chp #1 Flashcards
Definition of tax
Tax is defined as follows:
- Taxation is collection of share of individual and organization’s income by Government under authority of law.
- Taxation is used by Government for increasing revenue under authority of law to promote welfare and protection for its citizens.
Non-revenue objectives of taxation
The main purpose of taxation is to collect revenue for the Government. The Government levies tax to achieve
following objectives.
- To collect revenue to run and administer Government.
- Tax is a tool for implanting its policies.
- Tax is used for fair distribution of wealth.
In addition to finance Government expenses, tax uses
In addition to finance Government expenses, tax is used as a tool to carry out national objective of social and economic development as follows:
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.
- Taxes can be used to reduce inequalities in distribution of wealth.
- Tax prevents wealth being concentrated in a few hands of the rich.
- Through tax Government can encounter the effect of inflation and depression
- To promote science and invention, education systems, health care systems, energy system and military defense.
- It can be used to discourage investment abroad.
- Tax can be used as a bargaining tool in trade negotiation with other countries.
- Tax laws can be used for documentation of economy(Any amount transferred otherwise than banking channel will be deemed as income)
- Government can discourage use of harmful goods by levying heavy rates of tax on certain sectors.
- Tax can be used to discourage certain undesirable sectors and activities.
- Government can encourage research & developments by introducing tax credits.
Basics of tax laws
Adam Smith’s in his famous book “Wealth of Nations” has elaborated following canons of taxation:
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.
Tax as means for development
Tax is a main source of development. Tax helps in the development of country
as follows:
- Exemption of tax to agriculture sector to promote agriculture.
- Charities can be encouraged by providing tax credits on them.
- Imposing high custom duties on import of luxury items will encourage local manufacturing.
- Taxing rich at higher rate and low income group at lower rate. 5. Government can mark areas as tax free zones, industrial zone and economic zone to provide tax incentives to such areas. It will encourage business concerns to establish business units that will bring employment
opportunities.
6 Investment in new shares can be encouraged through introducing tax credits.
- Investment in new plant and machinery can be encouraged through introduction of tax credits.
Kinds of taxes/Structure of taxes
1:Proportional tax/ Flat tax
It is a tax where the rate of tax is fixed. A fixed rate is applied on person’s income low. Under this system people who earn more are not charged at a higher percentage
whether the income is high or
as compared to progressive tax.
2: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.
3: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.
2.3 Principles for levy of tax
Following are the principles for
levy of tax.
1: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.
2: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.
3: 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,
2.4 Characteristics of tax laws
Following are some of the characteristics of a taxation system:
- Administration and compliance costs should be low.
- It should be understandable to the taxpayer.
- The burden of taxes should be distributed in proportion to the ability of the tax-payer, i.e., it should be progressive in character.
4.The tax should be payable in cash. It means that payment through cheques should not be accepted.
- it should be mandatory in nature and payment should not be voluntary in nature.
- Taxes should be collected at a convenient time for tax payers
7.Tax should be imposed by state which Has the jurisdiction over the person to recover I.E , it should be imposed BY
Parliament in Pakistan.
8.IT IS levied for public purpose I.e taxes are imposed to support Government to implement projects Taxes should be charged on incomes, transactions or property
the principles of a sound tax system
fiscal adequacy
The sources of revenue should be
sufficient to meet expenses of
government. Revenues of Government should be capable of expanding or contracting annually in response to variations in public expenditures
2 Equality or Theoretical Justice
Taxes charged must be based upon the ability of the citizen to pay.
- Administrative Feasibility
tax laws should be clear and plain to taxpayers. Capable and well-trained public officers should enforce it Time of payment should be convenient.
- Consistency or Compatibility with Economic Goals
Tax laws should be consistent with economic goals of the government. The goal of Government is to provide basic services for general public.
1 TYPES OF TAXES IN PAKISTAN
Direct taxes
federal taxes in Pakistan are classified into 2 broad categories:
- Direct taxes
- Indirect taxes
Direct Taxes
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.
indirect taxes
Indirect Taxes
Sales Tax
Sales tax is charged and paid at the rate of 17% of the value of
(a) taxable supplies made by a registered person in the course of any taxable activity carried on by him;
and
(b) goods imported into Pakistan
For determining tax liability input paid at the time of purchase or import is deducted from output tax charged on
Sales.
Customs Duty
Customs Act in Pakistan specifies import and export duties on certain goods.
A major portion of Government’s revenue collected through this tax.
The rate of custom duty is determined by socio-economic factors.
Under this Act high rate is applied on luxury items as well as less essential goods.
The import tariff on industrial plant and machinery is lower than that of consumer goods.
federal excise duty
Under Federal Excise Act tax is charged at specified rate on:
Goods produced or manufactured in Pakistan
Goods imported in Pakistan
Services provided in Pakistan
the base on which tax is charged may be value or retail price or weight.
Classification of goods is done as per Harmonized Commodity Description and Coding system. All exports are charged to tax at the rate of zero percent
- HISTORY OF TAX LAWS IN PAKISTAN
In Pakistan Federal Government has the right to collect tax on the income of a person.
the history of modern tax came from year ?
1860
who first introduced?
Before the partition, income tax was introduced for the first time in 1860 The British Empire first introduced the Income Tax Act 1860 to fulfill the deficit faced due to war of independence of 1857. The tax was repealed in 1865.
Thereafter Income Tax Act of 1886 was introduced and it was imposed on traders by some of provinces.
After the World War, the Government required more funds. So in 1916 for the first time progressive rates of tax were introduced. Government thought that flat rates of taxes are not justified and the amount of the tax levied should depend upon the income of the earner. For collecting additional resources, a Super Tax was levied in 1917.
Its base scheme survives till today. It introduced the definition of agricultural income and it was made exempt from tax and the exemption is applicable till now.
