Income Tax
Globally, governments levy Income Tax on their citizens with
certain level of Income. The single most important purpose of this tax is, of
course, generation of money or revenue for governmental operations. The
government of Pakistan also levies Income Tax on personal with a certain level
of income to generate revenue.
Rates of Income Tax
The rates of Income Tax also vary considerably around the
globe. These rates of taxing incomes may be progressive, proportional, or
regressive. The progressive rates become higher when Income increases; the
proportional rates remain same when Income increases; and the regressive rates
decrease when income increases. In Pakistan, the rates of Income Tax are
progressive. The purpose of making the rates progressive is to give relief to
the lower income groups in the society and to put more tax burden on higher
income groups.
Income Tax is a direct tax
In general, taxes are classified into direct taxes and
indirect tax. A direct tax cannot be escaped and a person has to pay it
directly out of personal financial resources. It means a person cannot shift
the burden of his direct tax; however, the person can shift the burden of his
indirect tax. Income Tax in Pakistan is a direct tax. An example of indirect
tax in Pakistan is sales tax. A seller can easily shift the burden of tax to
the buyer by adding sales tax to the price of the product being sold.
Understanding the Income Tax Law
The Income Tax Law in Pakistan four
components, namely:
(1)
The Income Tax Ordinance, 2001;
(2)
The Income Tax Rules 2002;
(3)
The Finance Acts or Ordinances; and
(4)
The Case Law.
The Income Tax Ordinance, 2001
Governance in Pakistan has three tiers:
(1)
The Federal Government;
(2)
The Provincial Government; and
(3)
The Local Government.
Each tier of governance has its own financial powers to
impose and collect taxes. The powers to tax are given in the Legislative Lists,
which are part of the Constitution of Pakistan. Item No. 47 of the Federal
Legislative List empowers the Federal Government to impose tax on the incomes
of persons. The government levies and regulates Income Tax through the Income
Tax Ordinance, 2001. The ordinance is a federal ordinance; it has thirteen
chapters, 240 sections, and seven schedules. Each chapter has been divided into
parts and each part has been divided into Divisions where needed. The thirteen
chapters are as under:
No Title of
chapters
(1)
Preliminary
(2)
Charge of tax
(3)
Tax on Taxable Income
(4)
Common rules
(5)
Provisions governing persons
(6)
Special industries
(7)
International
(8)
Anti-avoidance
(9)
Minimum tax
(10)
Procedure
(11)
Administration
(12)
Transitional advance tax provisions
(13)
Miscellaneous
The seven schedules are as under:
No. Title of the schedule
(1)
Rates
of tax
(2)
Exemptions and tax concessions
(3)
Depreciation
(4)
Rules for the computation of the profits and
gains of insurance business
(5)
Rules for the computation of the profits and
gains from the exploration and production of petroleum
(6)
Recognized provident funds
(7)
Rules for the computation of the profits and
gains of a banking company and tax payable thereon
The Income Tax Rules 2002
Government makes rules under an act or ordinance to
practically perform the actions under the act or ordinance. The rules provide details of action to be
done and the way of doing the actions. The rules are also a part of the law.
The rules framed under the Income Tax Ordinance, 2001 are The
Income Tax Rules 2002 and are a part of Income Tax law in Pakistan.
The Finance Acts or Ordinances
The Income Tax Ordinance, 2001 is not a static law; it keeps
changing through enactment of finance acts, or ordinance to reflect a justified
taxing of various persons and sectors in the economy of Pakistan. The finance
acts, or ordinances are annual pieces of legislation, which amend and update
Income Tax and other laws. For example, the finance act, 2013 imposes minimum
tax on builders keeping in view their ability to bear the burden of tax in
current economic situation.
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