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SECTION 2: Principles

of Taxation
System of Taxation in
—  Objectives of tax laws
—  Revenue objectives
—  Non-revenue objectives
—  Taxes as means for development

—  Basics of Taxation Laws

—  Equality
—  Certainty
—  Convenience of payment
—  Economy of collection
—  Principles for levy of tax
—  The benefit principle
—  The ability to pay principle
—  The equal-distribution principle

—  Structure of taxes
—  Proportional tax
—  Regressive tax
—  Progressive tax
—  Characteristics of tax laws
—  Tax is an enforced contribution
—  Tax is generally payable in cash (bank)
—  Tax is proportionate in character
—  Tax is levied on income, transactions or property
—  Tax is levied by state via law making bodies
—  Tax is levied for public purposes
—  Equality or theoretical justice
—  Administrative feasibility
—  Consistency or compatibility with economic goals
—  Forms of escape from taxation
—  Shifting
—  Capitalisation
—  Strategies for taxation management
—  Tax avoidance vs tax evasion
Introduction to different
taxation laws of Pakistan
—  Direct taxes
—  Income tax
—  Salary
—  Income from property
—  Income from business
—  Capital gains, and
—  Income from other sources
—  Capital value tax
—  Indirect taxes
—  Custom duty
—  Federal excise duty
—  Sales tax
—  Tax relief for cross border transactions
—  Ethics – meaning and application
—  Ethics for taxpayers
—  Three approaches of tax compliance
—  Utilitarianism
—  Denotology
—  Virtue ethics
—  Ethics and morality for taxation compliance
—  The conduct of taxpayers
—  Whistle blower
Basic concepts of taxation
—  Scope of tax
“Income tax shall be imposed for each tax year on every person who has
taxable income, as per the applicable tax rates”

—  Tax year
—  Normal tax year
—  Special tax year
—  Transitional tax year
—  Computation of taxable income
—  Income
—  Heads of income
—  Salary
—  Income from property
—  Income from business
—  Capital gains
—  Income from other sources
—  Taxable income
Total Income other than exempt xxxxx
Less: Deductible Allowances (Discussed below) (xxxx)
Taxable Income xxxxx
—  Deductible allowances
—  Zakat
—  Workers welfare fund
—  Workers participation fund
—  Profit on debt
—  Education expenses

—  Person
—  An individual
—  Company
—  Federal, foreign and provincial governments etc
—  Taxpayers
—  Filer and non-filer
—  Resident and non-resident persons
—  (i) Mr. Raza is working as Director Operations in the Ministry of Tourism.
On 15 July 2016 he was posted to Pakistan Embassy in Italy for two

—  (ii) Anderson LLC was incorporated as limited liability company in UK.

The control and management of its affairs was situated wholly in
Pakistan. However, with effect from 01 November 2016, the entire
management and control was shifted to UK.

—  (iii) On 01 February 2017, Mr. Sameel was sent to Pakistan by his UK

based company to work on a special project. He left Pakistan on 23
August 2017.

—  (iv) BBL is a non-listed public company incorporated under the

Companies Ordinance, 1984. All the shareholders of the company are
individuals. The control and management of affairs of the company
during the year was outside Pakistan.

—  (v) Mr. Salman a property dealer in USA came to Pakistan on 01

February 2016. During his stay upto 02 August 2016 in Pakistan, he
remained in Peshawar upto 30 June 2016 and thereafter till his
departure from Pakistan, in Quetta. Assume that Commissioner has
granted him permission to use calendar year as special tax year.
Tax rates for individuals -
Tax rates for individuals -
—  50% reduction in tax liability for senior citizens
—  Tax rate for companies is 29% (frozen until 2023)
and banks is 35%

—  Tax rate for small companies is 23% reduced by

1% each year until 2023 after which it will be fixed
at this rate
—  Small company is an enterprise which;
—  employs less than 250 people, OR
—  has paid up capital up to Rs 25 million, OR
—  Has sales up to Rs 250 million
Computation of income tax payable

Tax Liability = (Taxable Income x Rate of Tax) – Tax


Computation of tax
Gross tax XXX
Less: Tax reductions, credits & averaging (XX)
Net Tax XXX
Tax already paid including adjustments (XX)
Balance XXX
—  Salary and its components
—  Pay, wages etc, leave pay, overtime, bonus, commission etc
—  Any perquisite (benefits) received
—  Any allowance paid
—  Any personal expenditure reimbursed
—  Any additional payments received at the time of joining or
leaving a job and from gratuity or provident fund
—  Any pensions received
—  Any gains earned on shares received under ‘employee
share scheme’
—  Any amount of tax paid by employer on behalf of the
Determination of value of perquisites
—  Conveyance
—  If used for both personal and professional use – 5%
of the cost to employer
—  If used for personal only – 10% of the cost to
—  If for professional use only – no addition
—  Accommodation
—  Higher of rental value of the property and 45% of the
minimum MTS or basic salary
—  Utilities and services of domestic servants
—  Interest free / concessional loans
—  Benefit is calculated at 10% of the loan amount
—  If interest free loan then 10% benefit, if concessional
rate then difference between applicable rate and 10%

—  Transfer of property
—  Fair market value of the asset

—  Any other perquisites

—  Fair market value of the benefit
—  Medical Benefit
—  Medical facility or the reimbursement received by an
employee is exempt
—  Cash medical allowance is exempt upto 10% of basic
—  Cash medical allowance is fully taxable in case
exempt medical facility is also provided by the
(i) As part of remuneration package, a company provides for
reimbursement of telephone costs on actual basis to its
(ii) Actual expenditure incurred by an employee in relation to
travelling and daily allowances is less than the amount of
allowances paid by the employer.
(iii) A company has taken health insurance cover for its
employees. The insurance company reimburses employees for
actual cost of medical services for themselves and their

(iv) ABC Ltd has provided scholarship to one of his employees

for higher studies abroad.
(v) Mr. A has leased a car and pays for its lease rentals from his
own sources. He uses the car for business purpose. What will be
the treatment of lease rentals paid and expenditure incurred on
vehicle running and maintenance?
(vi) A partner in a firm is entitled to a fixed remuneration each month.
Would this constitute his salary income?

(vii) Mr. Azhar is 65 years old and his taxable salary for the tax year is Rs.
943,000. Mr. Azhar has obtained a housing loan from a local bank. How the
tax reduction for senior citizenship and deductible allowance for markup
paid on loan will be calculated.

(viii) Mr. Aslam is 67 year old and employed as research scholar in a

recognized nonprofit institution. His taxable salary for the tax year is Rs.
654,000. Azhar is of the view that he is entitled to both reductions i.e. in
respect of senior citizen allowance as well as for full time teacher allowance.

(ix) Mr. Sarmad has purchased a generator amounting to Rs. 1,000,000

from an interest free loan taken from his employer. He rented the generator
at an annual rental value of Rs. 250,000. Total expense of Rs. 25,000 was
expanded on repair, transport and maintenance of the generator.