Question: Elaborate the income tax ordinance 2001, and discuss deductibility of bad debts.
Income Tax Ordinance, 2001
Another Commission constituted by the government submitted its report in May 2001. The commission suggested that Income Tax Ordinance, 1979, should be replaced by Income Tax Ordinance, 2001, which is claimed to be simple and less complicated. This new Income Tax Ordinance was promulgated on
13th September 2001 and it has become effective from 1st July 2002, Before promulgation necessary changes have been made through Finance Ordinance 2002. The assessments of tax year 2003 onwards are finalized under Income Tax Ordinance, so this book is completely based on the new Ordinance. The Central Board of Revenue has claimed that the new Ordinance is a justifiable, pragmatic easy to understand and in accordance with the global environments.
The government claims that by introduction of this Ordinance truly revolutionary changes have been brought in the income tax law and these changes are aimed at simplifying its application and enabling taxpayers to comply with its provisions.
The new law has abolished the role of “assessing officer” who used to determine the income of taxpayer and compute his tax liability. These responsibilities have now been entrusted to taxpayer himself.
It has also been claimed that under the new Ordinance the self assessment procedure will be more meaningful and many conditions which were necessary for such an assessment have been withdrawn. It will be universal in the true sense of the word, as all classes of taxpayers, without any exception will be entitled to the use of the scheme. The new concept is a removal of one of the most pervasive distortion of income tax system. This change is likely to bring modernity and progress in the system.
The government is also hopeful that the new law will obtain uniformity of tax rates and tax treatment, encourage voluntary compliance and ensure an effective dispute resolution.
In spite of all these claims it has been observed that the new Ordinance will need lot of changes and additions to become a workable law in our society. Actually a lot of changes have already been made through Finance Order, 2002, as well as subsequent Finance Acts. With these hopes and observations the “Income Tax Ordinance, 2001” has been enforced and all income tax returns for income earned from 1st July 2002 onward are being taxed under this law.
Tax Administration Reforms Programme
The Government of Pakistan has started a Tax Administration Reforms Programme with the help of International Monetary Fund. The basic objectives of the programme are to bring cultural, operational and structural changes in the taxation system. The Central Board of Revenue has planned to replace the existing divisional structure of income tax with a functional structure. Three Large Taxpayers Units have been established at
, Karachi and Lahore . In the big cities Medium Taxpayers Units have also been established. Ultimately it is planned that all Medium Taxpayers Units will be converted into Regional Tax Offices. In total fourteen Regional Tax Offices will be established which will be responsible for collection of all domestic taxes, i.e. income tax, sales tax and excise. Under this programme, twenty three Taxpayers Facilitation Centres have been opened whereas twenty-nine more such Centres are planned to be started. The Programme is expected to be completed by 2008. It will be only then that an assessment of the achievements of the programme will be possible. Islamabad
In order to properly implement the Tax Administration Reforms Programme the Central Board of Revenue is being transformed into Federal Board of Revenue (FBR). The Federal Board of Revenue Act, 2007, has empowered the tax officials to formulate policy for performance management awards, incentive packages, golden handshake scheme and integrated management policy for the tax machinery. It will also provide powers to implement a complete human resource policy, power to assess, identify, create, decrease and reduce or designate various posts. The FBR Act empowers the Board to make rules for maintaining discipline in the organization. It also ensures complete autonomy of the Board to run its day to day affairs in an efficient manner. The implementation process of the FBR Act, 2007, is likely to be completed in six months.
Income Tax Authorities except that through this implementation the tax base will be broadened and the tax collection in the country will be enhanced.
Scope of Income Tax Laws
We shall discuss the scope of Income Tax Laws from two different angles:
1. The territorial limits to which the Income Tax Ordinance applies.
2. The components of Income Tax Law in our country.
1. Extent of Income Tax Ordinance, 2001
The Income Tax Ordinance, 2001, applies to the whole of
. The definition of word “ Pakistan ” has been provided in the Article 1(2) of the Constitution of Pakistan 1973. The following territories have been included therein: Pakistan
(a) Provinces of Balochistan,
North-West Frontier Province, Punjab and Sindh.
(b) Federal Capital.
(c) Federally Administered Tribal Areas.
(d) States and territories as may be included in
, whether by accession or otherwise. Pakistan
Under Article 246 of the Constitution
(a) Tribal Areas means the areas in
which, immediately before the commencing day, were Tribal Areas, and includes: Pakistan
1. The Tribal Areas of Balochistan and
North-West Frontier Province; and
2. The former States of Amb, Chitral, Dir and Swat.
(b) Provincially Administered Tribal Areas means:
1. The districts of Chitral, Dir and Swat (which includes Kalam), Malakand protected area, the Tribal Area adjoining Hazara district and the former State of
; and Amb
2. Zob district, Loralai district (excluding Bhuke Tehsil), Dalbandin Tehsil of Chagai district and Marri and Bugti Tribal territories of Sibi district.
(c) Federally Administered Tribal Areas include:
1. Tribal Areas adjoining
2. Tribal Areas adjoining Kohat district
3. Tribal Areas adjoining Bannu district
4. Tribal Areas adjoining Dera Ismail Khan district
5. Bajaur in Malakand Agency
6. Mohamand Agency
7. Khyber Agency
8. Kurram Agency
9. North Waziristan Agency
10. South Waziristan Agency
Subject to the Constitution, the executive authority of the Federation shall extend to the Federally Administered Tribal Areas and the executive authority of a Province shall extend to the Provincially Administered Tribal Areas therein.
No Act of Parliament shall apply to any Federally Administered Tribal Areas or to any part thereof, unless the President so directs and no Act of Parliament or a Provincial Assembly shall apply to Provincially Administered Tribal Areas, or to any part thereof, unless the Governor of the Province in which the Tribal Area is situated, with the approval of the President, so directs, and in giving such a direction with respect to any law, the President or, as the case may be, the Governor may direct that the law shall, in the application to a Tribal Area, or to a specified part thereof, have effect subject to such exceptions and modifications as may be specified in the direction.
The President may, at any time, by order direct that the whole or any part of a Tribal Area shall cease to be a Tribal Area, and such order may contain such incidental and consequential provisions as appear to the President to be necessary and proper. But before making any order, the President shall ascertain, in such manner as he considers appropriate, the views of the people of the Tribal Area concerned as represented in tribal jirga.
2. Components of Income Tax Law
The following are the constituents of Income Tax Law in
(a) Income Tax Ordinance, 2001 (as amended)
(b) Rules framed by the Board
(c) Notifications, Circulars and Orders
(d) Income Tax Case Law
(e) Finance Acts or Ordinances
(a) Income Tax Ordinance, 2001 (as Amended)
It is the basic constituent of income tax law in our country. On its basis, the whole taxation structure of the country is founded. The whole procedure of taxation including matters regarding payment of tax, collection of tax, penalties, assessment, refund, appeals etc. has been provided in the Ordinance. It consists of thirteen chapters. Each chapter deals with a particular subject and has been divided into parts. Many parts are further subdivided into divisions. There are 240 sections of the new Ordinance as compared to 167 sections of Income Tax Ordinance, 1979 (repealed). The Ordinance also contains seven schedules. Schedules are also treated as part of the Ordinance. The changes in the Income Tax Ordinance, 2001, are brought about by the Finance Ordinance or Finance Act every year. Such changes are of a payment nature.
(b) Income Tax Rules
The Federal Board of Revenue, which is the highest income tax executive authority in
, makes rules from time to time which are meant for the guidance of its officers as well as the tax payers. The Central Board of Revenue has been assigned this power under section 237 of the “Income Tax Ordinance, 2001”. These rules are notified in the official gazette. Such rules have the same force as the sections in Income Tax Ordinance itself and are implemented in the same manner. Pakistan
Since 1924, CBR has framed a number of rules regarding rates of depreciation, registration of firms, submission of returns, forms of appeals, etc. which are treated as a part of income tax law. The latest rules “Income Tax Rules, 2002” have been issued to meet the requirements of Finance Ordinance, 2001. During 2007, Federal Board of Revenue will replace CBR and perform all its functions.
(c) Income Tax Case Law
In the interpretation of tax laws, the possibility of different types of disputes is evident. When such a dispute arises, the aggrieved party presents its case to a court of law, which decides the case and provides correct interpretation of the law. Such decisions of the courts are known as Income Tax case law and reference to such decisions is subsequently made in order to get necessary guidance. Thousands of cases, regarding the interpretation of tax laws and the definitions of terms, used in the Ordinance, have been decided by the courts. These are also a very important component of income tax law in
(d) Finance Acts or Ordinances
In order to meet the budgetary requirements and other social and economic needs of the country an annual law known as Finance Act or Ordinance is promulgated every year. It usually prescribes the maximum income which is not liable to tax. Changes in the Income Tax Ordinance, 2001, itself are also brought about through this legislation. Rates of tax applicable for the next financial year are also specified. The principles of taxation and computation of tax are also laid down by the Finance Act or Ordinance. These changes are made in order to bring the law in line with the changing economic environments of the country. The Finance Act or Ordinance contains provisions of general character which are of permanent operation and it forms part of the general law of taxation.