Income Tax Introduction-11
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Transcript of 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
Additional Commissioner
Enforcement
Additional Commissioner
Audit
Additional Commissioner
Enforcement
Additional Commissioner
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.