Taxation Report

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OVERVIEW OF TAXATION IN PAKISTAN

TAXATION REPORT

SECTION: C

DATE OF SUBMISSION:

NOV 6TH, 2012

NAMES OF GROUP MEMBERS:

FIZZAH SIDDIQUI (9886)

MAIMONA MOBEEN
Executive summary

INTRODUCTION

The constitution empowers the Federal Government to collect taxes on income other than agricultural income, taxes on capital value, customs, excise duties and sales taxes. The Central Board of Revenue (CBR) and its subordinate departments administer the tax system. Each of the three principal taxes has a different history and different set of issues. For a large number of income tax payers the core of the business process is pre-audit and assessment by a tax official. This process gives considerable discretion to tax officials, with potential for abuse. Moreover, this process is also not tenable as the number of taxpayers increase. The report is focused on a total overhaul of the process and organization of income tax. Sales tax is recent and its process and organization is adjusted to the needs of an expanding tax base. These are based on self-assessment and selective audit. Similarly, in customs the accent is on accelerating and broadening the changes begun in recent years. Before long, central excise will be subsumed in sales tax. During the nineties, despite many changes in the tax regime and introduction of withholding and presumptive taxes, Federal Government tax to GDP ratio has varied narrowly around eleven percent. The tax base has grown but still remains narrow and skewed. The number of income tax filers is around one million. At less than one per cent of the population, it is a lower proportion than in many developing countries. Pakistan’s fiscal crisis is deep and cannot be easily resolved. Taxes are insufficient for debt service and defense. If the tax to GDP ratio does not increase significantly, Pakistan cannot be governed effectively, essential public services cannot be delivered and high inflation is inevitable. The Reforms to improve our taxation system need to be focused on human resources, business process and organization, corruption and information management. An effective revenue organization must be comprised of trained and dedicated persons with integrity, transparent processes, a comprehensive information system, and taxpayer education. The paper recommends self-assessment, selective audit, and expansion and upgrading of information management, emphasizes reduction of discretion and direct contact between tax collector and taxpayer

How to calculate income tax in Pakistan

Law concerning taxation of income in Pakistan is stated in the Income Tax Ordinance, 2001 (the Ordinance) and the rules framed thereunder viz. Income Tax Rules, 2002 (the Rules). The Ordinance is a Central statute and is, therefore, applicable to the whole of Pakistan .Under section 4 of the Ordinance, income tax is imposed for each tax year at specified rates on every person who has taxable income for the year. The tax payable is calculated by applying the rate(s) of tax to the taxable income of the taxpayer for the year and any tax credit allowed to the taxpayer for that year is deducted from that amount. . The following tax credits are allowed under Chapter 3 Part 10 of the Ordinance: Charitable donations, investment in shares, retirement annuity scheme and profit on debt.

Tax year in Pakistan

Tax year is a period of 12 months ending on 30th June and shall be denoted by the calendar year in which the said date falls

Taxable income in Pakistan

It is the total income of a person for a tax year reduced by the total of any deductable allowances, under the Ordinance for the year. A person is entitled to deductible allowance for the amount of any Zakat paid by the person in a tax year under the Zakat abd Ushr Ordinance, 1980.

Total income

It is the sum of a person’s income under each heads for income for the year.

Heads of Income in Pakistan

Under the...
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