History of tax laws in Pakistan

In Pakistan, Federal Government is empowered to levy and collect tax on the

income of a person. The history of modern income taxation dates back to the
year 1860. The British Empire introduced first formal Income Tax Act of 1860 in an
effort to end the budgetary deficit faced due to the war of independence of
1857. The tax was not intended to be permanent and was repealed in 1865.

The Income Tax Act of 1886 was a general income tax that had been imposed
on traders by some of the provinces. This Act of 1886 was a great improvement
on earlier enactments. Its basic scheme, by and large, survives till today. It
introduced the definition of “agricultural income” which is almost the same as in
the Income Tax Ordinance 2001. This Act continued in force for 32 years.

The 1918 Act consolidated a number of wartime amendments. A graduated

super tax on income over Rs.50,000 and on the undistributed profits of the
corporation and other entities was introduced by the Super Tax Act of 1917 and
continued in force through modifications by the Super Tax Act of 1920. The
Income Tax Act and the Super Tax Act were later on consolidated in another act
i.e. the Income Tax Act of 1922, which remained in force in Pakistan till 30th June
1979; when the new law was promulgated i.e. the Income Tax Ordinance, 1979
with effect from 1st July 1979.

Income Tax Ordinance 1979 was amended through innumerable presidential

ordinances, annual finance acts/ordinances and statutory regulatory orders
(SROs) and most of its lacunas were removed over a long period of time.
However, after approximately 23 years of its existence when substantive
amendments and judicial pronouncements made it a universally understandable
and acceptable piece of legislation for everybody, a new ordinance (i.e.)
Income Tax Ordinance, 2001 was promulgated on 13th September 2001.

(This will give you idea about how the taxation system started in Pakistan)
Now Answer to Following Question;

1. Briefly explain difference in direct and indirect taxes and different kind of
such taxes prevailing in Pakistan. (Write detail on separate page)

We will be focusing on Income tax at First Stage

Income tax law deals with the levy of tax on the income of a person.

The scope of income tax law is defined in section 4 of the Income Tax Ordinance, 2001 in the following
manner: ―

“Income tax shall be imposed for each tax year on every person who has taxable income, as per the
applicable tax rates”

Perusal of the aforesaid provision of law rises following questions in our minds:

i. What is a tax year?

ii. What is taxable income and how it is computed?
iii. Who is person?
iv. What are applicable rates of tax?
v. What is the procedure for levy of tax?

These primary questions are answered in the upcoming paragraphs.