Taxation - Summary PDF

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(INCOME TAX AUTHORITIES)

SUBJECT:

TAXATION LAW

SUBMETTED TO:

MAM BENISH ASLAM

SUBMITTED BY:

TAHIRA ASHRAF

REGISTRATION NO.

3661/F-18(E) 4TH SEMESTER (B)

INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD

TOPIC:

-: INCOME TAX AUTHORITIES: TAXATION:

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Taxation is a system by which a government levies or imposes charges on citizens and corporate entities to finance its expenses such as defense, welfare (Education, Health, Care, Infrastructure) etc. TAX: Tax is a compulsory payment to government under any law. TYPES OF TAX: There are many kinds of taxes. They may be direct tax or indirect tax. 1. Direct tax:

A direct tax is one that the taxpayer pays directly to the government. These kinds of taxes cannot be moved to any third person or group. The amount of direct taxes depends upon the capacity of taxpayer. Examples of direct tax: • •

Taxes that are based on how much money a company earns are called corporate taxes Taxes that are based on how much money a person earns are called income taxes.

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Taxes that are based on how much a person owns are called a property tax. Things like houses have a property tax on them. 2. Indirect tax:

A direct tax is one that the taxpayer pays directly to the government. These kinds of taxes cannot be moved to any third person or group. Indirect taxes do not look at the costumer’s ability to pay but is the same for everyone who buys the goods or services. Examples of Indirect tax: •

Taxes that are based on how much a person buys are called sales taxes

Taxes can also be fragmented into 3 groups: • • •

Flat taxes: Everybody pays the same percentage. Russia has a flat income tax and everybody in Russia must pay 13% of the income. Progressive taxes: The more money a person makes, the higher percentage of their income they have to pay. Most countries have progressive income taxes. Regressive taxes: The less money a person makes, the higher percentage of their income they have to pay. Sales taxes are usually called regressive as poor people spend a higher percentage of their money, than rich people.

HISTORY OF TAXATION: The beginnings of the income tax in this part of the world can be traced to year 1860 when it was stated in the then Indian Legislature that “the suppression of the “Mutiny” (War of Independence of 1857) has entailed a very heavy expenditure and made a large addition to the public debt”. One of the measures which were considered necessary to secure the solvency of the Government, and the most important was proposal for additional taxation. It was contained in two Bills – one

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Consequently, Income Tax was introduced for the first time through Income Tax Act, 1860. During the period 1860 – 1922, no less than six Tax Acts were promulgated which remained in force for periods ranging from one year to 32 years. However, during this period there were two occasions when there was NO INCOME TAX -- during (i) 1865 to 1867 and (ii)1873-1877. DEVELOPMENT IN PAKISTAN: Income Tax Act, 1922: When Pakistan came into being, the Income Tax Act, 1922, was in force. After independence in 1947, the Government of Pakistan adopted this Act and its provisions were extended to whole of Pakistan, except special areas. This Act continued for 57 years, till 1979 and was amended several times during this period. Each amending act, to check evasion of tax, made the law more complicated and difficulties arose in its day to day working. Income Tax Ordinance, 1979 : To overcome these difficulties, the Income Tax Act, 1922, was replaced by the Income Tax Ordinance, 1979 and was made effective from 1st July 1979. Self-Assessment Scheme was further broad based. Changes were brought about every year through annual Finance Acts. The Income Tax Ordinance, 1979 remained in force until 30th June 2002. INCOME TAX ORDINANCE 2001: This Ordinance was enforced on the 1st of July 2002. It has repealed the Income Tax Ordinance, 1979 (subject to certain savings mentioned in section 239) and now forms the main body of statute law on income tax in Pakistan. The Income Tax Rules, 2002 are an integral part of the main enactment.

INCOME TAX AUTHORITIES: The income tax ordinance 2001 specifies the provisions relating to the various classes of tax authorities. It also deals with the provisions regarding appointment, jurisdiction and functions of these authorities. According to these provisions the following different classes if income tax authorities may be appointed: • • • • • • •

Administrative authorities Investigation and intelligence authorities Training and research authorities Internal audit authorities Withholding taxes authorities Independent private agencies, firms or companies such as, auditors, surveyors and valuers Appellate authorities

❖ FEDERAL BOARD OF REVENUE (BOARD) Board means the Federal Board of Revenue (FBR) established under section 3 of the Federal Board of Revenue Act, 2007. The Federal Board of Revenue is the highest tax authority in Pakistan and is also known as “central Board of Revenue (CBR). It has the jurisdiction to exercise

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the general administration of the income tax ordinance, 2001. Board mat appoint as many officers as it deems necessary. For instance; • • • • • • • • • •

Directorate-General of internal Audit. Directorate-General of training and Research. Directorate-General of withholding Taxes. Directorate-General of Law. Directorate-General of International Tax Operations. Directorate-General of valuation. Chief Commissioner Inland Revenue (CCIR). Commissioner Inland Revenue (CIR). VALUERS Firms of Chartered Accountants or cost and Management Accountants to conduct audit UNCTIONS AND

The Board shall determine the jurisdiction of different tax authorities. All officers and person, employed in the execution of the income Tax Ordinance, shall observe and follow the orders, instructions and directions of Board. But Board cannot issue orders, instructions or directions, which may be considered as interference in the appellate functions of the commissioner (Appeals). HISTORY of FBR: FBR was established as the Central Board of Revenue on 1 April 1924 through enactment of the "Central Board of Revenue Act, 1924". In 1944, the CBR was put under the Revenue Division with the Ministry of Finance until 1960, when on the recommendations of the "Administrative Reorganization Committee", the CBR was made into a division of the Ministry of Finance. In 1974, further changes were made to streamline the organization and its functions. In 1991, the CBR was once again reverted to its original status under the Revenue Division, however in January 1995, the Revenue Division was abolished and the CBR was once again reverted to a division of the Ministry of Finance. In 2007, the "FBR Act" was passed in July 2007, whereby the Central Board of Revenue was renamed to the present-day Federal Board of Revenue and for a third time placed again under the Revenue Division of the Ministry of Finance. MISSION & VISION OF FBR: The vision of FBR is to be a modern, progressive and creditable organization for optimizing revenue by providing quality service and promoting compliance with tax. The FBR was established to enhance the capacity of the tax system to collect taxes through application of modern techniques, providing taxpayer assistance and by creating a motivated, dedicated and satisfied, professional work force.

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FUNCTIONS AND POWERS OF BOARD: • • • • • • •

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Grand exemption from tax to the newly established industrial undertaking and make rules for such exemption. Makes rules for the recovery of tax from the taxpayer who is in default. Make rules for tax credit for certain investment. Certify an institution as conducting research in Pakistan. [26(2)] Approve schemes regarding employee training. [27(c)] Appoint any of the income tax authorities including valuers. Issue circulars for the guidance to taxpayers and officers of Board. [206] The main object of the circulars is to achieve consistency in the administration of the ordinance and to provide guidance to the taxpayers and officers of the board. Circular is binding over all the authorities except the Commissioner (appeals). Issue advance ruling on the application of a non-resident. [206A] Prescribe forms, etc., for the purpose of the Income Tax Ordinance, 2001. [217] Make rules for carrying out the purposes of the income Tax Ordinance, 2001. [237] FBR has the responsibility for the formulation and administration of fiscal policies. Coordination in respect of matters relating to the National Assem bly and Senate Standing Committees on Revenue and Finance.

❖ CHIEF COMMISSIONER INLAND REVENUE: ‘Chief commissioner’ means a person appointed to be a chief commissioner Inland Revenue (CCIR) under section 208 of the Income Tax Ordinance. It also includes regional Commissioner Inland Revenue and a Director-General of Income Tax and Sales Tax. Chief Commissioner is appointed by Board. Board also specifies the functions, duties and jurisdiction of Chief Commissioner. He works under the administration of Board and oversee the Commissioners Inland Revenue sand other sub-ordinate officers working within his jurisdiction. Chief Commissioner has to see the functioning of his subordinate tax authorities and will make arrangements to ensure that the provisions of law and directions given by the Board are being compiled with. POWERS AND FUNCTIONS: Followings are the powers and functions of Chief Commissioner of Pakistan; • • •

He transfers the jurisdiction in respect of cases or persons from one Commissioner subordinate to him to another. Revise certain orders passed by his subordinate authorities. Call for the record of any proceedings relating to the issuance of an exemption or lower rate certificate with regards to collection or deduction of tax at source.

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•

With the approval of Board, he can appoint any of his subordinate authorities. [208(B)]

❖ COMMISSIONER INLAND REVENUE: ‘Commissioner’ means a person appointed to be a Commissioner Inland Revenue (CIR) under section 208 of the Income Tax Ordinance,2001. Formerly, it means a person appointed officially to supervise the collection of taxes, including income tax, capital gains tax and corporation tax, but not VAT. It also includes any other authority vested with all or any of the powers and functions of the Commissioner. [Section 2(13)] CIR is appointed by Board and is subordinate to Board and Chief Commissioner under whose jurisdiction he works. FUNCTIONS AND POWERS: CIR Is head of a Revenue Zone. He performs all such functions as are required by any provision of the Income Tax Ordinance and as directed by Board. He oversees the performance and functions of all subordinate authorities working within his jurisdiction. Under the Income Tax Ordinance, 2001, the CIR is the most powerful authority. Almost all functions concerning the administration of the Ordinance are vested in him. His powers are manifold. CIR enjoys the following powers: 1) Allow an employee to pay tax on his retirement payments and golden handshake payments as per normal procedure or pay tax, based on, average rate of tax based on the three preceding tax years. [Section 12(6)] 2) Allow an employee to pay tax on salary received in arrears in the tax year in which services were rendered. [Section 12(7)] 3) Extend the date of selection out of the options available to an employee. [Section 12(8)] 4) Allow a person to change his method of accounting. [Section 32(4)] 5) Permit the change of stock valuation method. [Section 35(6)] 6) Allow a person to use special tax year. [Section 74(3)] 7) Allow a person to use normal tax year instead of special tax year. [Section 74(7)] 8) Impose conditions while permitting a person to use a special tax year or normal tax year. [Section 74(5)] 9) Withdraw the permission granted to a person to use a specific tax year. [Section 74(7)] 10) Distribute, apportion or allocate incomes, deductions or tax credits in respect of any transaction between associates. [Section 108(1)] 11) Charge to tax the value of any unexplained income or asset and determine the value if it is declared less than the fair market value. [Section 111(3)] 12) Require a person or his representative to furnish the return of income. [Section 111(3) &(4)]

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13) Require a person to furnish his wealth statement. [Section 116(1)] 14) Require a person to furnish the return if the business is discontinued and the person has not furnished his return of income. [Section 117(3)] 15) Extent the time for filing a return. [Section 119] 16) Make-an assessment order if the taxpayer has not furnished his return of income. [Section 121] 17) Make an amended assessment order and a provisional assessment order. [Section 122-123] 18) Make an assessment order to give effect to an order of an appellate authority or a court. [Section 124] 19) Make an assessment in the light of a point of law decided by the High Court or the Appellate Tribunal. [Section 124A (1)] 20) Modify the original orders if the orders of the Tribunal or the High Court are changed at the higher appellate forum. [Section 124A (2)] 21) Take all necessary and appropriate actions for recovery of tax from a taxpayer. [Section 138] 22) Recover the tax from a person who holds money on behalf of the taxpayer. [Section 140] 23) Notify and recover the tax from the liquidator of a company which has gone into liquidation. [Section 141] 24) Allow a person to make payment without deducting tax at source. [Section 153(4)] 25) Issue an exemption certificate. [Section 159] 26) Adjust the amount of excess tax paid by a taxpayer and if there is any balance after the adjustment of any other tax liability refund the same to the taxpayer. [Section 170] 27) Authorize a person to maintain the prescribed records, books, accounts, etc. [Section 174] 28) Enter and search premises. [Section 175] 29) Issue notice in order to obtain information or evidence. [Section 176] 30) Select any person for audit. [Section 177] 31) Approve a person as translator in case the accounts, etc., are kept by a taxpayer in a language other than Urdu or English. 32) Impose penalties for different defaults. [Part-X of Chapter-X] 33) Impose default surcharge if the taxpayer fails to pay the tax by due date. [Section 205] 34) Appoint any of his subordinate authority with the approval of Board. [Section 208(2)] 35) Delegate any of his powers to any Officer of Inland Revenue. [Section 210] 36) Rectify any mistake in his order, apparent from the record and can appoint an expert for the purposes of valuation, audit, etc. [Section 221-222] ❖ OFFICER OF INLAND REVENUE: Officer of inland revenue is an officer, appointed by the Board for the purpose of the income Tax Ordinance. Additional Commissioner Inland Revenue, deputy Commissioner Inland Revenue, special officer or any other officer, appointed by the Board, is an Officer of Inland Revenue. Usually Officer of Inland Revenue is subordinate to the commissioner under whose jurisdiction he works but if he vested with the power of commissioner, he would be equivalent to other commissioners and is subordinate to Chief Commissioner. Ordinance does not mention

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the authority of Officer of Inland Revenue, but Ordinance allows that the Board, Chief Commissioner or Commissioner Inland Revenue can delegate their powers or functions to him. JURISDICTION OF INCOME TAX AUTHORITIES: Regarding jurisdiction of various authorities in Pakistan, Income Tax Ordinance says; • The jurisdiction of CCIRs, CIRs and Commissioners (appeals) are determined by The Board. The Board will assign these positions to them, in respect of the persons, classes of persons or areas. • The Board or The Commissioner may transfer the jurisdiction of cases or persons from one Commissioner to another. • The Board or CCIR may assign the Officer of Inland Revenue the powers of CIR. After the delegation of power to Officer of Inland Revenue, he shall be treated as CIR and has the jurisdiction in respect of the CIR or other officers. The CCIR can make such orders only if he has obtained approval from The Board. • The CIR is assigned for a specified area and he has jurisdiction over that area. While doing so the following shall be considered: ✓ If the place of business of a person (carrying on a business) is within that area, where the business of a person is carried on in many places, then the principal place of the business is within that area. ✓ If the person (any other person) resides in that area. PLACE OF BUSINESS’ means; (A) Place of business means a place where the registered office of the company is situated (for listed or unlisted public limited companies.) (B) In case of other companies; I. If the company is primarily engaged in manufacture or processing, the place where factory is situated. II. The place where main business activities are carried on if the company is established for other purposes than manufacture or processing. • If the dispute raised regarding the jurisdiction of a CIR over a person then the matter will be decided by; I. The concerned Chief Commissioner II. The concerned chief commissioners, or III. The Board, if the CCIRs are not in agreement. [209(6)] • Under following situations, CIR’s jurisdiction cannot called by a person; I. Where the person has filed the return of income to the CIR, or II. Where a person has been served a notice for furnishing of a return of income and the person has not furnished it within the prescribed time mentioned in the notice. Under this situation he can challenge the jurisdiction only when the specified time in the notice has not expired. [209(7)] • A CIR has the jurisdiction in respect of any income arising within the area assigned to him. [209(8)] • Where any tax authority has succeeded the jurisdiction, then it may continue the proceedings from the stage where it was left by its predecessor. [209(9)]

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DELEGATION OF POWERS: [209(2) & 210] Delegation of power means the transfer of powers and functions of an authority to another authority. The functions and powers of the commissioner may be delegated to an officer of Inland in any of the following ways; a) Delegation by board: [209(2)] The Board may assign all or any of the powers and functions of the commissioner in respect of any person, class of persons or area. b) Delegation by Chief Commissioner: [209(2) & (3)] The Chief Commissioner can also appoint the Commissioner with the approval of the Board. c) Delegation by CIR: The CIR can delegate his power and functions to any Officer of Inland Revenue, but he cannot transfer his power of delegation to officer of Inland Revenue. It means that officer Revenue cannot further delegate his powers. [210(1)] • The CIR cannot transfer the powers of amendment of assessment to an officer below the rank of Additional Commissioner. • The CIR has the power to cancel or modify the order issued by him for delegation of powers. • The Board may authorize any income tax authority to assist, guide or instruct the CIR or any officer of Inland Revenue in the course of the proceedings. CONFIDENTIALITY OF THE INFORMATION GIVEN TO TAX DEPARTMENT: Any document submitted before the Tax Department under the provision of the ordinance shall be treated as confidential and public servant cannot disclose the information except where Ordinance allows. Following information of the documents will be treated as confidential; ✓ Any statement made, return furnished or accounts or documents produced under the ordina...