The government exacts two kinds of taxes from the people – direct and indirect. While direct taxes include income tax and capital value taxes, indirect taxes are sales tax, customs and duties, and federal excise duty, governed by the Sales Tax Act 1990, the Customs Act 1990, and the Federal Excise Act 1990.
The primary purpose of taxes is to generate revenue to run the affairs of the state. According to the latest data, a total of Rs3.91 trillion were collected for the fiscal year 2020, 41.4 per cent of which were collected as income tax, 36.5 per cent as indirect sales tax, 7.9 per cent as excise and 14 per cent under custom duties. For the current fiscal year, the government has estimated to collect Rs2.04 trillion from direct and Rs2.9 trillion from indirect taxes.
The government uses the money to meet the cost of administration and carry out social and economic development, such as encouraging the production of certain goods or promoting a certain sector. Taxes may be imposed on certain goods (through imports) to encourage the growth of the local industry. Tax credits are also allowed for investment in modern equipment and generation of employment.
Besides being a tool of the documentation of the economy, the tax system is a vehicle for a more equitable distribution of wealth and income among various classes of people. Taxation helps in regulating how certain products are consumed or it may be imposed on commodities, the consumption of which the government wishes to restrict or discourage. Taxes on cigarettes are a pertinent example.
Foreign and Pakistani source income, generated by a resident person within a normal tax year (1st July – 30th June), is chargeable to tax whereas a non-resident person shall pay tax solely on their Pakistan source income. The condition to qualify as a resident is that the person be present in Pakistan for an aggregate of 183 days in a tax year or remains in Pakistan for 123 days in the tax year under question in addition to 365 days in the four preceding tax years.
Income tax for an individual is charged on an earning, which is derived from the heads of either salary, business, property capital gains or other sources. Any salary (being either revenue or capital in nature) received from the employer) is treated under the head of salary when it is received by the person. It includes wages, remuneration, perquisites, payment instead of leave, overtime bonuses, commissions, gratuity, etc.
Interestingly, the collection of tax is also used as a tool of bargaining in trade negotiations with bodies, such as the International Monetary Fund (IMF), which treats it as an indicator for future forecasts before agreeing to provide financial assistance.
Income from business includes all incomes that are derived as profit or gains from a business activity carried out by a person. Any income from any trade/professional association from the sale of goods or rendering of services, hire of tangible moveable property and yielding of the fair value of any benefit, derived during past, present or prospective business relationships. Profit or interest on debt where the business of a person generates income from such an activity is treated as taxable business income. In computing income from the lines of businesses, deductions are allowed for any expenditure incurred wholly and exclusively for the business.
Income from property includes any rent and non-adjustable amounts received by a person for a tax year; however, an individual or association of persons having derived an amount of rent up to Rs 200,000 in a tax year is not required to pay tax. Gains arising from the sale of a capital asset are chargeable under a separate head: Income from capital gain, where the term “capital asset” is applied to any property held by a person, whether or not connected to a business. Stock in trade, consumable stores, a property for which deductions have already been obtained under the head of business and any moveable property held for personal use are not covered by the term “capital asset.”
By definition, gain on sale of shares of a private and public unlisted company, the share of a member in a partnership firm, goodwill, copyrights, patents, immovable properties, corporate debt securities, jewellery, antiques and collectables etc. all fall under the head of income from capital gains.
Where an income cannot be classified under any of the heads, it is considered income from other sources. It includes dividends (cash or bonus shares), royalties, profit on debt (where such is not the business clause of a person), additional payments on delayed refund under any tax law, ground rent, rent from sublease of land or building, income from the lease of any building together with plant or machinery and the provision of amenities and services to a tenant of a property.
As can be seen, our income tax laws are complicated and cumbersome and give too much discretionary power to tax authorities which leave ample room for corruption. Unless the tax laws are simplified and rates revised down, taxpayers will continue to avoid their liabilities and the Federal Board of Revenue (FBR) can never achieve its target.