The taxation system plays a vital role in the economic growth and development of any country. According to Black’s Law Dictionary “A charge, monetary imposed by the Government on persons, entities, transactions, or property to yield public revenue.”
In Pakistan tax can only be levied through the Act of Parliament. The general classification of taxation comprises Direct Taxes and Indirect Taxes.
Direct Tax
Direct taxes are the taxes that a taxpayer pays directly to the government or any other body imposing them.
In Pakistan, there is a progressive tax system which means that the amount of tax that a person has to pay is directly proportional to his income. In other words, if a person earns more income then he would have to pay more tax. Examples of Direct taxes include Income Tax, Property Tax, Land Tax, etc.
Since the taxpayer deposits direct taxes to the Government Treasury directly by himself as opposed to indirect taxes therefore the chances of tax evasion are greater.
In this article, we will discuss the basics of Income-tax that a filer pays directly by filing an Income Tax Return at the end of every tax year.
The Income-tax laws first came into existence in the year 1922 after the promulgation of the Income Tax Act 1922. Both the Pakistani and Indian governments adopted this Act after the partition in 1947. Pakistan promulgated its first Income Tax Ordinance in 1979 known as the Income Tax Ordinance, 1979 which was subsequently repealed by the Income Tax Ordinance 2001.
Income Tax Ordinance, 2001
The Income Tax Ordinance, 2001, was promulgated on September 12, 2001, and came into force on 1st July 2002. It consists of 13 Chapters, 242 Sections, and 10 Schedules.
Sections 4 to 113C are the charging sections that deal with the computation and taxation of income. Sections 114 to 241 are the administrative sections that primarily deal with the methods of charging provisions of law.
The Income Tax Rules, 2002, came into force on July 1st, 2002 and comprised of 232 Rules and 2 Schedules.
Income Tax law being a Special Law has Special Courts in which the Appellate Forums include Commissioner Appeals Inland Revenue and the Appellate Tribunal Inland Revenue. Moreover, being a special law, the provisions of the Income Tax Ordinance, 2001, would prevail where there is a contradiction with the General Law.
The sources of income on which tax is levied by the Federal Government are broadly classified into 5 categories/ heads which are the following:
- Salary.
- Property.
- Business.
- Capital Gains.
- Other Sources (E.g. profit on Debt and National Saving Certificates, dividends, Pension, etc)
Agricultural Income
In Pakistan, the Federal Government levies, charges, and collects tax on income that a person derives from all sources except the tax on “Agricultural Income” which is exempt under Income Tax Ordinance, 2001 being the subject of the Provincial Government.
However, concerning agricultural income, it is important to note that the Federal Board of Revenue (FBR) will only accept the agricultural income being exempt to the extent of tax paid on the same in the province. Otherwise, if the taxpayer fails to furnish the evidence of tax paid in the province then the taxing authorities will levy the tax on such income by treating it as unexplained income as per Section 111 of the Income Tax Ordinance, 2001.
Indirect Tax
Indirect taxes are those taxes where the consumer/ taxpayer bears the tax burden and the taxpayer does not deposit these directly to the Government Treasury rather an intermediary collects those on behalf of the Government. As the Government imposes Indirect taxes upon all individuals irrespective of their income, it is impossible to avoid indirect taxes.
In Pakistan, examples of Indirect Tax include sales tax, customs duty, etc but the most commonly known Indirect Tax is Sales Tax which is majorly governed by the Sales Tax Act, 1990.
Sales Tax Act, 1990
The Sales Tax is the tax on sales and supply of goods and services and on goods imported into Pakistan which is levied by the Federal Government and governed by the Sales Tax Act, 1990. The Government levies sales tax on the taxable supplies of the registered person made in the course or furtherance of any taxable activity carried on by him and upon goods imported into Pakistan.
The Sales Tax Act, 1990 consists of 10 Chapters, 76 Sections, and 12 Schedules.
In contrast to the Income Tax, the Tax Period for Sales Tax means one month or such other period as the Federal Government in the Official Gazette may specify.
Taxable goods mean all goods, but exclude specifically exempted goods as per section 13 and Sixth Schedule of the Sales Tax Act, 1990. The Federal Government also provides certain exemptions by issuing Statutory Regulatory Orders (SROs).
Impact of 18th Amendment of the Constitution of Islamic Republic of Pakistan
The abolition of concurrent list vides 18th amendment of the Constitution of the Islamic Republic of Pakistan, 1973 resulted in some changes in the taxation system. The power to levy and collect certain taxes was transferred to the Provincial Governments. One of these includes Sindh Sales Tax on Services governed by Sindh Sales Tax on Services Act, 2011.
Consequent to the 18th amendment, after the transfer of powers to the Provinces, the Government of Sindh formed Sindh Revenue Board (SRB) under Sindh Revenue Board Act, 2010. Later, the Sindh Government enacted Sindh Sales Tax on Services Act, 2011 to levy and collect sales tax on services provided or rendered. This Act became effective on 1st July 2011.
The Sindh Revenue Board (SRB) is responsible for the administration, enforcement, and collection of sales tax on services. It is a mandatory requirement that all persons providing services that are taxable under the Sindh Sales tax on Services Act, 2011 register with Sindh Revenue Board (SRB) and file their returns.
Conclusion
Both direct and Indirect taxes are crucial for the economy of the country. Therefore as responsible citizens, we need to realize that there is certainly no excuse for tax evasion.
