Income Tax Law in Pakistan

Tuesday, March 9, 2010

History of Income Tax Law in Pakistan:

1) Promulgation of Income Tax Act, 1922:

When Pakistan came into being, the Government of Pakistan promulgated the Income Tax Act, 1922, as amended upto the date for regulating the taxation system in Pakistan.

2) An Applicability of the Income Tax Act, 1922:

The provisions of the Act were extended to the whole of Pakistan except the specified areas.

3) Formation of the Taxation Inquiry Committee:

"A Taxation Inquiry Committee", was introduced in 1958 which was consist of officials and the representatives of trade and commerce.

4) Recommendations of Taxation Inquiry Committee:

"Taxation Inquiry Committee" submitted a report after keen analysis of prevailing tax system and suggested some recommendations. Some of the recommendations were accommodated which resulted in the amendment of Income Tax Act, 1922.

5) Abolishment of Super Tax:

Before 1959, super tax was imposed on the incomes of all the persons but in registered firm and companies.

6) Expression of Rate Slab as a Percentage of Income:

In 1959, the rates of each slab were expressed as a percentage of income considering the recommendations of "Taxation Inquiry committee".

7) Change in Financial Year:

Before 1960, the financial year was considered from 1st April to 31st March but in 1960, it was changed from 1st July to 30th June.

8) Introduction of Income Tax Committee:

In 1961, FBR introduced an "Income Tax Committee". Main purpose of introduction of such committee was to make recommendations for simplification of the Income Tax Act, 1922 and procedure of taxation.

9) Introduction of Self Assessment Scheme:

Before 1965, an assessment officer was assessed the income and determined the tax liability of the person but in 1965, "Self Assessment Scheme" was introduced.

10) Promulgation and Enforcement of the Income Tax Ordinance, 1979:

Till 1979, lot of amendments were made in the context of the Income Tax Act, 1922. As a result of these amendments, the Act became a complicated law and difficulties arose in its working. Keeping these difficulties in view, the Government promulgated a new income tax law namely "The Income Tax Ordinance, 1979" through the Finance Ordinance on June 28, 1979 and included all the basic concept of the repealed Act, so that the benefit of the whole case law built up over the last 57 years is not rendered useless.

11) Formation of National Tax Reform Commission:

In 1985, the Federal Government formed a National Tax Reform Commission. It was consist of members of Senate and National Assembly, high government officials and renowned industrialist. Major purpose of such commission was to suggest way and means to improve the existing structure of tax laws in Pakistan.

12) Income Tax Survey 1999-2000:

In 1999-2000, under the Income Tax Ordinance, 1979, an income tax survey was conducted to analyze the prevailing taxation structure and to procure the suggestions and recommendations from surveyors.

13) Introduction of Tax Amnesty Schemes:

Many tax amnesty schemes were introduced under the Income Tax Ordinance, 1979. These schemes were introduced to provide a chance to black money holders, so that they can change their black money into white money. Latest scheme was introduced in the year 2002.

14) Promulgation of the Income Tax Ordinance, 2001:

After 22 years of the promulgation of the Income Tax Ordinance, 2001, to modernize the taxation system, a government of Pakistan introduced a new income tax law namely, "The Income Tax Ordinance, 2001" which was promulgated on September 13, 2001. It was published in the Extraordinary Gazette of Pakistan at pages bearing Nos. 969 to 1217.

15) Short Title of the Income Tax Ordinance, 2001:

Under section 1, the Ordinance specifies that "The Income Tax Ordinance, 2001" shall be the short title of the law.

16) Applicability of the Income Tax Ordinance, 2001:

Under section 1, the Ordinance specifies that the Income Tax Ordinance, 2001 shall extend to the whole of Pakistan.

17) Date of the Enforcement of the Income Tax Ordinance 2001:

Section 1 of the Ordinance, empowers the Federal Government to notify the date from which the Income Tax Ordinance, 2001 shall came into force. The Federal Government, vide its notification No. S.R.O. 381 (1)/ 2002, dated 15th June, 2002, announced that the Income Tax Ordinance, 2001 shall came into force on the first day of July, 2002.

18) Status of the Income Tax Ordinance, 2001:

According to section 3 "The Income Tax Ordinance, 2001" overrides other laws enforceable in Pakistan. It means, in case of any contradiction between the provisions of the Income Tax Ordinance, 2001 and any other law of the country, the provisions of the Income Tax Ordinance, 2001 shall prevail.

19) Purpose of the Income Tax Ordinance, 2001:

The preamble of the Ordinance specifies the object of law. It specifies that the Income Tax Ordinance, 2001, is promulgated to consolidate and to amend law relating income tax and provide for matters ancillary to and connected with the income tax.

20) Income Tax Rules, 2002:

The FBR under the authority of section 237 of the Income Tax Ordinance, 2001 made the Income Tax rules, 2002. These rules were published on July1, 2002 in Extraordinary Gazette of Pakistan at pages 1819 to 1966.

21) Finance Act, 2009:

To update the income tax law in Pakistan according to the requirements of time, different methods of changes have been adopted by competent income tax authorities like S.R.O's and Circular’s etc. Finance Act is the regular source of change, it is presented in the month of June in each year. Finance Act, 2009 is one step to continuance process of change.

Tax Administration Reforms Programme:

Pakistan’s fiscal crisis is deep and not easily resolvable. Tax receipts are insufficient to pay even for debt service and defence and there is hardly any net foreign assistance for development. Simultaneously, there is a crisis of confidence between the taxpayer and the government. If taxes relative to the GDP do not increase significantly, without new levies, Pakistan can not be governed effectively, essential public services can not be delivered, and high inflation can not be avoided. The reform of tax administration is the single most important economic task for the government.

Consequently, the Government of Pakistan has started a tax Administration Reforms Programme. The basic objective of the programme is to develop modern, integrated, effective and efficient tax system in Pakistan which promotes mutual trust and satisfaction both for the tax payers and the tax collectors.

The divisional structure of taxation system has been converted into functional structure. For example: Large Taxpayers Units (LTU) has been established at Karachi, Lahore and Islamabad.

Furthermore, in other big cities, Medium Taxpayer Units have also been established. Ultimately, it is planned that all Medium Taxpayers Units shall be converted into Regional Tax Offices (RTO). Fourteen Regional Tax Offices shall be responsible for collection of all domestic taxes. For example: Income tax, sales tax and excise etc.

Under Tax Administration Reforms Programme twenty three taxpayers facilitation centers have been opened whereas 29 more such centres are planned to be started.

To implement such Tax Administration Reforms Programme, the Government has transformed the Central Board of Revenue (CBR) into the Federal Board of Revenue Act, 2007. Almost, all powers and functions of the CBR have been vested to the FBR. The FBR shall consist of at least seven members. These members shall be appointed by the FBR. The head of the FBR is called Chairman who is appointed by the Federal Government.

Major objectives of such tax administration reforms programme are the followings:

1) To provide quality service to each employee.

2) To increase productivity by providing quality work environment and adequate compensation to all employees.

3) To improve voluntary compliance by taxpayers through efficient and organized management.

4) To bring cultural, operational and structural changes in the taxation structure of Pakistan.

Scope of Income Tax Law:

1) The territorial limits to which the Income Tax Ordinance, 2001 applies.

2) The components of the Income Tax Law in Pakistan.

Extent of the Income Tax Ordinance, 2001:

The Income Tax Ordinance, 2001 applies to the whole of Pakistan. The definition of word "Pakistan" has been provided in Article 1(2) of the Constitution of Pakistan, 1973. The following territories have been included therein:

1) Pakistan shall be a Federal Republic to be known as the Islamic Republic of Pakistan.

2) The territories of Pakistan shall comprise—

a) The territories of Balochistan, the North-West Frontier, the Punjab and Sindh;

b) The Islamabad Capital Territory.

c) The Federally Administered Tribal Areas; and

d) Such States and territories as are or may be included in Pakistan, whether by accession or otherwise.

3) [Majlis-e-Shoora (Parliament)] may by law admit into the Federation new States or areas on such terms and conditions as it thinks fit.

a) "Tribal areas" means the areas in Pakistan which; immediately before the commencing day, were Tribal Areas, and includes—

i) The Tribal areas of Balochistan and the North-West Frontier Province; and

ii) The former States of Amb, Chitral, Dir and Swat;

b) "Provincially Administered Tribal Areas" means---

i) The district of Chitral, Dir and Swat (which includes Kalam), the [The Tribal Area in Kohistan district], Malakand Protected Area, the Tribal Area adjoining [Mansehra] district and the former State of Amb: and

ii) Zhob district, Loralai district (excluding Duki Tehsil), Dalbandin Tehsil of Chgai District and Marri and Bugti Tribal territories of Sibi district; and

c) "Federally Adminstered Tribal Areas" includes---

i) Tribal Areas adjoining Peshawer district;

ii) Tribal Areas adjoining Kohat district;

iii) Tribal Areas adjoining Bannu district;

iv) Tribal Areas adjoining Dera Ismail Khan distrct;

v) Bajaur Agency;

vi) Orakzai Agency;

vii) Mohamand Agency;

viii) Khyber Agency;

ix) Kurram Agency;

x) North Waziristan Agency; and

xi) South waziristan Agency.

Sources / components of Income Tax law:

The following are the constituents of income tax law in Pakistan:

1) The Legislative Law, i.e. The Income Tax Ordinance, 2001.

2) The Procedural Law, i.e. The Income Tax rules, 2002.

3) The notifications, circulars etc. issued by the FBR.

4) The case law

5) Finance Acts or Ordinances.

1) Income Tax Ordinance, 2001:

Income Tax Ordinance, 2001 is the basic component of income tax law in Pakistan. All the income tax law revolves around the Income Tax Ordinance, 2001. All matters of taxation regarding computation of taxable income, computation of tax liability, payment of tax, recovery of tax, appeals, refund, penalties and prosecution etc. have been discussed in the Ordinance. The Income Tax Ordinance, 2001 has 240 sections which have been discussed in 13 chapters. Each chapter deals with a particular subject and has been divided into parts. Many parts have been further subdivided into divisions. There are also Seven Schedules of the Income Tax Ordinance, 2001. Each Schedule deals with a particular subject and has been divided into parts. Some parts are further subdivided into divisions. Schedules are also treated as part of the Ordinance.

2) Income Tax Rules:

The FBR being the regulatory body and the highest income tax executive authority in Pakistan is empowered to make rules regarding the procedural matters connected with the implementation of the concerned laws like the Income Tax Ordinance, 2001. These rules are made for the guidance of its officials as well as the tax payers. The FBR under the authority of section 237 of the Income Tax Ordinance, 2001 made the Income Tax Rules, 2002. These rules were published on July1, 2002 in Extraordinary Gazette of Pakistan at pages 1819 to 1966. Income tax rules have the same force as the sections in the Income Tax Ordinance and such are implemented in the same manner.

3) Notifications, Instructions, Orders, SROs etc.:

Notifications, instructions, orders, SROs etc. are issued by the FBR u/s 206 of the Income Tax Ordinance, 2001 for the guidance of its officials. Similarly, the Federal Government is also empowered u/s 53 of the Income Tax Ordinance, 2001 to exempt certain types of Income or specific persons from income tax and to prescribe special reduced rates for certain persons or allow a reduction in tax liability by making amendments to the Second Schedule to the Ordinance. Such amendments are usually made by way of statutory Regulatory Orders (SROs) issued by the Federal Government by notification in the official gazette. However, all such amendments during a particular financial year have to be placed before the national Assembly at the end of that year.

4) Income Tax Case Law:

Different disputes arises in respect of rendering the income tax under the taxable limits, assessment of persons, payment and recovery of tax, refunds etc. brought about before the competent authorities for decision in respect of above-mentioned disputes. When such disputes are decided, these decisions are not only help in setting the present disputes but also for future decisions and reference to such decisions is subsequently made in order to get necessary guidance.

5) Finance Acts or Ordinances:

In order to fulfill the budgetary requirements and other social and economic needs of the country, some important amendments are made in the prevailing income tax ordinance every year. Such changes should be approved by the assembly, if Assembly is not in existence, President of Pakistan shall approve these changes. If such annual changes are approved by the National Assembly, are called Finance Act and if these are approved by President, are called Finance Ordinance. Finance Act or Ordinance is presented for the guidance regarding procedure of the computation, assessment and administration etc. for the coming tax year. For example, Finance Act, 2008 was used to compute taxable income, tax liability etc. of tax year 2009.

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