CHAPTER:-1 PART-I
INCOME TAX LAW
QUESTION NO:-01
WRITE A SHORT ESSAY ON THE EVOLUTION OF INCOME TAX LAW IN THE SUBCONTINENT.
OR
ELABORATE THE HISTROICAL BACKGROUND OF IN COME TAX LAW IN PAKISTAN.
ANSWER:-
INTRODUCTION:-
Income tax is a federal tax and it is the third important source of the income of Government of Pakistan.
Income tax plays an important role in the national economy of a country. It is a direct tax and it is burden falls on the same person on whom it is levied. It is not business expenses but it is the personal liability of the proprietor.
1. EVOLUTION / HISTORY OF INCOME TAX:-
Income tax was introduced in the sub-continent in 1860 on the pattern of British law. In Britain it was introduced on 1798. Between 1860 and 1880 it was amended thirteen times and abolished two times. The Act of 1886 remained practically unaltered for a period of thirty years. In 1916 income tax at slab rates was introduced. Previously all incomes were charged at flat rates. In 1918 distinction was made between taxable and total amount.
Up tell 1921 the highest authority in the taxation was known as board of in land revenue. It was renamed as Central Board of Revenue (CBR) by passing of CBR act 1921.
With a view to centralizing the administration and improve the incidence of taxation an all India committee was appointed in 1921 and on its recommendations the income tax Act 1922 was enacted. In 1939 drastic changes in the system of administration and in the incidence of taxation were made. The appellate tribunal was also established by the Income Tax Amended Act 1939, which started functions from January 25, 1941. In 1944 pay as you earn scheme was introduced. In 1945 distinction was made for the first time between earned and unearned income and relief was given in respect of earned income.
SINCE INDEPENDENCE:-
1947:-Income tax Act-1922 was promulgated as amended up to date.
1958:-A Taxation enquiry committee was constituted which was consisted of Govt: officials, and representatives of trade & commerce. On the recommendations of the committee the act was amended.
1959:-Super tax was abolished except for registered firms and companies.
1960:- Financial year was changed from 1st April 31 to July 1, ---- June 30, next.
1961:-CBR also formulated an other committee to review the law in consultation with tax enquiry committee.
1971:-Interim report of the committees was published and most of the recommendations were incorporated in the law.
1979:-The income tax ordinance was promulgated on June 28, 1979, became effective from July 1, 1979; it repeated the income tax Act 1922.
1985:-National tax reforms commission was formed consisted of top Govt: officials, representatives of senate and National Assembly and renowned Industrialists.
2001:-As a result of the tax reform commission the income tax ordinance 2001 was promulgated on Sept: 13, 2001, repealed the Income Tax Ordinance 1979 and became effective from July 1, 2002.
2002:-A lot of changes have already been made through Income Tax rules 2001 as well as subsequent finance Acts.
The new law contains 13 chapters 240 sections and 7 schedules. From the date of its promulgation different notifications and circulars have been issued by the CBR up to June, 2006 and afterward by the FBR to facilitate the tax officials and tax payers. These will continue to apply until repealed or rescinded.
QUESTION NO:-02
DESCRIBE THE IMPORTANT ROLE OF TAXATION IN THE NATIONAL ECONOMY.
OR
THE ROLE OF INCOME TAX IN THE DEVELOPMENT OF A COUNTRY CANNOT BE IGNORED DISCUSS.
ANSWERS:-
To meet the budgetary requirements of the country and fulfill the needs of people the Government tries best to collect revenue from various sources. The most important of these sources is taxation.
Some revenues are derived from state enterprises including communication, high ways air ways and railways etc and some from nationalized industries. Besides these sources income tax is one of the main sources of the Government finance.
Income tax is federal tax and it is the third important source of revenue of the government of Pakistan. The other two important sources are excise and customs.
Tax is a compulsory contribution of the citizens towards the National economy. Every stat is always in need of some funds for the general administration of the country. For this purpose every stat imposes taxes to achieve its goal so to say no state can meet its expenses if taxes are not levied upon the citizen. The importance of tax can be judged from the fact the when one is born has to pay taxes when one lives has to pay taxes and ALLAH forbid when one dies taxes are after him. So the payment of tax is compulsory. Every person upon whom tax is levied must pay it.
So it can be said that income tax plays an important role in the economy. If government does not levy taxes on incomes then it cannot be able to balance its budget and to improve its infra structures.
The principle that Government follows in imposing different kind of tax should be so that every person can pay it and the Government get maximum revenues .As far as possible tax should be imposed according to the ability of the tax payers to pay. The rich should pay more and the poor should pay less i.e the progress system of taxation should be followed. Further it should be collected in a manner that tax payers should not find any difficulty to pay it in time. The Government should impose taxes in such a way that its cost of collection is not too large. If the cost of collection is more then it is possible that the government may not obtain maximum revenues.
So the Government should try to levy taxes in the manner that it can be paid easily and also the Government can collect them and can given proper attention to utilize the revenues in its various fields of endeavor.
In nut-shell it is an admitted fact that if the system of taxation is followed in its true sense it will not merely prosper the economy but the people as well.
QUESTION NO.03
EXOLAIN THE OBJECTIVES OF TAXATIONS:
ANSWER:-
In our country like all other countries of the world the government receives different types of direct and indirect taxes in order to finance its day to day expenses, defense requirement and other development projects. The taxes include customs, excise, income tax, and sales tax etc.
OBJECTIVES:-
The main objective of taxation is to provide a perpetual and regular source of revenue to the Government, the details of the objectives are as under:-
1. AVIOD CONCENTRATION OF WEALTH:
To avoid excessive concentration of wealth and economic power in a few hands.
2. CIRCULATION OF WEALTH:
De-Concentration of wealth result in circulation of wealth in the economy and such the widely based lower or middle classes are fostered.
3. CORRECT ECONOMIC IMBALANCE:
Through healthy taxation policy economic imbalance among various regions with in the country can be easily corrected.
4. IMPROVE RURAL ECONOMY:
To reverse the long continued decline of the rural economy.
5. BALANCING MODERNIZATION AND REPLACEMENT:
To increase Pakistan capacity to build or acquire for it self he machinery and equipments essential to modern industry and agriculture.
6. EN-COUERAGE MODERNIZATION AND REPLACEMENT:
To generate domestic saving and develop exports on a scale that will enable us progressively to dispense with foreign assistance.
7. ERADICATE INFLATION:
Inflationary pressure can be controlled by mopping up extra purchasing power through proper taxation.
8. MOBILIZE INVESTMENT:
Through appropriate investment Rebate the target pattern of investment and development can be achieved.
9. DISPERSAL OF INDUSTRIES:
By virtue of tax holiday in less developed area a network of industries can be extended to the deprived sectors of the country.
10. DIVERSIFICATION OF INDUSTRIES:
Certain industrial undertakings are not attaining due attention of the investors due to one reason or other through excessive tax relief to selected industries this problem can be redressed.
11. SUPPORT DOMESTIC PRODUCTION:
En-courage domestic production by extending exorbitant relief to domestic producers.
12. JOB OPPORTINITIES:
Through an indirect way job opportunity is created with in the country as these taxes funding are utilized in various fields of endeavors.
13. FLOURISH SAVINGS:-
By restraining consumption savings can be promoted to a greater extent.
14. BALANCE OF PAYMENTS / TRADE:
By promoting exports through flexible tax rebates balance of trade or payments can be rendered favorable.
DEFINITIONS PART-I
QUESTION NO.04
DEFINE THE FOLLOWING TERMS PROVIDED UNDER THE INCOME TAX ORDINANCE 2001.
ANSWER:-
Like every other subject income tax law also contains a few terms which are exclusively meant for the subject. Having being assigned specific meanings in the ordinance. Important definitions and terms are as follows.
1. AGRICULTURAL INCOME:
The Agricultural income means income:
a. Derived from land
b. Land is situated in Pakistan and
c. Land is used for agricultural purpose.
TYPES OF AGRICULTURAL INCOME:
i. Rent or revenue derived from agricultural land
ii. Income derived from such land by the performance of a process ordinary employed by cultivator or receiver of rent in kind to render the product fit for the market.
iii. Income derived from such land by agricultural.
iv. Income derived from such land by the sale of produce by a cultivator or receiver of rent in kind.
v. Income derived from any building required for agricultural purpose.
2. ASSESSMENT :
Assessment is the process under which taxable income, tax liability or refund of the taxpayer is determined under the income tax ordinance, 2001. Assessment is the responsibility of the Commissioner of Income Tax.
However, if complete return is field by the taxpayer, such complete return may be considered as assessment order. Assessment also includes re-assessment and amended assessment.
3. BUSINESS:
Business means and includes the following:-
a) Trade
b) Commerce
c) Manufacture
d) Profession
e) Vocation or
f) Adventure or concern in the nature of trade commerce, manufacture, profession or vocation.
However, the term business does not include employment.
EXPLANATION:-
I) TRADE:-
Purchase and sale of goods with a motive of earning profit, undertaken by a person is called trade.
COMMERCE:-
All those activities which facilitate the trade represent commerce. For example, insurance, transportation, warehousing, marketing, banking etc.
Ii) MANUFACTURE:-
Any process in which an article is either converted in to another article or product or is so changed or reshaped that it becomes capable of being put to use differently or distinctly.
Iii) PROFESSION:
Profession means an ability of a person to do some particular work purely by the application of intellectual skill or through manual skill controlled by intellectual skill.
For example: Professor, Doctor, Lawyer etc.
Iv) VOCATION:-
Vocation means an ability of a person to do some particular work, generally, by the application of manual skill. For example Carpenter, Singer, Dancer etc.
4. CAPITAL ASSET:-
Capital Asset means property of any kind held by a person, whether or not connected with a business, but does not include:
i) Any stock-in-trade (not being stocks and shares) consumable stores or raw materials held for the purpose of business.
ii) Any depreciable asset (asset on which depreciation is allowed u/s 22). For example: Plant, machinery, building etc.
iii) Any intangible asset on which amortization is allowed u/s 24. For example: Patent, Copy right, Trade mark etc.
iv) Any immovable property. For example land, building etc.
v) Any movable property held for personal use by the person or a member of the person’s family dependent on the person. For example: Car held by the person’s family etc.
Note: Following movable property is included in the definition of capital asset:
a) A painting, sculpture, drawing or any other work of art.
b) Jewelry
c) A rare manuscript, folio or book
d) A postage stamp or first day cover
e) A coin or medallion; or
f) An antique
Further examples of capital assets;
i) Modaraba certificates
ii) Participation Term Certificates (PTCs)
iii) Term Finance Certificates (TFCs)
iv) Musharika Certificates
v) Shares of companies
vi) Pakistan Telecommunication Corporation (PTC) vouchers issued by the Government of Pakistan.
vii) Leasehold rights.
viii) Partner’s share in an AOP.
5. COMPANY:
Company means a company as defined in section 80.
According to section 80, Company means:
1. A company as defined in the Companies Ordinance, 1984.
2. A body corporate formed by or under any law in force in Pakistan.
3. A Modaraba;
4. A body incorporate by or under the law of a country outside Pakistan relating to incorporation of companies;
5. A trust a co-operative society or a finance society or any other society established under any law for the time being in force.
6. A foreign association, whether incorporated or not, which the FBR has declared to be a company for the purposes of the Income Tax Ordinance, 2001.
7. A Provincial Government
8. A local authority in Pakistan
9. A small Company.
6. DIVIDEND:
Dividend is that part of divisible profits of a company which is distributed among its members. For the purpose of the Income Tax Ordinance, 2001, dividend includes the following transactions.
a. Any distribution of accumulated profits by a company to its shareholders.
b. Any distribution of profit to Modaraba certificate holders.
c. Any distribution of profits to the shareholders or Modaraba certificate holders by way of debenture or any other deposit certificate.
d. Any distribution to shareholders or Modaraba certificate holders on the liquidation (if the recipient is entitled to participate in the surplus assets in the event of the liquidation of a company).
e. Any distribution to the shareholders or Modaraba certificate holders on the reduction of capital to the extent of the accumulated profit of the company ( if the recipient is entitled to participate in the surplus assets in the event of the liquidation of a company
f. Any payment made by a private company to its shareholders if the following conditions are fulfilled.
i) The payment is made by way of:
a) Loan
b) Advance
c) Payment on behalf of a shareholder or
d) Payment for the individual benefits of a shareholder
ii) The payment is made to the extent to which the company possesses accumulated profits.
7. INCOME:
a) Any amount chargeable to tax under the Income Tax Ordinance 2001.
b) Any amount subject to collection or deduction of tax at source u/s 148,150,152 (1),153,154,156,156A,233,233A, & 234(5)
c) Any amount treated as income under any provision of the income tax Ordinance 2001.
d) Any loss of income.
EXPLANATION:
Any amount subject to deduction or collection of tax at source. Under the above mentioned sections is considered as income in the hands of recipient. So the person paying such amount is required to collect tax on such payment.
Remember loss is a negative income such negative income is adjusted against other incomes during the tax year while computing the total income of a person.