By:Fayaz Hussain Abro, Assistant Commissioner

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 Britain’s war against Napoleon. Hence, it is sometimes said that Napoleon is the “Father of Income Tax”

Then in undivided India in 1860 being 600 taxable per anum. After 2 years it was imposed on 200 @ 2%.

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1. Who levies it? Parliament

2. Why is it imposed? - To generate revenue for Govt- Re-distribution of wealth- To help the poor

3. What is taxed? Income

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.

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Income Tax Authorities:

Chairman FBR 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

1. Income Tax Ordinance, 2001.2. Income Tax Rules, 2002.3. Finance Acts4. Statutory Regulatory Orders (SRO)5. Circulars6. Case Law

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Historically, there have been three laws imposing tax on income in Pakistan:

Income Tax Act,1922.

Income Tax Ordinance, 1979.

Income Tax Ordinance,2001.

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REASONS FOR PROMULGATION: Simplification of income tax law

Effort to make it easy to understand even for a lay man.

Rearrangement of income tax law Due to numerous amendments, the I.T.

Ordinance,1979, had become complex. Introduction of Universal Self Assessment

Scheme (USAS).

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There are 13 Chapters in Income Tax Ordinance,

2001.– Chapter are divided into Parts– Parts may be further sub-divided into Divisions– Divisions consists of Section

No. of original sections : 240No. of omitted sections : 11No. of sections inserted later on: 37No. of current sections : 266No. of schedules : 07

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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 138 and Section 139, it is written as 138A.

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Charging Section: The section which imposes tax is called charging section. Sections: 4 of the IT Ordinance,2001 is

the charging section, which imposes tax on taxable income.

Machinery Sections: Those sections which provide for the method of computation and collection of the tax imposed in charging section. All the sections of the IT Ord,2001, other

than Section: 4, are machinery sections.10

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 rates specified in Division I or II of Part I of the First Schedule, as the case may be, on every person who has taxable income for the year.”

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There are four major underlying concepts in

Section 4(1):

1. Tax Year Concept2. Tax Rate Concept3. Person Concept4. Income Concept

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• Section 74: Tax year

• Tax year is a period of twelve months ending on the 30th day of June.

• Types of Tax Years– Normal Tax Year– Special Tax Year– Transitional Tax Year

Definitions:

These are of three types1. Exclusive: it gives definite meaning to the word or

term and does not give ordinary meaning of the term or word.

The exclusive definition starts with the expression “mean” or “means”

E.g. “Prescribed means prescribed by rules made under the ordinance”. S.(44)

2. Inclusive: A word that retains its ordinary dictionary meaning & also acquires the meaning assigned to it by the definition given in the statute.

This type of definition begins with the word “includes”

Cont..

e.g. Business includes any trade, commerce, manufacture etc

e.g. S.(9)3. Exhaustive: This definition carries both

the elements it is both flexible as well as restrictive.

e.g. S.2(7)

A Tax Year is denoted by the calendar year in which 30th June of the said tax year falls.

And, such tax is called ‘Normal Tax Year’

EXAMPLE01.07.2008 to 30.06.2009 (Tax Year 2009)01.7.2005 to 30.06.2006 (Tax Year ………)

• On application, the Commissioner may allow a taxpayer to use a period of twelve months’ different from normal tax year.

• Such tax year is called ‘special tax year’• It is denoted by the calendar year relevant to

normal tax year in which the closing date of the special tax year falls.EXAMPLE

- 01.01.2009 to 31.12.200931.12.2009 relates to N.T. Year 01.07.2009-30.06.2010 Hence, Tax Year 2010 (not Tax Year 2009)

• Where the tax year of a person changes from normal to special tax year, the period in-between the two tax years is known as the “transitional tax year”.

• A taxpayer with Normal Tax Year 01.06.2007 to 30.06.2008, shifts to Special Tax Year 01.01.2009 – 31.12.2010.

• The period of 01.07.2008 to 31.12.2008 is known as trasitional tax year.(S.74(9)

Types of Tax Rates: Progressive Regressive Flat

Tax rates in Inc. Tax Ordinance,2001, are progressive.

Tax rates are provided in the 1st Shedule

• Section 80: PersonThe following shall be treated as persons for the purposes of this Ordinance, namely:(a) An individual; (b) A company or association of persons incorporated, formed, organized or established in Pakistan or elsewhere;(c) The Federal Government, a foreign government, a political subdivision of a foreign government, or public international organization.

“Association of Persons” includes a firm, a Hindu undivided family (HUF), any artificial juridical person and any body of persons formed under a foreign law, but does not include a company.

Company means: (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

country outside Pakistan relating to incorporation of companies

(v) a trust, a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force

(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 this Ordinance

(vii) a Provincial Government (viii) a Local Government] in Pakistan, or (ix) a Small Company as defined in

section 2.

• Section 10: Total IncomeThe total income of a person for a tax year shall be the sum of the person’s income under each of the heads of income for the year.

• Section 11: Heads of incomeFor the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely:

(a) Salary(b) Income from Property(c) Income from Business(d) Capital Gains, and(e) Income from Other Sources.

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) by the total of any deductible allowances under Part IX of this Chapter of the person for the year. (i.e zakat, workers’ welfare fund, workers’ participation fund)

Head of Inc Salary IFP IFB C.GAINS IFOS

Amount Chargeable

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 ?

Tax Liability ….

Less: Tax Cr …..

Tax Payable ……

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.

OBJECTIVES:

TO RAISE REVENUE FOR THE STATE TO STOP PEOPLE CONSUMING SOME

HARMFUL ITEMS I.E OPIUM. TO REMOVE INEQUALITIES WHILE

DISTRIBUTION OF INCOME. TO PROVIDE SERVICES LIKE FREE

SCOOLING & FREE MEDICAL TO THE POOR.

Certain Expressions

1.Subject to: means the effect of the provision under consideration depends on (is subordinate to) the other provisions of the statute.

2.Notwithstanding anything contained in: the provision under consideration will have over-riding effect on other provisions of the statute in case of conflict.

3.Provided that: a proviso creates an exception from a general principle or restricts the scope of preceding enactment.

Exemptions & Tax Concessions ( Part VII of Chapter III) Items contained in Sections 41 to51 have been

exempted fully from tax or some concession in the tax has been provided.

Section 53 specifies that items mentioned in the second schedule will be:

1. Completely exempt from tax; or2. Exempt from tax subject to fulfillment of certain

conditions; or3. Will be liable to pay tax at lower rates; or4. Will be allowed a reduction in tax liability; or5. Will be exempt from the operation of certain

provisions of Income Tax Ordinance,2001.

Second Schedule: Four Parts Part I Exemptions from total income There are 139 clauses in this Part. Incomes of the persons shall be exempt from tax subject to the conditions and the extent specified in the

given clauses/ Part II Reduction in tax rates There are 26 clauses in this Part. Incomes of the persons shall be liable to tax @ such rates which are less than the rates specified in the

First Schedule.

Part III Reduction in tax liability There are 06 clauses in this Part. Income of the persons shall be allowed reduction in tax liability to the extent and subject to such

conditions in the given clauses. Part IV Exemption from specific provisions There are 72 clauses in this Part. Income of the persons shall be exempt from the operation of such provisions of this Ordinance subject to

such conditions and to the extent as specified in the given clauses.

Cotinue..

Second Schedule of Income Tax Ordinance,2001 contains the list of exempted incomes.

Federal Govt is empowered to make such changes but such changes should be:

1. Notified in the official Gazette2. The Federal Govt is bound to place all

such changes before the National Assembly.

Incomes Exempt from TAX:

Agriculture Income (S.41) Diplomatic & United Nations Exemptions (S.42) Foreign government officials (S.43) Exemptions under international agreements (S.44) President’s honours. (S.45) Profit on debt (S.46) Scolarships (S.47) Support payments under an agreement to live apart (S.48) Federal govt, Provincial govt & Local govt income

(S.49)

Cont…

Foreign-source income of short-term resident individuals (S.50)

Foreign-source income of returning expatriates (S. 51)