tax is what we pay for a civilized society.


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WHAT IS INCOME?

1. Ordinary Meaning: Any amount that is

ordinarily considered income.

2. Ordinance Specific Meaning: Any amount

chargeable to tax under the ITO 2001.


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ORIGIN OF TAX ON INCOME

Tax was imposed on Income in 1799 for the first time

in Britain.

Earlier, taxes were being imposed on trade, land,

property, or even tax on expenditure but not on income. The reason for tax on income was to generate

revenues to meet the expenses of Britainswar against

Napoleon. Hence, it is sometimes said that Napoleon

is the Father of Income Tax. Income Tax was first introduced in the Indo-Pak Sub-

continent by Sir James Wilson in 1860 to meet the

losses of the Govt.

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ORIGIN

The last Act in the British India on the subject

of taxation of income was the Income Tax Act

1922 which became the first law of Pakistan,

Bangladesh and India.


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HOW IS LAW MADE IN PAKISTAN?

A State has three pillars:

1. Legislature(Parliament/Majils-e-Shoora)

2. Executive3. Judiciary

FUNCTIONS:

Legislature makes law Executive enforces law

Judiciary interprets law


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LEGISLATURE

LEGISLATURE

LowerHouse

( NationalAssembly)

UpperHouse

(Senate)


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HOW LEGISLATURE MAKES LAW?

According to Article 70 of the Constitution of

Pakistan,1973, a proposed law (is called a Bill)

may originate in either of the two houses of the

Parliament. Having been passed by the houseof its origin, the Bills transmitted to the other

house, from where ( if it is passed by the house)

it is sent to the President for his assent.

Thereafter the Bill takes the form of Law on the

day it is signed by the President and becomes

an Act of Parliament.


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WHAT IF PARLIAMENT IS NOT IN SESSION?

Such circumstances make it necessary for

the President to take immediate action and

he makes law in the form of an Ordinance.

Ordinance has the same force as an Act ofParliament.

in order to become a permanent law, an

Ordinance needs approval of the Parliament.


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5 BASIC QUESTIONS ABOUT INCOME TAX

1. Who levies it? Parliament

2. Why is it imposed? - To generate revenue for Govt

- Re-distribution of wealth &

income in the society.

- Tool of fiscal policy to encourage

or discourage certain activities insociety.

3. What is taxed? Income (Real & Deemed)

4. Type of tax? Direct Tax

5. Who pays it? The person on whom it is levied.Incidence many not be passed on to an

other person. 12


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SOURCES OF TAX LAW

1. Income Tax Ordinance, 2001: (Primary source of law in

Pakistan)

2. Income Tax Rules, 2002: (made by FBR- Procedural in nature-

do not require Parliaments approval)

3. Finance Acts: (the amendments in the financial laws includingITO 2001 are carried out in the form of a Finance Act

essential part of ITO 2001

4. Statutory Regulatory Orders (SRO): Federal Govt empowered

to grant or withdraw exemption from income tax.

5. Circulars: explanations of provisions of ITO 2001 issued by

FBR.

6. Case Law; Legal disputes b/w tax department & the taxpayers,

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INCOME TAX LAWS IN PAKISTAN

Historically, there have been three laws for

imposition of tax on income in Pakistan:

Income Tax Act,1922. Income Tax Ordinance, 1979.

Income Tax Ordinance,2001.

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INCOMETAX ORDINANCE 2001

REASONS FOR PROMULGATION:

Simplification of income tax law

Effort to make it easy to understand even for a lay

man.Re-arrangement of income tax law

Due to numerous amendments, the I.T.

Ordinance,1979, had become complex.

Introduction of Universal Self AssessmentScheme (USAS).

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INLAND REVENUE AUTHORITIES (S.207)

Board(Federal Board Of Revenue)

Chief Commissioner Inland Revenue

Commissioner Inland Revenue

Commissioner Inland Revenue (Appeals)

Additional Commissioner Inland Revenue

Deputy Commissioner Inland Revenue

Assistant Commissioner Inland Revenue Officer of Inland Revenue

Special Officer Inland Revenue; and

Inspector Inland Revenue


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FBR ORGANOGRAM

Chairman Federal Board of Revenue

Secretary Revenue Division

Member

(IR)

Member (Tax Policy)

Member (FATE)

Member (Taxpayer Audit)

Member (Enforcement & Accounts)

Member (Legal)

Member (Strategic Planning Reforms & Statistics)

Member (Administration)

Member (Human Resource Management)

09 Director Generals (Look after Special Fields)

Member

(Customs)

Chief Commissioners Chief Collectors

Deputy Chairman

(Inland Revenue)

Deputy Chairman

(Customs)


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FBR INLAND REVENUE

Member Inland Revenue

18 Regional Tax Offices

1. Karachi2. Lahore

3. Islamabad

03 Large Taxpayer Units

1. 03 Karchi 10. Multan

2. 02 Lahore 11. Bahawalpur

3. Islamabad 12. Hyderabad

4. Rawalpindi 13. Sukkur

5. Peshawar 14. Quetta

6. Abottabad

7. Faisalabad

8. Sargodha

9. Sail Kot

LTUs look after Big Taxpayers

RTOs deal with small and medium Taxpayers

Chief Commissioner is the head of each RTO / LTU


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WORKING STRUCTURE

Chief Commissioner

Commissioner

Withholding Taxes

Additional Commissioner

Withholding Taxes


Enforcement


Audit


Enforcement


Audit

ACs/DCsACs/DCsACs/DCs ACs/DCs ACs/DCs

Commissioner

Zone-I

Commissioner

HRM / IP

Commissioner

Zone-II


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INCOME TAX ORDINANCE 2001

There are 13 Chapters in Income Tax Ordinance,

2001.

Chapters are divided into Parts

Parts may be further sub-divided into Divisions Divisions consists of Sections

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ARRANGEMENT OF SECTIONS

Representation of Sections and their Sub-divisions: Sections are represented by 1,2,3 Sub-sections are represented by (1),(2), (3). Clauses are represented by (a), (b), (c).. Sub-clauses are represented by (i), (ii), (iii).

Later Insertions:- If a section is inserted between two sections, such as

between Section 161 and Section 162, it is written as 161A.- The sections are not renumbered due to the cross-

referencing of those sections found in same or other laws.- HOW TO READ?- E.g Section 14(2)(e)(iv)- Means sub-clause (iv) of clause (e) of sub-section (2) of

section 14.

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CHARGING VS MACHINERY SECTIONS

Charging Section: The section whichimposes tax is called charging section.

Sections: 4 of the IT Ordinance,2001 is thecharging section, which imposes tax on

taxable income.

Machinery Sections: Those sectionswhich provide for the method of

computation and collection of the taximposed in charging section.

All the sections of the IT Ord,2001, other thanSection: 4, are machinery sections.

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DEFINITIONS: Section 2

Three types: Exclusive

Inclusive

Exhaustive

1. Exclusive: gives definite meaning to the word or term & therefore excludesthe ordinary dictionary meaning.

E.g in ordinary sense the expression agri income can be understood as incomearising from all kinds of agri operations. This definition starts with the expressionmean or means.

2. Inclusive:A word that retains its ordinary meaning & also acquires themeaning assigned to it by the definition given in the statute.

E.g business includes any trade, commerce, manufacture, profession, vocationetc

This type of definition begins with the word includes.

3. Exhaustive: it is both inclusive as well as exclusive or it is both flexible aswell as restrictive.


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DEFINITIONS..

Illustration:

1) Charitable purposeincludes relief of the

poor, education, medical relief and the

advancement of any other object of generalpublic utility;]

2) Debtmeans any amount owing, including

accounts payable and the amounts owingunder promissory notes, bills of exchange,

debentures, securities, bonds or other

financial instruments;


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DEF..

3)Employee means any individual engaged

in employment;

Employermeans any person who engages

and remunerates an employee;


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CHARGING SECTION

Section 4(1) reads:

4. Tax on taxable income.- (1) Subject to this

Ordinance, income tax shall be imposed for each

tax year, at the rate or ratesspecified in DivisionI or II of Part I of the First Schedule, as the case

may be, on every person who has taxable

incomefor the year.

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FOUR KEY CONCEPTS

There are four major underlying concepts in

Section 4(1):

1. Concept of Tax Year

2. Concept of Tax Rate

3. Concept of Person

4. Concept of Income

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1. TAX YEAR

Tax year (Section 74)

Tax year is a period of twelve

months ending on the 30th day ofJune.

Types of Tax Years

Normal Tax Year

Special Tax Year

Transitional Tax Year


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NORMAL TAX YEAR

A Tax Year is denoted by the calendar year in

which 30thJune of the said tax year falls.

And, such tax is called NormalTax Year

EXAMPLE

01.07.2008 to 30.06.2009 (Tax Year 2009)

01.7.2005 to 30.06.2006 (Tax Year )


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SPECIAL TAX YEAR

On application, the Commissioner may allow a taxpayerto use a period of twelve monthsdifferent from normal taxyear.

Such tax year is called specialtax year

It is denoted by the calendar year relevant to normal taxyear in which the closing date of the special tax year falls.

EXAMPLE

- 01.01.2009 to 31.12.2009

31.12.2009 relates to N.T. Year 01.07.2009-30.06.2010

Hence, Tax Year 2010 (not Tax Year 2009)


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TRANSITIONAL TAX YEAR

Where the tax year of a person changes fromnormal to special tax year, the periodin-between the two tax years is known as the

transitionaltax year. A taxpayer with Normal Tax Year 01.06.2007

to 30.06.2008, shifts to Special Tax Year01.01.200931.12.2010.

The period of 01.07.2008 to 31.12.2009 isknown as special tax year.


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2. TAX RATES

Types of Tax Rates:

Progressive

Regressive

Flat

Tax rates in Inc. Tax Ordinance,2001, are

progressive.

Tax rates are provided in the 1stShedule


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3. PERSON

Section 80: PersonThe following shall be treated as persons forthe purposes of this Ordinance, namely:

(a) An individual;

(b) A company or association of personsincorporated, formed, organized orestablished in Pakistan or elsewhere;

(c) The Federal Government, a foreigngovernment, a political subdivision of aforeign government, or public

international organization.


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AOP

Associationof Persons includes a

firm, a Hindu undivided family

(HUF), any artificial juridical personand any body of persons formed

under a foreign law, but does not

include a company.


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COMPANY

Companymeans:(i) a company as defined in the Companies Ordinance,

1984

(ii) a body corporate formed by or under any law in force

in Pakistan(iii) a Modaraba

(iv) a body incorporated by or under the law of a countryoutside Pakistan relating to incorporation ofcompanies

(v) a trust, a co-operative society or a financesociety or any other society established or constituted byor under any law for the time being in force


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COMPANY

(vi) 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 thisOrdinance

(vii) a Provincial Government

(viii) a Local Government] in Pakistan, or

(ix) a Small Company as defined in section 2.


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4. INCOME

Section 10: Total IncomeThe total income of a person for a tax year shall be the sumof the persons income under each of the heads of incomefor the year.

Section 11: Heads of incomeFor the purposes of the imposition of tax and the computation oftotal income, all income shall be classified under the followingheads, namely:

(a) Salary

(b) Income from Property(c) Income from Business

(d) Capital Gains, and

(e) Income from Other Sources.


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INCOME

Section 9: Taxable income

The taxable income of a person for a tax

year shall be the total income of the person

for the year reduced (but not below zero) bythe total of any deductible allowances under

Part IX of this Chapter of the person for the

year.


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ILLUSTRATION

Head of Inc Salary IFP IFB C.GAINS IFOS

AmountChargeable

500,000 250,000 800,000 200,000 150,000

Les: Deductions

Allowed

Nil Nil 600,000 50,000 50,0000

Net Amount

Chargeable

under the Head

500,000 250,000 200,000 150,000 100,000

Total Income 1,200,0000

Less:

Deductable

Allowances

100,000

Taxable Income 1,100,000

Tax Rate 10%

Tax Liability 110,000

Less: Tax Cr 10,000

Tax Payable 100,000


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WHAT IS INCOME TAX?

It is an equitable form of taxation wherein

burden lies with whom who pays it.

It is Progressive in nature hence reduces the

economic disparity.


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OBJECTIVES:

TO RAISE REVENUE FOR THE STATE

TO STOP PEOPLE CONSUMING SOME

HARMFUL ITEMS IE OPIUM.

TO REMOVE INEQUALITIES WHILE

DISTRIBUTION OF INCOME.

TO PROVIDE SERVICES LIKE FREE

SCOOLING & FREE MEDICAL TO THE

POOR.

Income Tax Introduction-11

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