THE BASICS OF TAX LAW IN PAKISTAN
Tax law is the branch of law that deals with the rules and regulations governing the collection and administration of taxes by the government. Taxes are compulsory payments imposed by the government on individuals and entities to finance public goods and services. Tax law covers various types of taxes, such as income tax, sales tax, customs duty, excise duty, property tax, wealth tax, etc.
In Pakistan, the Constitution of 1973 provides the framework for the taxation system. It divides the legislative authority to levy taxes between the federal government and the provincial governments. The federal government has the exclusive power to levy taxes on income (except agricultural income), customs duties, sales tax on goods imported or exported or consumed in the course of inter-provincial trade or commerce, excise duty on goods produced or manufactured (except alcoholic liquor and narcotics), capital value tax on immovable property (except agricultural land), etc. The provincial governments have the power to levy taxes on agricultural income, sales tax on services, excise duty on alcoholic liquor and narcotics, property tax on urban immovable property, etc. The local governments have the power to levy taxes on octroi, tolls, fees for services rendered, etc.
The main laws that govern the taxation system in Pakistan are:
Income Tax Ordinance 2001
The Income Tax Ordinance 2001 is the main legislation that governs the taxation of income in Pakistan. It was enacted by the Parliament of Pakistan on September 13, 2001 and came into force on July 1, 2002. The ordinance covers various aspects of income tax, such as the charge of tax, the scope of income, the computation of income, the deductions and allowances, the tax credits and rebates, the withholding of tax, the filing of returns and statements, the assessment and collection of tax, the appeals and revisions, the penalties and prosecutions, and the administration and enforcement of tax laws.
ON WHOM INCOME TAX ORDINANCE 2001 APPLIES
The ordinance applies to all persons who derive income from Pakistan or who are resident in Pakistan for tax purposes. A person is considered to be resident in Pakistan if he or she is present in Pakistan for 183 days or more in a tax year, or if he or she is an employee or official of the federal or provincial government posted abroad. The ordinance also applies to non-residents who have a permanent establishment in Pakistan or who receive income from a source in Pakistan.
HEAD OF INCOME TAX
The ordinance divides income into five heads: salary, income from business, income from property, capital gains, and income from other sources. Each head has its own rules for determining the taxable income and the allowable deductions and exemptions. The ordinance also provides for various tax credits and rebates for certain taxpayers, such as senior citizens, disabled persons, charitable donations, investment in shares and securities, education expenses, etc.
INCOME TAX FILLING
The ordinance requires every person who is liable to pay tax to file a return of income by the due date specified by the Federal Board of Revenue (FBR). The FBR is the apex body responsible for administering and collecting income tax in Pakistan. The FBR may issue notices to taxpayers to furnish information or documents related to their income or tax affairs. The FBR may also conduct audits and assessments of taxpayers to determine their correct tax liability. The FBR has the power to impose penalties and initiate prosecutions for non-compliance with the ordinance.
INCOME TAX APPEALS AND REVISIONS
The ordinance provides for a system of appeals and revisions for taxpayers who are aggrieved by any order or decision of the FBR or its officers. The first level of appeal is to the Commissioner (Appeals), who is an officer of the FBR. The second level of appeal is to the Appellate Tribunal Inland Revenue (ATIR), which is an independent judicial body. The third level of appeal is to the High Court, and the final level of appeal is to the Supreme Court of Pakistan.
The Income Tax Ordinance 2001 is a comprehensive and complex law that regulates the taxation of income in Pakistan. It aims to ensure that every person pays his or her fair share of tax according to his or her ability and sources of income. It also seeks to promote economic growth and development by providing incentives and concessions for certain sectors and activities. It also strives to prevent tax evasion and avoidance by establishing a robust system of administration and enforcement.
Taxability of Agricultural Income in Pakistan
Agricultural income is a major source of livelihood for millions of people in Pakistan, as well as a significant contributor to the national economy. However, the taxation of agricultural income in Pakistan is not uniform, efficient, or equitable, we will discuss the current status, challenges, and possible reforms of the agricultural income tax system in Pakistan.
According to the Constitution of Pakistan, agricultural income is a provincial subject, meaning that each province has the authority to levy and collect taxes on agricultural income within its jurisdiction. The federal government cannot impose any tax on agricultural income, except for certain cases where it is treated as non-agricultural income under the Income Tax Ordinance, 2001 (ITO).
DEFINITION AGRICULTURAL INCOME IN INCOME TAX ORDINANCE 2001
The ITO defines agricultural income as any rent or revenue derived from land used for agricultural purposes, any income derived from land from agriculture or related activities, or any income derived from any building owned and occupied by the receiver of rent or revenue of agricultural land. The ITO also exempts agricultural income from federal income tax under section 41, provided that it is taxed under provincial law.
However, the provincial laws on agricultural income tax are not consistent, effective, or progressive. The provinces have different definitions, rates, thresholds, and methods of taxation for agricultural income. For example, Punjab and Sindh use both area-based and income-based methods to tax agricultural income, while Khyber Pakhtunkhwa (KP) and Balochistan use only area-based method. The area-based method taxes agricultural income based on the size and type of landholding, regardless of the actual income or productivity of the land. The income-based method taxes agricultural income based on the declared or estimated income from agriculture or related activities.
The area-based method is simpler and easier to administer, but it is also regressive and unfair. It does not take into account the variations in crop yields, prices, costs, and profits among different farmers. It also does not capture the non-farm income of large landowners who may have other sources of income from business, industry, or services. The income-based method is more rational and equitable, but it is also more complex and prone to evasion. It requires accurate documentation and verification of agricultural income, which is often difficult to obtain due to poor record-keeping, informal transactions, and lack of cooperation from farmers.
The result is that the agricultural income tax collection in Pakistan is very low compared to its potential. According to a World Bank report, Pakistan collects only around Rs. 4 billion in taxes from agricultural income instead of the potential of Rs. 150 billion. This amounts to less than 0.1 percent of GDP and less than 1 percent of total tax revenue. Moreover, the burden of agricultural income tax falls disproportionately on small and medium farmers who have lower incomes and higher costs than large landowners who enjoy various exemptions and concessions.
The Sales Tax Act 1990
The Sales Tax Act 1990 is a federal law that regulates the collection and payment of sales tax in Pakistan. Sales tax is a type of indirect tax that is levied on the supply of goods and services at various stages of production and distribution. The Sales Tax Act 1990 defines the scope, rate, exemptions, registration, returns, assessment, audit, recovery and penalties related to sales tax.
The standard rates of Sales Tax
– The standard rate of sales tax is 18%, but there are different rates for certain goods and services, such as petroleum products, sugar, cement, fertilizers, etc. There are also zero-rated and exempt supplies that are not subject to sales tax.
– The sales tax is charged on the value of the supply, which includes the price paid or payable for the goods or services, plus any taxes, duties, fees or charges levied under any other law. The value of the supply can be determined by various methods, such as open market value, retail price, cost of production or import value.
– The sales tax is payable by the person who makes a taxable supply or imports taxable goods. However, in some cases, the responsibility to pay sales tax is shifted to the recipient of the supply or the person who acquires the goods. This is known as reverse charge mechanism or withholding sales tax.
– The person liable to pay sales tax must register with the Federal Board of Revenue (FBR) and obtain a sales tax registration number (STRN). The registered person must issue a sales tax invoice for every taxable supply made or received, and file monthly sales tax returns with the FBR. The registered person must also maintain proper records and books of accounts for sales tax purposes.
– The FBR has the power to conduct audits and investigations to verify the accuracy and completeness of the sales tax returns and payments. The FBR can also impose penalties and fines for non-compliance with the Sales Tax Act 1990. In case of any dispute or disagreement with the FBR’s assessment or decision, the registered person can appeal to the relevant authorities.
The Federal Excise Act 2005
The Federal Excise Act 2005 is a legislation that imposes excise duty on certain goods and services in Pakistan. Excise duty is a type of indirect tax that is levied on the production, import or sale of specific goods or the provision of specific services. The Federal Excise Act 2005 covers a wide range of goods and services, such as petroleum products, cigarettes, cement, sugar, beverages, cosmetics, telecommunication services, banking services, insurance services and air travel services.
Some of the key aspects of the Federal Excise Act 2005 that you should be aware of are:
– The rates of excise duty vary depending on the type and value of the goods or services. Some goods and services are subject to ad valorem duty (based on a percentage of the value), while others are subject to specific duty (based on a fixed amount per unit).
– The excise duty is payable at the time of production, import or sale of the goods or provision of the services. The person liable to pay the excise duty is the manufacturer, importer or seller of the goods or the service provider.
– The person liable to pay the excise duty is required to register with the Federal Board of Revenue (FBR) and obtain an excise registration number. The person is also required to maintain proper records and accounts of the goods or services subject to excise duty and file monthly excise returns with the FBR.
– The FBR has the power to audit, inspect and assess the excise duty liability of any person and impose penalties and fines for any non-compliance or evasion of excise duty.
The Federal Excise Act 2005 is a complex and dynamic legislation that requires careful attention and compliance from businesses involved in the production, import or sale of excisable goods or provision of excisable services. If you need any assistance or guidance on how to deal with the Federal Excise Act 2005, please feel free to contact me at your convenience.
The Customs Act 1969
The Customs Act 1969 is a federal law that regulates the import and export of goods in Pakistan. The act aims to prevent smuggling, protect national security, collect revenue, and facilitate trade. The act also provides for the establishment of customs authorities, the appointment of customs officers, the powers and duties of customs officers, the procedure for clearance of goods, the assessment and payment of customs duties, the penalties for violations of customs laws, and the appeals and remedies available to aggrieved parties.
The Customs Act 1969 is divided into 19 chapters and 219 sections. Some of the important chapters are:
– Chapter II: Customs Authorities and Officers
– Chapter III: Appointment of Customs Ports, Airports, etc.
– Chapter IV: Prohibitions and Restrictions
– Chapter V: Arrival and Departure of Conveyances
– Chapter VI: Clearance of Imported Goods and Export Goods
– Chapter VII: Warehousing
– Chapter VIII: Duty
– Chapter IX: Drawback
– Chapter X: Refunds
– Chapter XI: Recovery of Duties and Charges
– Chapter XII: Prevention of Smuggling
– Chapter XIII: Offences and Penalties
– Chapter XIV: Search, Seizure and Arrest
– Chapter XV: Confiscation of Goods and Conveyances
– Chapter XVI: Appeals and Revision
– Chapter XVII: Settlement of Cases
– Chapter XVIII: Miscellaneous
The Customs Act 1969 is a comprehensive and complex legislation that governs the movement of goods across the borders of Pakistan. It is essential for traders, importers, exporters, customs agents, and other stakeholders to understand the provisions and requirements of the act in order to comply with the customs laws and avoid any legal complications. The act also provides various incentives and facilities for promoting trade and economic development in Pakistan.
The Provincial Sales Tax Laws
The Provincial Sales Tax Laws in Pakistan
Pakistan is a federation of four provinces: Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan. Each province has its own legislative authority to levy sales tax on services provided or rendered within its territorial jurisdiction. The federal government also levies sales tax on services provided or rendered in the Islamabad Capital Territory and certain other areas under its control.
The provincial sales tax laws are broadly similar to the federal sales tax law, but there are some differences in terms of tax rates, exemptions, definitions and procedures. The provincial sales tax laws are administered by the respective provincial revenue authorities, while the federal sales tax law is administered by the Federal Board of Revenue (FBR).
We will briefly discuss some of the recent amendments made in the provincial sales tax laws through the Finance Acts 2021.
Punjab Sales Tax Laws
The Punjab government reduced the sales tax rates on various services, such as construction services, catering services, beauty parlors and salons, hotels and restaurants, marriage halls and lawns, and online marketplaces. The Punjab government also reduced the motor vehicle tax rate by 75% for electric vehicles to promote a green environment. Furthermore, the Punjab government extended the exemption of sales tax on health insurance services till 30 June 2022.
Khyber Pakhtunkhwa Sales Tax Laws
The Khyber Pakhtunkhwa government enhanced the sales tax rate from 15% to 16% for all taxable services, except for certain services that are subject to reduced rates or exemptions. The Khyber Pakhtunkhwa government also introduced a new levy of 2% infrastructure development cess on all taxable services, except for certain exempted services. Moreover, the Khyber Pakhtunkhwa government made some changes in the stamp duty and registration fee rates for various instruments and transactions.
Balochistan Sales Tax Laws
The Balochistan government revised the sales tax rates on some services, such as telecommunication services, insurance services, banking and financial services, and advertising services. The Balochistan government also exempted certain services from sales tax, such as health insurance services, educational testing and assessment services, and online marketplaces. Additionally, the Balochistan government made some amendments in the stamp duty rates for various instruments and transactions.
Sindh Sales Tax Laws
Sindh is one of the four provinces of Pakistan that has the authority to levy sales tax on services under the Constitution of Pakistan. The Sindh Revenue Board (SRB) is the agency responsible for administering and collecting sales tax on services in Sindh. The SRB was established in 2011 and has since introduced various laws and regulations to streamline the sales tax regime in the province.
The main law governing sales tax on services in Sindh is the Sindh Sales Tax on Services Act, 2011, which defines the scope, rate, exemptions, registration, returns, payment, assessment, audit, penalties and appeals related to sales tax on services. The SRB also issues notifications, circulars and rulings to clarify and implement the provisions of the Act. The SRB has also developed an online system for registration, filing of returns and payment of sales tax on services.
The SRB has notified various sectors and categories of services that are subject to sales tax in Sindh. Some of the major sectors include advertising, banking and insurance, construction, education, health, information technology, telecommunication, transport and travel. The standard rate of sales tax on services in Sindh is 13%, but some services are subject to reduced rates or exemptions. The SRB also grants refunds or adjustments of sales tax in certain cases.
The SRB coordinates with the Federal Board of Revenue (FBR) and other provincial revenue authorities to avoid double taxation and ensure harmonization of sales tax laws in Pakistan. The SRB also participates in the Council of Common Interests (CCI) and the National Finance Commission (NFC) to resolve inter-governmental issues related to sales tax on services.
The SRB aims to promote a fair and transparent sales tax system in Sindh that facilitates taxpayers and enhances revenue collection for the province. The SRB also strives to provide quality services and effective enforcement of sales tax laws in Sindh.
The provincial sales tax laws are an important source of revenue for the provinces and also affect the cost of doing business in Pakistan. Therefore, it is essential for taxpayers to keep abreast of the latest developments and changes in these laws and comply with their obligations accordingly.
The Provincial Excise Laws
Pakistan is a federal country with four provinces: Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan. Each province has its own excise laws and authorities that regulate the production, sale and consumption of various goods and services that are subject to excise duty. Excise duty is a type of indirect tax that is levied on certain goods and services that are considered to be harmful or luxurious, such as tobacco, alcohol, narcotics, petroleum products, cement, sugar, etc.
The provincial excise laws in Pakistan are mainly based on the Excise Act 1909, which was enacted during the British colonial rule. The act has been amended and adapted by each province according to its own needs and circumstances. The provincial excise laws provide for the imposition of excise duty on various goods and services at different rates and methods of calculation. The provincial excise laws also prescribe the procedures for registration, licensing, assessment, collection, recovery and enforcement of excise duty.
The provincial excise authorities are responsible for administering and collecting excise duty within their respective jurisdictions. They also have the power to conduct inspections, audits, searches and seizures to prevent evasion and fraud of excise duty. The provincial excise authorities also have the authority to impose penalties and prosecute offenders for violating the excise laws.
The provincial excise laws in Pakistan are an important source of revenue for the provincial governments. They also serve as a tool to regulate the production and consumption of certain goods and services that have adverse effects on health, environment and social welfare. The provincial excise laws in Pakistan aim to strike a balance between revenue generation and public interest.
The Property Tax Laws
The Property Tax Laws in Pakistan
Property tax is a tax levied on the ownership or possession of immovable property, such as land, buildings, and structures. In Pakistan, property tax is administered by the provincial governments and the local authorities, such as municipal corporations and district councils.
The property tax laws vary from province to province, but generally follow a similar structure. The property tax is calculated based on the annual rental value (ARV) of the property, which is determined by the valuation tables prepared by the provincial governments. The ARV is multiplied by a certain percentage, which depends on the type, location, and use of the property. The property tax rates range from 5% to 25% of the ARV.
The property tax laws also provide for various exemptions and rebates for certain categories of properties and taxpayers. For example, properties used for agricultural, educational, religious, charitable, or public purposes are exempt from property tax. Similarly, properties owned by widows, orphans, disabled persons, retired government employees, and low-income earners are eligible for rebates ranging from 50% to 100% of the property tax.
The property tax laws also impose penalties and fines for non-payment or late payment of property tax. The defaulters are liable to pay a surcharge of 2% per month on the outstanding amount of property tax. Moreover, the provincial governments and the local authorities have the power to recover the property tax arrears by attaching and auctioning the defaulters’ properties.
The property tax laws in Pakistan are aimed at generating revenue for the provincial governments and the local authorities, as well as promoting social justice and equity among the property owners. However, there are also some challenges and issues in the implementation and enforcement of the property tax laws, such as outdated valuation tables, low compliance rate, corruption, and lack of transparency. Therefore, there is a need for reforming and improving the property tax system in Pakistan to make it more efficient, fair, and effective.
Tax law in Pakistan is a dynamic and challenging area that requires constant updating and compliance. Taxpayers should consult with qualified tax professionals or lawyers to understand their rights and obligations under the law and to avoid any penalties or disputes with the tax authorities.