What is Income Tax?

What is Income Tax?

Focus on the word INCOME TAX in the basic sentence below:

For each Tax Year, the government imposes Income Tax at a specified rate on every Person who has Taxable Income.

The discussion below will develop an understanding of the word INCOME TAX.

Income Tax is a Federal Tax which the Federal Government has imposed on Person with Taxable Income. 

In general, tax is a common burden payable by the citizen of Pakistan to make the Governance of the state financially possible. Income Tax is the tax imposed on the citizen of Pakistan in exercise of power of the Federal Government under item no. 47 of the Federal Legislative List, the constitution of Pakistan. The Income Tax is administered under the provision of Income Tax Ordinance, 2001. The Ordinance defines the word Tax as follows:

Tax[1] means any tax imposed under the income tax law. It also includes any penalty, investment tax, fee or other charge or any sum or amount leviable or payable under the Income Tax Ordinance, 2001.

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[1] See Section 63

Understanding Income Tax

Understanding Income Tax

The word Income Tax has two parts: Income and Tax.

In order to have a professional level of knowledge about Income Tax, one has to understand following basic sentence and its underlying meaning in Income Tax Law – the Income Tax Ordinance, 2001.

"For each Tax Year, the government imposes Income Tax at a specified rate on every Person who has Taxable Income."

The sentence has words, which need explanation of their meanings as used in the Income Tax Ordinance, 2001. The words are Income,Taxable Income,Income Tax, Tax Year, Person, and the government.
In essence, defining these words will provide us with answers to the following basic questions:

(1) What is Income?

(2) What is Taxable Income?

(3) What is Income Tax?

(4) What is a Tax Year?

(5) Who is a Person?

(6) Who collects Income Tax?

(7) How much Income Tax is payable by a Person?

After knowing answers to these questions, you will have an overall understanding of Income Tax. Before going into details, a set of brief and non-technical answers are given below:

(1) What is Income?

Income is any amount on which Income Tax is chargeable, and it includes the amount, which the Income Tax Ordinance, 2001 treats as Income

(2) What is Taxable Income?

The Taxable Incomeis what a person gets after subtracting deductible allowances from the Total Income. The Income Tax is calculated on the Taxable Income, not the Income.

(3) What is Income Tax?

Income Tax is a tax imposed on person with Taxable Income by the Federal Government.Taxable Income is the basis of calculating Income Tax.

(4) What is a Tax Year?

The Tax Year is a period of twelve months for which income of a person is assessed. Normally, it starts on 1st July of a year and ends on the 30th June of the next year. It has three types: Normal Tax Year, Special Tax Year, and Transitional Tax Year.

(5) Who is a Person?

Commonly, a Person is an individual, but the concept of Person is wider in Income Tax; it includes Individuals, Association of Persons, Companies, and Governments, etc.

(6) Who collects Income Tax?

The Federal Governments collects the Tax through the Federal Board of Revenue. The Federal Board of Revenue runs the administration of the Income Tax department through the Chief Commissioners, the Commissioners, the Deputy Commissioners and other subordinate authorities, officers, and officials.

(7) How much Income Tax is payable by a Person?

The Tax Payable by the person depends on Income of the Person, the applicable rates of tax, and reliefs given to the Person under the Income Tax Ordinance, 2001.

Summary of basic questions and answers
Questions	Answers
What is Income?	(i) An amount chargeable to Income Tax (ii) An amount treated as Income under the Ordinance
What is Taxable Income?	The income on which tax is chargeable
What is Income Tax?	A federal tax on person with Taxable Income
What is a Tax Year?	A period of 12 months to assess income of a person
Who is a Person?	An individual, an AOP, a company, and a trust, etc.
Who collects Income Tax?	(i) The Federal Governments through the FBR (ii) Collecting and deducting agents
How much Income Tax is payable by a Person?	It depends on Income of the Person, the applicable rates of tax, and reliefs, credits and concessions.