Chapter 1 2 3

Question 1

Objectives of taxation
The main purpose of taxation is to collect revenue for the Government. The
Government levies tax to achieve following objectives.

Answer 1

1. To collect revenue to run and administer Government.
2. Tax is a tool for implanting its policies.
3. Tax is used for fair distribution of wealth

Question 2

Definition of tax

Answer 2

Tax is defined as follows:
1. Taxation is collection of share of individual and organization’s income by
Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority
of law to promote welfare and protection for its citizens.

Question 3

Non-revenue objectives of taxation

Answer 3

1. Government can encourage the production of certain goods by introducing exemptions.
2. By charging high tax rates on imports the Government can encourage local purchase.
3. Taxes can be used to reduce inequalities in distribution of wealth.
4. Tax prevents wealth being concentrated in a few hands of the rich.
5. Through tax Government can encounter the effect of inflation and depression
6. To promote science and invention, education systems, health care systems, energy system
   and military defense.
7. It can be used to discourage investment abroad.
8. Tax can be used as a bargaining tool in trade negotiation with other countries.
9. Tax laws can be used for documentation of economy(Any amount transferred otherwise
   than banking channel will be deemed as income)
   10.Government can discourage use of harmful goods by levying heavy rates of tax on certain
   sectors.
   11.Tax can be used to discourage certain undesirable sectors and activities.
   12.Government can encourage research & developments by introducing tax credits.

Question 4

Basics of tax laws
Adam Smith’s in his famous book “Wealth of Nations” has elaborated
following canons of taxation:

Answer 4

Equality
Tax payments should be proportional to income.
Certainty
Tax payable should be clear and certain to taxpayer.
Convenience of payment
Tax should be collected from taxpayer at a convenient time.
Economy of collection
Taxes should not be expensive to collect.

Question 5

Definition of tax

Answer 5

Tax is defined as follows:
1. Taxation is collection of share of individual and organization’s income by
Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority
of law to promote welfare and protection for its citizens.

Question 5

Kinds of taxes/Structure of taxes

Answer 5

Proportional tax/ Flat tax
It is a tax where the rate of tax is fixed. A fixed rate is applied on person’s income whether
the income is high or low. Under this system people who earn more are not charged at a
higher percentage as compared to progressive tax.
Progressive tax
It is a tax in which the tax rate increases as the income base increases. A progressive tax
takes a larger amount of tax from the high-income group as compared to low-income
group. This tax proportionately equal to a person’s status in the society.
Regressive tax
It is a tax where tax rate decreases as the amount of income increases. The higher income
group pays less in taxes than the lower income group. Regressive taxes impose greater tax
burden on the poor.

Question 6

2.3 Principles for levy of tax
Following are the principles for levy of tax.

Answer 6

The Benefit Principle
This principle says that taxes should be based on the benefits received. It means that
those who receive the greatest benefits from Government projects should pay the
most taxes. The benefit principle is commonly used for highways, libraries, etc.
The Ability-to-Pay principle
The tax should be based on ability to pay. It means that a person who is earning more
income should pay more tax. Progressive tax rates are an example of it.
The Equal Distribution Principle
It says that incomes and transactions should be taxed at a fixed rate. Therefore, people
who are earning more income shall pay more tax but not at higher rate.

Question 7

Direct Taxe

Answer 7

Income Tax
Income tax is imposed for each tax year, at specified
rates on every person who has taxable income for
the year.
Taxable income for charge of tax is divided under
the following heads:
a) Salary;
b) Income from Property;
c) Income from Business;
d) Capital Gains; and
e) Income from Other Sources.
Capital Value Tax
Capital value tax on different transaction such as
transfer of immoveable property, transfer of rights
etc.

Question 8

Indirect Taxes

Answer 8

INDIRECT TAXES
Following are the indirect taxes under the Pakistani Taxation System.
Custom Duty
Goods imported and exported from Pakistan are liable to rates of customs duties as prescribed in
Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute
a major part of the total tax receipts. The rate structure of customs duty is determined by a large
number of socio-economic factors. However, the general scheme envisages higher rates on luxury
items as well as on less essential goods. The import tariff has been given an industrial bias by
keeping the duties on industrial plants and machinery and raw material lower than those on
consumer goods.
Federal Excise Duty
Federal Excise duties are levied on a limited number of goods produced or manufactured, and
services provided or rendered in Pakistan. On most of the items Federal Excise duty is charged on
the basis of value or retail price. Some items are, however, chargeable to duty on the basis of
weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity
Description and Coding system which is being used all over the world. All exports are liable to Zero
per cent Federal Excise Dut
Sales Tax
Sales tax is levied at various stages of economic activity @ 18 per cent on:
 All goods imported into Pakistan, payable by the importers
 All supplies made in Pakistan by a registered person in the course of furtherance of any
business carried on by him
There is an in-built system of input tax adjustment and a registered person can make adjustment
of tax paid at earlier stages against the tax payable by him on his supplies. Thus, the tax paid at
any stage does not exceed 18% of the total sales price of the supplies

Question 9

Characteristics of tax laws
Following are major characteristics of a taxation system

Answer 9

Following are major characteristics of a taxation system:
 Tax is an enforced contribution
Tax payment is not voluntary in nature and the imposition is not dependent upon the will of
the person taxed.
 Tax is generally payable in cash (bank)
This means that payment by cheques, promissory notes, or in kind is not accepted.
 Tax is proportionate in character
Payment of taxes should be based on the ability to pay principle; higher income of the tax
payer, the bigger amount of the tax paid.
 Tax is levied (to impose; collect) on income, transactions or property
There are taxes that are imposed or levied on acts, rights or privileges.
 Tax is levied by the state which has jurisdiction over the person or property
As a general rule, only persons, properties, acts, right or transaction within the jurisdiction
of the taxing state are subjects for taxation.
 Tax is levied by the law making body of the state
This means that law must be enacted first by the Parliament in Pakistan.
 Tax is levied for public purposes
Taxes are imposed to support the government in implementation of projects and programs.

Question 10

The principles of a sound tax system

Answer 10

 Fiscal adequacy
The sources of revenue taken as a whole should be sufficient to meet the expenditures of
the government
 Equality or Theoretical Justice
Taxes levied must be based upon the ability of the citizen to pay
 Administrative Feasibility
In a successful tax system, tax should be clear and plain to taxpayers
 Consistency or Compatibility with Economic Goals
Tax laws should be consistent with economic goals or programs of the government

Question 11

Definition of tax

Answer 11

Tax is defined as follows:
1. Taxation is collection of share of individual and organization’s income by
Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority
of law to promote welfare and protection for its citizens.

Question 12

Federal consolidated fund and public account and expenditure to be charged to
Federal constitutional fund

Answer 12

Federal consolidated fund and public account [Article 78]
 All revenues received by the Federal Government, all loans raised by that
Government and all monies received by it in repayment of any loan, shall form
part of a consolidated fund, to be known as the Federal Consolidated Fund.
 All other monies:
 received by or on behalf of the Federal Government; or
 received by or deposited with the Supreme Court or any other court
established under the authority of the Federation;
shall be credited to the Public Account of the Federation.

Question 13

Expenditure charged upon federal consolidated fund [Article 81]

Answer 13

Expenditure charged upon federal consolidated fund [Article 81]
The following expenditure shall be expenditure charged upon the Federal Consolidated
Fund:-
 the remuneration payable to the President and other expenditure relating to his
office, and the remuneration payable to-
 the Judges of the Supreme Court and the Islamabad High Court
 the Chief Election Commissioner;
 the Chairman and the Deputy Chairman;
 the Speaker and the Deputy Speaker of the National Assembly;
 the Auditor-General;
 The administrative expenses, including the remuneration payable to officers and
servants, of the Supreme Court, the Islamabad High Court, the department of
the Auditor-General, the Office of the Chief Election Commissioner and of the
Election Commission and the Secretariats of the Senate and the National
Assembly;
 All debt charges for which the Federal Government is liable, including interest,
sinking fund charges, the repayment or amortisation of capital, and other
expenditure in connection with the raising of loans, and the service and
redemption of debt on the security of the Federal Consolidated Fund;
 Any sums required to satisfy any judgment, decree or award against Pakistan by
any court or tribunal; and
 Any other sums declared by the Constitution or by Act of Majlis-e-Shoora
(Parliament) to be so charged

Question 14

Provincial consolidated fund and public account and expenditure to be charged to
Provincial consolidated fund

Answer 14

Provincial consolidated fund and public account [Article 118]
 All revenues received by the Provincial Government, all loans raised by that
Government, and all monies received by it in repayment of any loan, shall form
part of a consolidated fund, to be known as the Provincial Consolidated Fund.
 All other monies:
 received by or on behalf of the Provincial Government; or
 received by or deposited with the High Court or any other court established
under the authority of the Province;
Shall be credited to the Public Account of the Province

Question 15

Definition of tax

Answer 15

Tax is defined as follows:
1. Taxation is collection of share of individual and organization’s income by
Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority
of law to promote welfare and protection for its citizens.

Question 15

Expenditure charged upon provincial consolidated fund [Article 121]

Answer 15

 The following expenditure shall be expenditure charged upon the Provincial
Consolidated Fund:
 The remuneration payable to the Governor and other expenditure relating
to his office, and the remuneration payable to:
 the Judges of the High Court; and
 the Speaker and Deputy Speaker of the Provincial Assembly;
 the administrative expenses, including the remuneration payable
to officers and servants, of the High Court and the Secretariat of
the Provincial Assembly;
 All debt charges for which the Provincial Government is liable, including
interest, sinking fund charges, the repayment or amortization of capital,
and other expenditure in connection with the raising of loans, and the
service and redemption of debt on the security of the Provincial
Consolidation Fund;
 Any sums required to satisfy any judgment, decree or award against the
Province by any court or tribunal; and
 Any other sums declared by the Constitution or by Act of the Provincial
Assembly to be so charged.

Question 16

The taxes referred above are the following taxes raised under the authority of Majlis-eShoora (Parliament), namely

Answer 16

The taxes referred above are the following taxes raised under the authority of Majlis-eShoora (Parliament), namely:
i. taxes on income, including corporation tax, but not including taxes on income consisting
of remuneration paid out of the Federal Consolidated Fund;
ii. taxes on the sales and purchases of goods imported, exported, produced, manufactured
or consumed;
iii. export duties on cotton, and such other export duties as may be specified by the
President;
iv. such duties of exercise as may be specified by the President; and
v. such other taxes as may be specified by the President

Question 17

Powers of the Federation to legislate on taxes
Following entries in the Federal legislative list as contained in the Constitution of Pakistan relates
to taxes:

Answer 17

43. Duties of customs, including export duties.
44. Duties of excise, including salt, but not including alcoholic liquors, opium or other
    narcotics;
45. Taxes on income other than agricultural income;
46. Taxes on corporations.
47. Taxes on the sales and purchases of goods imported, exported, produced,
    manufactured or consumed, except sales tax on services.
48. Taxes on the capital value of the assets, not including taxes on immovable property.
49. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear
    energy.
50. Taxes and duties on the production capacity of any plant, machinery, undertaking,
    establishment or installation in lieu of any one or more of them.
51. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their
    fares and freights.

Question 18

4.3 Powers of the Provinces to legislate on taxes
All taxes other than the mentioned in above list of Federal legislative list as contained in the
Constitution of Pakistan are covered in the scope of legislation of Provinces. Accordingly, various
types of taxes are introduced by the Provinces:

Answer 18

4.3 Powers of the Provinces to legislate on taxes
All taxes other than the mentioned in above list of Federal legislative list as contained in the
Constitution of Pakistan are covered in the scope of legislation of Provinces. Accordingly, various
types of taxes are introduced by the Provinces:
 Sales tax on services
 Taxes on transfer of immoveable property
 Professional tax
 Tax on luxury houses
 Tax on registration of luxury vehicles etc.
 Property tax

Question 19

1.1 Ethics – meanings and application

Answer 19

The word ethics is derived from the Greek word ethos, which means “character,” and from the Latin
word mores, which means “customs.” Aristotle was one of the first great philosophers to study
ethics. To him, ethics was more than a moral, religious, or legal concept. He believed that the most
important element in ethical behaviour is knowledge that actions are accomplished for the
betterment of the common good. He asked whether actions performed by individuals or groups are
good both for an individual or a group and for society. To determine what is ethically good for the
individual and for society, Aristotle said, it is necessary to possess three virtues of practical wisdom:
i. temperance,
ii. courage, and
iii. justice

Question 20

DISTRIBUTION OF REVENUES BETWEEN FEDERATION AND PROVINCES
National Finance Commission [160]

Answer 20

The President shall, at intervals not exceeding 5 years, constitute a
National Finance Commission consisting of:
▪ the Minister of Finance of the Federal Government,
▪ the Ministers of Finance of the Provincial Governments, and
▪ such persons as appointed by President after consultation with
Governors of the Provinces

Question 21

Definition of tax

Answer 21

Tax is defined as follows:
1. Taxation is collection of share of individual and organization’s income by
Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority
of law to promote welfare and protection for its citizens.

Question 21

Duties of NFC

Answer 21

It shall be the duty of the National Finance Commission to make
recommendations to President regarding1. The distribution of tax receipts between the Federation and the Provinces.
2. The making of grants-in-aid by the Federal Government to the Provincial
Governments;
3. The exercise by the Federal Government and the Provincial Governments of
the borrowing powers; and
4. Any other finance matter referred by the President.

Question 22

Taxes raised by Parliament
The taxes raised under authority of Majlis-e-Shoora (Parliament) are as
follows: -

Answer 22

1. Taxes on income, including corporation tax, but not including taxes on
   income consisting of remuneration paid out of the Federal Consolidated
   Fund;
2. Taxes on sales and purchases of goods imported, exported, manufactured
   or consumed;
3. Export duties on cotton, and such other export duties as specified by the
   President;
4. Such duties as specified by the President; and
5. Such other taxes as specified by the President.

Question 23

FEDERAL LEGISLATIVE LIST
Powers of the Federation to legislate on taxes (Areas whereby Federal Government can
legislate to levy taxes)

Answer 23

Following entries in the Federal legislative list contained in constitution of Pakistan relates to taxes or
following are the taxes which can be imposed by the Federation.
43. Duties of customs, including export duties.
44. Duties of excise, including salt, but not including alcoholic liquors, opium or other narcotics;
47. Taxes on income other than agricultural income;
48. Taxes on corporations.
49. Taxes on the sales and purchases of goods imported, exported, produced, manufactured or
consumed, except sales tax on services.
50. Taxes on the capital value of the assets, not including taxes on immovable property.
51. Taxes on mineral oil, natural gas and minerals for use in generation of nuclear energy.
52. Taxes and duties on the production capacity of any plant, machinery, undertaking
53. Terminal taxes on goods or passengers carried by railway, sea or air; taxes on their fares and
freights.

Question 24

Powers of the Provinces to legislate on taxes (Areas where Provincial Government
can legislate to levy taxes)

Answer 24

All taxes other than the mentioned in above list of Federal legislative list as contained
in the Constitution of Pakistan are covered in the scope of legislation of Provinces.
Accordingly, various types of taxes are introduced by the Provinces:
▪ Sales tax on services
▪ Taxes on transfer of immoveable property
▪ Professional tax
▪ Tax on luxury houses
▪ Tax on registration of luxury vehicles etc.
▪ Property tax

Question 25

Canons of taxation
Canons of taxation are the basic principles to run a good tax system. Adam Smith was the
first economist to develop a list of canons of taxation.

Answer 25

Canons of taxation
Canons of taxation are the basic principles to run a good tax system. Adam Smith was the
first economist to develop a list of canons of taxation.
Canons of Taxation discussed by Adam Smith in famous books “The Wealth of Nations”
1. Canon of Equity
This principal says that a person who earns more should pay more to the Government as
compared to a person who earns less. As a result the person earning high income should
pay tax at higher rate as compared to a person who is earning less income.
It is one of the fundamental concepts to bring social equality and equal distribution of
wealth in a country.
2. Canon of Certainty
The tax that a person is going to pay should be certain. Everything should be made clear
and simple for the taxpayer. It ensures that the taxpayer should have full knowledge about
amount of tax payment, mode of payment and the due-date. If this canon does not exist, it
leads to tax evasion.
Another aspect of certainty is that the Government is also certain regarding the amount it
will collect from tax
3. Canon of Convenience
The procedure for tax payment should be easy, convenient and taxpayer-friendly. The
time and manner of payment must be convenient for the tax payer so that he is able to
pay his taxes in due time. If the time and manner of the payment is not convenient, then
it may lead to tax evasion and corruption.
4. Canon of Economy
The canon of economy states that the cost of collecting taxes should be as minimum as
possible. The cost of tax collection should be lower than amount of tax received by
Government.
The purpose of collecting taxes is to generate revenue for the Government. If the canon
of economy isn’t applied, the collected amount will not be sufficient for Government.

Question 26

Morality behind Tax Compliance
There are three approaches to ethics for tax compliance which are as
under:

Answer 26

Utilitarianism tells us to aim for greatest happiness across the population.
‘Happiness’ is the satisfaction of our desires.
Deontology bases ethics on the idea of duty.
Virtue ethics focus on the virtues we should have. A broad conception must
be used here. Virtue is not only honesty but using one’s talents and leading
a fulfilled life is also a virtue.

Question 27

Utilitarianism:

Answer 27

This approach suggests that the right action is the one that
maximizes overall happiness or well-being across the population.
In terms of tax compliance, utilitarianism would suggest that individuals and
businesses should pay their taxes because it leads to the greatest amount of
happiness for the greatest number of people. For example, tax revenue is
used to fund public goods and services such as healthcare, education, and
infrastructure, which benefit the entire population. If everyone paid their
taxes correctly and on time, the collective well-being of society would
improve as there would be more funds for these public goods and services.
Utilitarian Individuals: These people are driven by outcomes. They can be
motivated to pay taxes if they understand and agree with the beneficial
impacts of tax revenue on society. They see their tax payments as
contributions to the overall wellbeing of the community, helping to fund
public goods and services.

Question 28

Deontology:

Answer 28

This approach is based on the idea of duty or what individuals
and businesses are morally obligated to do, regardless of the outcome.
From a deontological perspective, tax compliance is a duty that every citizen
and business has, because it is a legal obligation set forth by the governing
body. For instance, an individual who follows a deontological ethic would pay
their taxes in full and on time, not necessarily because of the benefits those
taxes could provide to society (as in utilitarianism), but because they believe
it’s their moral duty to follow the law.
Deontological Individuals: These people are driven by duty and rules. They
can be motivated to pay taxes because they see it as a moral and legal
obligation. They believe it’s important to obey the law, and hence they
comply with tax regulations, irrespective of the use or outcome of their tax
money.

Question 29

Virtue Ethics:

Answer 29

This approach emphasizes the importance of virtuous behavior
and personal character.
In terms of tax compliance, virtue ethics would suggest that paying taxes is
an act of good character. It shows virtues such as honesty, responsibility, and
fairness. For example, a business owner might decide to pay all of their taxes
because they believe in running an honest and ethical business. Beyond just
honesty, virtue ethics also encompasses virtues like diligence (in maintaining
accurate financial records), fairness (in paying the correct amount of taxes),
and contribution to society (by providing necessary funds for public services).
Virtuous Individuals: These people are driven by personal character and
integrity. They can be motivated to pay taxes because they see it as an act of
honesty, responsibility, and fairness. They believe in doing the right thing and
would feel morally compromised if they didn’t comply with tax obligations.

Question 30

Tax avoidance and evasio

Answer 30

In recent years, tax avoidance is a considerable public concern. It is compliance with the
law, though aggressive or abusive avoidance, as opposed to simple tax planning which
seek to comply with the letter of the law.
Tax evasion occurs when someone acts against the law.
Tax avoidance is the legal use of the tax law to one’s own advantage, to reduce the
amount of tax payable. For example, it is upto tax payer that whether the business is
started as a partnership or company. In case of partnership tax rates is lower than that of
company. Another example is starting business in a tax free zone.
Tax evasion is an illegal practice where individuals, AOPs and companies unlawfully
avoids payment of tax. In tax evasion taxpayer intentionally conceals the true state of
affairs to tax authorities. It is punishable under the law. For example, concealment of
income, misclassifying income under another head, claiming excess deductions, and
claiming wrong tax credits.

Question 31

ETHICS FOR TAX PRACTITIONERS

Answer 31

1. Integrity
   The tax practitioner should be straightforward and honest in all professional and business relations. He must act
   honestly and with integrity. All tax laws should be followed properly. He should not misuse the money given by
   his client for payment of tax.
2. Objectivity
   Practitioner should not allow bias, conflicts of interest or undue influence of others to override their
   professional or business judgments.
3. Confidentiality
   The tax practitioner should keep all information confidential acquired in professional and business relationships.
   The information received from client should not be disclosed to anyone unless it is required by law. Further the
   information obtained from client should also not be used for personal benefit or for benefit of a third party.
4. Professional Competence and due care
   Tax practitioner has a duty to maintain professional knowledge and skill at such level that client receives a
   competent service. The practitioner should have complete knowledge and skill of the service provided by him.
   All tax laws should be applied properly in accordance with the circumstances. Staff members must also be well
   trained.
5. Professional Behavior
   The practitioner should follow the laws and regulations and should avoid actions which discredits the
   profession. He should follow the code of ethics developed for tax practitioner. He should behave with courtesy
   with people

Question 32

Definition of tax

Answer 32

Tax is defined as follows:
1. Taxation is collection of share of individual and organization’s income by
Government under authority of law.
2. Taxation is used by Government for increasing revenue under authority
of law to promote welfare and protection for its citizens.