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History of Income tax law in Pakistan
Promulgation of income tax act, 1922:
When Pakistan came into being the government of Pakistan promulgated the income tax act, 1922.
Abolishment of super tax:
Before 1959, super tax was imposed on the incomes of all the persons but in registered firm & companies.
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”.
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”.
Promulgation & enforcement of the income tax ordinance, 1979:
Till 1979, lot of amendments was 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.
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.
The date of enforcement of the income tax ordinance 2001:
The federal government, vide its notification no. S.R.O. 381 (1)/ 2002. Dated 15 th June, 2002, announced
that the income tax ordinance. 2001 shall come into force on the first day of July, 2002.
The status of the income tax ordinance, 2001:
”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.
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Income tax rules:
FBR is empowered to make rules regarding the procedure matters connected with the implementation
income tax ordinance, 2001. They shall came into force 1st July, 2002 except rule 3 to 9.
Notifications, instructions orders, SROs etc.:
Notifications, instruction, order, SROs etc. are issued by the FBR u/s 206 of income tax ordinance,
2001. For interpretation of this ordinance. 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 prescribe
special reduced rates for certain persons or allow a reduction in tax amendments are usually made by way
of statutory regulatory orders (SROs).
Tax:
Tax means any tax imposed, charged, levied, or paid under the income tax ordinance, 2001 it may in the
form of:
Income tax;
Additional tax;
Penalty;
Fee; and
Any other charge under the income tax ordinance, 2001.
Introduction:
Taxation according to a person’s ability to pay is universally accepted principle. Taxes are classified as
direct or indirect.
Direct tax:
A tax paid directly by the person or organization on whom it is levied is called direct tax.
Indirect tax:
A tax levied on goods or services rather than on persons or organization is indirect tax.
Since income tax is progressive in nature, it tends to reduce economic disparity, tax rates and method of
calculating taxable income varies with fiscal status of the tax payer. Following are the broad categories of
taxpayers:-
Companies
Association of persons (AOP)
Non salaried individuals
Salaried individual
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PRACTICAL KNOWLEDGE
Tax Year- Section 74
Tax year is of 3 types, normal tax year, special tax year and transitional tax year.
1. Normal tax year:
A period of 12 month from 1 July to ending 30 June.
2. Special tax year:
Any income year ending other than 30th June is special tax year.
Special year 1.1.2011 to 31.12.2011- this year end falls in the normal tax year 1.7.2011 to 30.6.2012 and
therefore tax year relevant to the normal tax year i.e. tax year 2012 shall be the tax year for this special
year.
The FBR has authority to prescribe any special tax year in respect of any particular class of taxpayers e.g.
30th September has been prescribed for textile industry.
3. Transitional tax year:
Period from the day next following the last full tax year to the date of commencement of new tax year
shall be treated as transitional tax year.
Normal tax year 1.7.2010 to 30.6.2011. In this case, period from 1.7.2011 to 31.12.2011. i.e. transitional
tax year 2012.
Residential Status of An Individual – Section 82
Residential status for tax purpose has no relationship with nationality. Residential status of an individual
is based on number of days he is physically present in Pakistan during a tax year.
0 to 182 days Non-Resident
183 or more days Resident
Residential Status of Company – Section 83
A company incorporated in Pakistan, is resident without any condition.
Company incorporated outside Pakistan is resident if control and management of the affair is situated
wholly in Pakistan in the year.
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Residential Status of Association of Person (AOP) Section 84
AOP shall be considered as resident if control and management of the affairs is situated wholly or partly
in Pakistan in the year.
Final tax regime (FTR)
KEY POINTS OF FTR –Section 8 AND 169
In FTR Tax deducted or collected at source become full and final discharge of tax liability.
In FTR Tax liability not reduced by any credit.
If source of income is FTR Return of income is not required to be filed. Statement for FTR [section
115(4)] is required to be filled.
An individual filling statement for FTR and has paid tax of Rs. 35,000 or , more for the tax year shall file
a wealth statement along with wealth reconciliation statement- section 116(4).
HEAD UNDER FTR AND TAX THEREON
1. Retailers – Section 113a
An individual or an AOP involved in retail business having turnover up to Rs. 5 million in a tax year
may option to pay tax@ 0.5% of his turnover as final tax instead of normal tax structure.
2. Retailers – Section 113b
An individual or AOP (registered for sales tax purpose) involved in retail business having turnover
exceeding Rs. 5 million for any tax year is required to pay final tax on his turnover as under:
Turnover exceed Rs. 5 million but does not exceed Rs. 10 million 25,000 + 0.5%
Turnover exceeds Rs. 10 million. 50,000 + 0.75%
Under this section, a retailer cannot claim adjustment of any withholding tax.
3. Imports – Section 148
Every importer @ 5% on value + ST + FED.
3% on value of raw material clause 9A 2nd Schedule.
1% on value of gold, silver and mobile phone clause 13G 2nd Schedule.
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At import stage tax paid by Importer is the final tax other than
Raw material plant and machinery equipment for its own use by an industry.
Fertilizer import by fertilizer manufacturer.
An Import house paid up capital 250 million.
Import exceeding 500 million.
Tax @ the rate 3.5%not deducted at source where section 153(5)(A)
Sale of good made by importer.
Sale of goods without any value addition.
Tax paid at import stage in respect of such goods.
4. Dividend income- Section 5 and 150
Tax deducted @ 10% dividend considered full and final tax.
5. Interest income – Section 151
Tax deducted 10% on amount of profit on debt. (after deducting zakat)
6. Supply of goods and contracts –Section 153
Supply of goods @ 3.5%
Services @ 6%
Federal government, provincial and local government.
Non-profit organization.
AOP having turnover Rs. 50 million or above in a tax year.
Individual having turnover of Rs.50 million or above in a tax year.
Foreign contractor or consultant.
25,000 in case of goods 10,000 in case of service SRO 826 dated 24.8.1991.
7. Export – Section 154
Tax deducted @ 1% as final tax from export proceeds.
An exporter making payment on services of stitching, dying, printing, embroidery, washing,
sizing and weaving deducted tax @ 0.5% of service charges as the same shall be final tax under
FTR – section 153(1A).
Income from export of computer software or IT enabled service is exempt up to 30.6.2016-
clause 133 part 1 2nd schedule e.g. software development and maintenance, web design, network
design, accounting and HR services and export of locally produced TV programmers.
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8. Prizes and winnings – Section 156
Tax shall be deducted of the gross amount of the following:
10% on prize on prize bond
20% on lottery, prize on winning a quiz prize offered by companies for promotion of sales
9. Petrol pump operators – Section 156A
Collect 10 % on commission as a final tax.
10. Commission or brokerage – Section 233
Tax deducted @ 10 % from commission or brokerage considered full and final liability
11. CNG stations – Section 234A
Full and final tax @ 4% is applicable on the amount of gas consumption charges. CNG stations
shall not be allowed to claim any other withholding tax.
