History Of Taxation in Pakistan and Income Tax Authorities - Presentation

1. History of Taxation in Pakistan & Income tax Authorities

2. AN OVERVIEW OF TAXATION
General Definition of Tax:
• General compulsory contributions of wealth levied upon persons by the state, to meet the expenses incurred in
providing common benefits upon the residents.
• Statutory Definition of Tax
Tax means any tax imposed under chapter II includes a penalty, fee or other charge or any sum or amount levy able
or payable under this ordinance.
• Taxes Vs Fees:
Taxes are compulsory levy and it is the legal obligation of the person to pay the amount of tax which is required to
pay under the law, where as payment of fee is the discretion of any person and when a fee is paid, the person
becomes an entitled to claim counter benefits.
Taxes are important instrument of Fiscal Policy

3. AN OVERVIEW OF TAXATION
What is Fiscal Policy?
Fiscal policy is a discipline that deals with arrangements which are adopted by government to collect the revenue and make the expenditures so that
social and economic stability could be attained /maintained.
Objectives of Fiscal Policy
• Economic Development
• Raising level of employment (Achieving full employment level)
• Influencing consumption patterns
• Price stability
• Redistribution of income
• Removal of deficit in Balance of Payments
Instruments of Fiscal Policy
• Government Expenditures
• Taxes
• Deficit Financing
• Subsidies
• Transfer Payments—like Unemployment Allowances etc.

4. AN OVERVIEW OF TAXATION
Sources for Revenue Generation for State
• Taxes, Tariffs
• Internal & External Borrowing
• Penalties & Fines
• Aids & Grants
Canons of Taxation:
1.Simplicity
This principle implies that taxation system should be plain, and easily understandable by the tax payer.
2.Convenience
The convenience of tax payer as well as tax collector must be the bottom line of any taxation system. The
time of payment of tax, mode of collection of tax, should be convenient for the tax payers.
3.Certainty
This cannon suggest that the amount of payment should be certain and there should not be any arbitrariness or ambiguity
with respect to the amount of tax to be paid by the tax payer.
4.Judicious
The taxation system should be based on the principles of equity, fair play, and all known principles of natural justice.

5. AN OVERVIEW OF TAXATION
Canons of Taxation (Contd..):
5.Capacity to Pay
This principle suggests that taxation system must be based keeping in view the capacity to sacrifice by the person on
whom the tax is levied, those who have more income should pay taxes at high rates/ proportions, where as those
who have low income, they should pay taxes at lower rates or proportion.
6.Benefit principle
This principle suggests that taxes should be levied according to the benefits derived by the person from the state.
Since more benefits are derived by lower income groups, hence according to this principle, those who derive more
income but enjoy less benefits from the state should be taxed at the lower rates and those persons who derives less
income but more benefits from State should be taxed at high rates.
7.Business Friendly
According to this principle, the taxation policy should be such as to boost business atmosphere and not discouraging
the investment environment.

6. AN OVERVIEW OF TAXATION
Type of Taxes:
Different types of taxes are explained below:
Direct taxes
Direct taxes are the taxes where incidence of taxation is on the person on whom levied. For example income tax.
Indirect Taxes
Indirect taxes are the taxes where incidence of tax can be shifted by the person on whom levied to other persons. For
example sale tax
Proportional Taxes
These taxes are levied with the same percentage. For example, sales tax is levied at the rate of 15%
Progressive Taxes
This is based on the “capacity to pay” principle of taxation. In this type, the rate of tax increase as the income increase.
Regressive taxes
A Regressive tax is the opposite of a Progressive Tax. It is based on the benefits received principle. A type of tax that takes
a larger percentage from the income of low-income people than the income of high-income people is called regressive tax.
Value Added Taxes.
This type of tax is levied at each stage of value addition. For example sales tax

7. AN OVERVIEW OF TAXATION
Taxation Structure of Pakistan:
• Federal Taxes:
Federal taxes are the taxes which can be levied by the federal government and include among others the followings:
• Income tax
• Corporate tax
• Customs duties/Tariffs
• Sales tax
• Provincial Taxes:
• Stamps Duty
• Registration Tax
• Motor vehicle tax

8. AN OVERVIEW OF TAXATION

9. INCOME TAX HISTORY OF PAKISTAN

10. INCOME TAX HISTORY OF PAKISTAN
Before Partition
Income Act, 1860:
• As followed as prevailing United Kingdom.
• Come in force on July 1860 and continued for 5 years up to 1st August 1865
• A major characteristic : The agricultural income from land, above the rental value of Rs. 690 per
annum was taxable.
The License Tax Act of 1867:
• Income Tax was not applicable for the next two years.
• Re-imposed with certain changes in 1867 and was called: “The License Tax Act of 1867”.
• Income earned up to Rs.200 per annum was not taxable under this law. Amounts earned above this
limit were taxable at the rate of 2 per cent.
• In this Act, agricultural income was exempted from tax.

11. INCOME TAX HISTORY OF PAKISTAN
Before Partition
The Certificate Act, 1868:
• In 1868, the license tax act name was changed to ‘The Certificate Act, 1868”.
• The exemption limit was raised to Rs.500, but the rate of tax was also reduced to 1.6 percent.
Income Tax Act II:
• In 1869, the Certificate Act was converted again into Income Tax Act II.
• Agricultural income was again brought under taxation.
• Different rates of tax were proposed on different types of income.
• Force for only one year and during the next four years, tax was levied by annual legislation.
The License Act, 1877:
• Tax on trade and access on land was proposed.
• This Act continued up to 1886 with few changes.

12. INCOME TAX HISTORY OF PAKISTAN
Before Partition
Income Tax Act, 1886:
• Important landmark in the taxation history of the country.
• for long period of time.
• The great improvements in the legislation were also made.
• A proper definition of agricultural income for the first time, completely exempted
• Concession in payment of tax was provided if a person paid life insurance premium.
• Income Tax Act, 1886, itself continued up to 1918 and during its life of 32 years, only one major
amendment was made in it in the year 1903.

13. INCOME TAX HISTORY OF PAKISTAN
Before Partition
The Income Tax Act, 1918:
• Another landmark in the taxation history of subcontinent.
• “The Income Tax Act, 1886” was replaced by “the Income Tax Act, 1918”.
• Difference between “Total Income’.’ and “Taxable Income” was introduced.
• Previously income of the same year was taxed immediately, but in this act tax imposed on income
earned during the previous income year.
• Felt difficulty, and first time All India Committee was formed in 1921.
• The purpose of this committee was to revise the-whole law regarding income tax and on the report
of this committee, the Act (XI of 1922) was introduced.

14. INCOME TAX HISTORY OF PAKISTAN
Before Partition
Income Tax Act, 1922:
• a complete machinery and procedure of assessment.
• Rates of tax will be fixed every year by the Finance Acts.
• In 1935, formed an expert committee
• Purpose of this committee was to investigate the law from all possible angles.
• Submit report about (a) Whether the tax burden imposed by the government is reasonable and
justified,
• (b) Is the income tax administration working efficiently?
• In 1944, “Pay as You Earn” scheme was introduced. (This scheme which still continues in a little
different. shape requires an early depositing of tax by certain persons.)
• In 1945, distinction between “Earned” and “Unearned” income was made and some concession was
provided on the ‘Earned Income”.

15. INCOME TAX HISTORY OF PAKISTAN
After Partition
Promulgation of Income Tax Act, 1922:
• After Independence on 14 August 1947, the Pakistan Government adopted the Income Tax Act,
1922.
• The provisions of the Act were extended to the whole of Pakistan except the special areas.
Formation of the Taxation Inquiry Committee:
• Formed in June 1958.
• Submitted its report to the CBR.
• Recommendations of the committee were accepted and income Tax Act, 1922, was amended
accordingly.
Super Tax & Expression of Rate Slab:
In 1959, Super Tax was abolished on income of all persons except registered firms and companies.
The rates of each slab were expressed as a percentage of income. in 1960.
Change in Financial Year:
Financial year was changed to commence on 1st July and end on 30 June. Previously, it used to start
on 1st April and end on 31st March.

16. INCOME TAX HISTORY OF PAKISTAN
After Partition
Introduction of Income Tax Committee:
• Formed by the CBR to make recommendations for simplifying the Income Tax Act and procedures.
Introduction of Self-Assessment Scheme:
• In 1965 “Self-Assessment scheme was introduced.
• Before 1965, an assessment officer was assessed the income and determined the tax liability of the
person but in 1965, "Self-Assessment Scheme" was introduced.
Promulgation of the Income Tax Ordinance, 1979:
• Between 1922 and 1979 as many as 71 amendment acts were passed by the legislature.
• The purpose of most of these changes was to check evasion of tax
• The government introduced a new income tax law namely “Income Tax Ordinance, 1979”.
• The Ordinance replaced the Income Tax Act 1922 and was enforced as from 1st July 1979.

17. INCOME TAX HISTORY OF PAKISTAN
After Partition
Formation of National Tax Reform Commission:
• In 1985, the Federal Government formed a National Tax Reform Commission.
• Consist of members of Senate and National Assembly, high government officials and renowned
industrialist.
• In 1985, the government set up a National Tax Reforms
• Commission to suggest ways and means to improve the existing tax structure in the country.
Income tax survey 1999-2000:
• Under income tax ordinance 1979 the income tax survey was conducted in 1999-2000.
• PURPOSE : The prevailing taxation structure and to procure the suggestions and
recommendations.
Introduction of Tax Amnesty Scheme:
• Introduce to provide a chance to black money holder to convert it into white money.

18. INCOME TAX HISTORY OF PAKISTAN
After Partition
Promulgation of income tax ordinance, 2001:
• After 22 years government of Pakistan introduces a new income tax law namely “ The Income Tax
Ordinance 2001”.
• Section 1, the ordinance specifies that Income Tax
• Ordinance should extend to whole Pakistan.
• This ordinance was enforced at 1st July 2002.
Status of Income Tax Ordinance, 2001:
• Section 3 The Income Ordinance 2001overrides other laws enforceable in Pakistan.
Income tax rules:
FBR has authority to make the income tax rules.
Finance act, 2013:
• To update income tax law
• Finance Act is the source to make change.
• It is presented in month of June each year.

19. INCOME TAX HISTORY OF PAKISTAN
After Partition
IT rules 2002
• These were promulgated by CBR on 1st July 2002 in exercise of powers granted under section 237 of the Ordinance.
• Rules are integral part of the main enactment / Law.
• I.T Ordinance 1979 stands repealed vide section 238 of the Ordinance.
• The Ordinance overrules all other laws for the time being in force (Sec 3).
• Federal Government empowered to allow exemptions to certain types of income or specific persons during financial year but required to place the same
before National Assembly at the end of that financial year Sec 53(3).
• CBR can issue administrative instructions explanations/circulars under the powers vested through
• Sec 206 and 213. However, CBR’s instructions not binding on Tax Payers since these are administrative interpretation not judicial interpretation.
• Basic Features of Income Tax Ordinance 2001
• Scheme of the Ordinance is given below:
• There are thirteen chapters
Chapters are divided into:
• Parts &
• Divisions
• There are 240 Sections
• This ordinance comprises of seven Schedules
• Schedules are integral part of the Ordinance.

20. Components of Income Tax law
The following are the constituents of Income Tax Law in Pakistan
• (A) Income Tax Ordinance, 2001 (as amended)
• (B) Rules framed by the Board
• (C) Notifications, Circulars and Orders
• (D) Income Tax Case Law
• (E) Finance Acts or Ordinances
(A) Income Tax Ordinance, 2001 (as Amended)
• It is the basic constituent of income tax law in our country.
• On its basis, the whole taxation structure of the country is founded.
• The whole procedure of taxation including matters regarding payment of tax, collection of tax, Penalties,
assessment, refund, appeals etc. has been provided in the Ordinance.
• It consists of thirteen chapters. Each chapter deals with particular subject and has been divided into
parts. Many parts are further subdivided into divisions. There are 240 sections of the new Ordinance as
compared to 167 sections of Income Tax Ordinance, 1979 (repealed).
• Ordinance also contains eight schedules. Schedules are also treated as part of the Ordinance. The
changes in the Income Tax Ordinance, 2001, are brought of about by the Finance Ordinance or Finance
Act every year. Such changes are of a permanent nature.

21. Components of Income Tax law
(B) Income Tax Rules
• The Federal Board of Revenue, which is the highest income tax executive authority in Pakistan,
makes rules from time to time which are meant for the guidance of its officers as well as the tax
payers.
• The Federal Board of Revenue has been assigned this power under section 237 of the "Income Tax
Ordinance, 2001". These rules are notified in the official gazette. Such rules have the same force as
the sections in Income Tax Ordinance itself and are implemented in the same manner.
• Since 1924, CBR has framed a number of rules regarding rates of depreciation, registration of firms,
submission of returns, forms of appeals etc., which are treated as a part of income tax law. The
latest rules "Income Tax Rules, 2002" have been issued to meet the requirements of Finance
Ordinance, 2001. During 2007.
• Federal Board of Revenue has replaced CBR and is performing all its functions.

22. Components of Income Tax law
(c) Notifications, Circulars and Orders
• The Federal Government is authorized under section 53 of Income Tax Ordinance, 2001, to exempt
any class of income or the income of any class of persons, in whole or in part, or reduce the rates of
tax, or make any other modifications in respect of income tax.
• The Federal Government must place all amendments made by it in a financial year before the
National Assembly
• The Federal Board of Revenue also issues circulars and orders for the guidance of its officials. Any
such circular issued by the Board is binding on all Income Tax Authorities and other persons
employed in the execution of the Ordinance. Such circulars are not binding on taxpayers.
• These notifications, circulars and orders are the third component of income tax in the country.
• Now these are being issued by the Federal Board of Revenue

23. Components of Income Tax law
(D) Income Tax Case Law
• In the interpretation of tax laws, the possibility of different types of disputes is evident. When such a
dispute arises, the aggrieved party presents its case to a court of law, which decides the case and
provides correct interpretation of the law. Such decisions of the courts are known as Income tax
case law and reference to such decisions is subsequently made in order to get necessary guidance.
• Thousands of cases, regarding the interpretation of tax laws and the definitions of terms, used in
the Ordinance, have been decided by the courts. These are also a very important component of
income tax law in Pakistan.