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1. Introduction Section
Introduction and Scope of Income Tax Law in Pakistan
Like other countries of the world, our government levies different types of taxes in
order to finance daily expenditure of the government. Taxes are considered as the main
source of revenue for a state. Since proper law is required to be enforceable in the
country in order to assist and provide guidance in the collection of taxes. Generally
government collects different taxes which includes customs and excise duties, income
tax, sale tax and property tax etc. the history of income tax law in Pakistan is discussed
as under in detail.
In Subcontinent
In undivided India income tax was introduced for the first time in 1860. It was
introduced by income tax act 1860. This act was continued for only five years. This act
was re-imposed with certain amendment with a new name as the License Tax act 1867.
In this act agriculture income is not taxable certain changes which were made in this act
with the passage of time till 1922, when a new act 1922 was promulgated.
Different names and certain changes were made to the income tax act 1860 up to 1922.
These are shortly mentioned as under:
 Income tax act 1860
 License tax act 1867
 The certificate act 1868
 The income tax act 1869
 The license act 1877
 The income tax act 1886
 The income tax act 1918
 The income tax act 1922
 Income tax act 1922

2.  The income tax act 1922
The income tax act 1922 continued for 57 years till 1979. During this period a lot of
amendments were made in the original act between 1922 and 1978. These
amendments were made regarding taxation and structure. These total amendments are
71 later on this act was replaced by income tax ordinance 1979
 Income tax ordinance 1979
The ordinance replaced income tax act 1922 and was enforced as from 1st
July 1979. It
adopt4e4d all basis concepts of income tax act 1922. This law continued prevails in the
country for 22 years. Under this law income tax survey was conduct in 1999 to 2000. But
due to the changes in economic condition this ordinance was replaced by income tax
ordinance
 Income tax ordinance 2001
This new income tax ordinance was promulgated 13 September 2001, and it has
become effective from 1st
July 2002. Before promulgation necessary changes have been
made through finance ordinance 2002. This ordinance was issued with a hope to fulfill
all the necessary requirements of income tax pattern and structure of the country
Tax administration structure
The federal board of revenue (FBR) is the supreme administrative authority of the
federal government for the purpose of tax collection in the country it controls the whole
working of the tax machinery and matters. The federal government appoints the
members and the chairman of federal board of revenue. The federal board of revenue
act 2007 has empowered the tax official to formulate policy for better performance
management it also empowered the board to make rules for marinating discipline in
organization
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3. Scope of income tax law in Pakistan
The scope of income tax law can be judge from the following two points
1. The territorial limits to which the Income Tax Ordinance applies.
2. The components of Income Tax Law in our country.
A. Extent of Income Tax Ordinance, 2001
The Income Tax Ordinance, 2001, applies to the whole of Pakistan. The definition of
word “Pakistan” has been provided in the Article 1(2) of the Constitution of Pakistan
1973. The following territories have been included therein:
 Provinces of Baluchistan, North-West Frontier Province, Punjab and Sindh.
 Federal Capital.
 Federally Administered Tribal Areas.
 States and territories as may be included in Pakistan, whether by accession or
otherwise.
1. Tribal Areas
Tribal area means the areas in Pakistan which, immediately before the commencing
day, were Tribal Areas, and includes:
 The Tribal Areas of Baluchistan and North-West Frontier Province; and
 The former States of Amb, Chitral, Dir and Swat.
2. Provincially Administered Tribal Areas means:
 The districts of Chitral, Dir and Swat (which includes Kalam), Malakand protected
area, the Tribal Area adjoining Hazara district and the former State of Amb; and
 Zob district, Loralai district (excluding Bhuke Tehsil), Dalbandin Tehsil of Chagai
district and Marri and Bugti Tribal territories of Sibi district.
3. Federally Administered Tribal Areas include:
a. Tribal Areas adjoining Peshawar district
b. Tribal Areas adjoining Kohat district
c. Tribal Areas adjoining Bannu district
d. Tribal Areas adjoining Dera Ismail Khan district
 Bajaur in Malakand Agency
 Mohamand Agency
 Khyber Agency

4.  Kurram Agency
 North Waziristan Agency
 South Waziristan Agency
B. 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 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 2001. There are
240 sections of the new Ordinance as compared to 167 sections of Income Tax
Ordinance, 1979 (repealed). The Ordinance also contains seven schedules. Schedules
are also treated as part of the Ordinance. The changes in the Income Tax Ordinance,
2001, are brought about by the Finance Ordinance or Finance Act every year. Such
changes are of a payment nature.
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 Central 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 will replace (CBR) and perform all its functions.

5. c) 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.
d) Finance Acts or Ordinances
In order to meet the budgetary requirements and other social and economic needs of
the country an annual law known as Finance Act or Ordinance is promulgated every
year. It usually prescribes the maximum income which is not liable to tax. Changes in the
Income Tax Ordinance, 2001, itself are also brought about through this legislation. Rates
of tax applicable for the next financial year are also specified. The principles of taxation
and computation of tax are also laid down by the Finance Act or Ordinance. These
changes are made in order to bring the law in line with the changing economic
environments of the country. The Finance Act or Ordinance contains provisions of
general character which are of permanent operation and it forms part of the general law
of taxation.
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6. Definition of various Terminologies
Accumulated earnings/Profit
Accumulated profit means any reserves maintained by a business out of its profit. It is
the sum of yearly’s profit accumulated each year from the inception of the company
which is utilized for the future profit.
Or it can also be defined as:
Accumulated profit is the sum of a company's profits, after dividend payments, since the
company's inception. It can also be called retained earnings, earned surplus, or retained
capital.
Appellate Tribunal
In case of any dispute between taxpayers and tax department an appeal can be made to
appellate tribunal. This is the highest judicial authority in the matter of tax. It consists of
judicial members as well as accountant members. The members are appointed by the
federal government
Approved Gratuity Fund
The government and private organizations maintain gratuity fund for the benefits of
their employees. These funds are accumulated from year to year and generally repaid
along with the interest at the time off retirement of the employees. In case of death of
employee during the service this fund is paid to his family. Under the income tax
ordinance 2001, the commissioners of income tax brought such approve.
Assessment
It includes reassessment and amended assessment is recorded. Generally it includes the
process through which the death of a person regarding, income expenses and tax
payment is checked. This will help in order to finalize the tax liability. This is done either
by the person himself or by the tax department
Assessment year
Assessment year means the period of 12 months. It begins on the first day of July to 30th
June of the next year. It is also considered as the income tax year.
Association of person
Association of person includes a firm, a Hindu undivided family, any artificial judicial
person and anybody of persons formed under a foreign law. However it doesn’t include
a company
Agriculture income
An agriculture income means the income
Derived from land
Land is situated in Pakistan
Land is used for agriculture purposes
Explanation

7. From the above definition it is cleared that any income which is obtained as rent,
revenue or form sale of any product which is grown o n pakistnai9i land is called
agriculture income further it is most necessary such land must be used for agriculture
purposes. Moreover agriculture income requires human labor and efforts. If a product is
grown on land without any human efforts it is not considered as agriculture income.
Business
Business means any activity undertaken in order to earn profit or to make investment
tin any profitable organization to receive yield on his principal amount according to the
income tax law business include the following terms.
Trade
Any dealing between two or more person/parties for the purchase and sell of
commodities.
Commerce
It include trade and all those activities to facilitate the exchange off goods and service
between producer and consumer such as transportation, banking advertisement,
marketing, insurance etc.
Manufacture
Manufacturing involves the converting of inputs (raw material) through the work in
process into finished goods
Profession or vocation
Profession requires some specialized knowledge and training these are generally
includes teaching, accounting, law, medicine etc.
Capital assets/fixed asset
Capital asset means property of any kind held by a person. It is in-material whether the
property is connected with business or not the raw material, any stock in trade or
consumable stores are not included in capital assets.
Explanation
The medicine available in medical stores is not considered as capital assets. The capital
assets must be depreciated and amortized
Company
The company is an artificial person created by law with a unique name having limited
liability of its member and perpetual secession with its capital divided into transferable
shares which has a common seal.
OR
A company, abbreviated as co., is a legal entity made up of an association of people, be
they natural, legal, or a mixture of both, for carrying on a commercial or industrial
enterprise. Company members share a common purpose, and unite in order to focus
their various talents and organize their collectively available skills or resources to
achieve specific, declared goals

8. Cooperative society
A cooperative (also known as co-operative, co-op, or coop) is "an autonomous
association of persons united voluntarily to meet their common economic, social, and
cultural needs and aspirations through a jointly-owned and democratically-controlled
enterprise".[1] Cooperatives may include:
 non-profit community organizations
 businesses owned and managed by the people who use their services (a consumer
cooperative)
 Organizations managed by the people who work there (worker cooperatives) etc.
Debts
Debt is money owed by one party, the borrower or debtor, to a second party, the lender
or creditor. The borrower may be a sovereign state or country, local government,
company, or an individual. The lender may be a bank, credit card company, payday loan
provider, business, or an individual.
Depreciable assts
Depreciable asset are the business assts which can be depreciated. That is the value of
the assets is considered as business expenses over the life of assets.
OR
Depreciable property/asset is any type of asset that is eligible for depreciation
treatment in accordance with Internal Revenue Service (IRS) rules. Depreciable property
can include vehicles, real estate (except land), computers and office equipment,
machinery and heavy equipment.
Building, furniture, machinery, vehicle, etc are the example of depreciable assets.
Dividend
Dividend is the part of profit of the joint stock company which is distributed amon the
shareholders of the company it is distributed among the shareholder at the end of
financial year but its rate may be fixed or not either distribute full profit or part of it
OR
A dividend is a distribution of a portion of a company's earnings, decided by the board
of directors, paid to a class of its shareholders. Dividends can be issued as cash
payments, as shares of stock, or other property
Intangible Asset

9. Those asset which have no physical existence but they are valuable for the firm and also
having sale value are called intangible asset. Goodwill, trade mark, copy right, patent
right are the example of intangible assets.
Profits on Debts
Profits on debts means any interest, penalty, fees, charges, and other benefitson debts
received by financer is called profit on debtrs. However it doest include the return on
capital
firm
Under the income tax ordinance 2001, firm means a relation between persons who have
agreed to hsare the profit fo a business carried on by all or any of them acting for all
Foreign source income