Taxation

Taxation is a term for when a taxing authority,

usually a government, levies or imposes a
financial obligation on its citizens or residents.
 Types Of Taxes
Proportional tax, also referred to as a flat tax
affects low-, middle-, and high-income earners
relatively equally. They all pay the same tax
rate, regardless of income. A progressive tax
has more of a financial impact on higher-
income individuals than on low-income
earners.
 Types Of Taxes
Regressive Taxes
• Low-income individuals pay a higher amount
of taxes compared to high-income earners
under a regressive tax system. That's because
the government assesses tax as a percentage
of the value of the asset that a taxpayer
purchases or owns. This type of tax has no
correlation with an individual's earnings
or income level
 Types Of Taxes
Progressive Taxes
• Taxes assessed under a progressive system are
based on the taxable amount of an individual's
income. They follow an accelerating schedule,
so high-income earners pay more than low-
income earners
 Other Types Of Taxes
• Direct and indirect taxes
• A direct tax is a tax that a person or company pays
directly. For example, income tax is taken out of
your salary.
• An indirect tax is paid by a third party. For example,
when you buy a TV, there is a VAT charge which is
included in the price, the consumer does not pay,
but the firm who sells the good is responsible for
paying the tax to the government on your behalf.
 DIRECT TAXES
Direct Taxes:
A tax which is born and paid directly by the
person on whom it is impose is a direct tax
e.g., Income Tax, Wealth Tax,
• It is directly paid by the tax payer to the
government without any intermediary and it
• comes from own pocket.
 Indirect Taxes
• If a tax is passed on by the tax payer to some
other person, it is and indirect tax
• e.g. Sales Tax, Value Added Tax (VAT) etc.
• It is not directly paid by the person on whom it
is levied, but is paid indirectly through the
• medium of other persons.
 TAXABLE INCOME

• Taxable Income means Total Income reduced

by donations qualifying straight for deductions
and certain deductible allowances.
• TOTAL INCOME
Total Income is the aggregate of Income
chargeable to Tax under each head of Income.
 Heads of Income in Pakistan
• Under the Ordinance income is classified into
the following five heads:
• Salary,
• Income from property,
• Income from business,
• Capital gains
• Income from other sources.
 RESIDENT

An individual is considered resident for a tax

year if he/she is in Pakistan for more than 182
days in that tax year.
 RESIDENT COMPANY

• A Company is Resident for a Tax Year if :It is

incorporated or formed by or under any law in
force in Pakistan;
• The control and management of its affairs is
situated wholly in Pakistan at any time in the
year.
• It is a Provincial Government or a local
Government in Pakistan.
 NON-RESIDENT

• An Association of Persons, a Company and an

Individual are Non-Resident for a Tax Year if
they are not Resident for that year.
 Real property tax

A 6% tax is imposed on the value of real

property
 Inheritance Tax

A type of tax levied on individuals who inherit

the estate of a deceased person. 
 Excise Taxes

• Excise taxes are taxes imposed on a specific

good or activity, usually in addition to a broad
consumption tax, and comprise a relatively
small and volatile share of total tax collections.
Common examples of excise taxes include
those on cigarettes, alcohol, soda, gasoline.
 Excise Taxes

• Excise taxes can be employed as “sin” taxes, to

offset externalities. An externality is a harmful
side effect or consequence not reflected in the
cost of something. For instance, governments
may place a special tax on cigarettes in hopes
of reducing consumption and associated
health-care costs, or an additional tax on
carbon to curb pollution.
 Excise Taxes

• Excise taxes can also be employed as user

fees. A good example of this is the gas tax. The
amount of gas a driver purchases generally
reflects their contribution to traffic congestion
and road wear-and-tear. Taxing this purchase
effectively puts a price on using public road
 Wealth Taxes

Wealth taxes are typically imposed annually on

an individual’s net wealth (total assets, minus
any debts owed) above a certain threshold.
 Taxation of dividends
A resident entity pays tax at a rate of 10% on
dividend income regardless of whether the
dividends are Pakistan or foreign source. A
nonresident pays tax at a rate of 10% on
Pakistan source dividends.
 TAX YEAR

• Is a period of twelve months ending on 30th

day of June i.e. the financial year and is denoted
by the calendar year in which the said date falls.
For example, tax year for the period of twelve
months from July 01, 2017 to June 30, 2018
shall be denoted by calendar year 2018 and the
period of twelve months from July 01, 2018 to
June 30, 2019 shall be denoted by calendar year
2019. It is called Normal Tax Year.
 SPECIAL TAX YEAR

• Means any period of twelve months and is

denoted by the calendar year relevant to the
Normal Tax Year in which closing date of the
Special Tax Year falls. For example, Tax Year for
the period of twelve months from January 01,
2017 to December 31, 2017 shall be denoted by
calendar year 2018 and the period of twelve
months from October 01, 2017 to September 30,
2018 shall be denoted by calendar year 2019.
 Pakistan Income Tax Law
• Income tax Pakistan Law concerning taxation
of income in Pakistan is stated in the Income
Tax Ordinance, 2001.
 Taxable Income in Pakistan
• It is the total income of a person for a tax year
reduced by the total of any deductible
allowances, under the Ordinance, for the year.
A person is entitled to a deductible allowance
for the amount of any Zakat paid by the
person in a tax year under the Zakat & Ushr
Ordinance, 1980.
 sales tax
A sales tax is a consumption tax charged at the
point of purchase for certain goods and
services. The tax amount is usually calculated
by applying a percentage rate to the taxable
price of a sale.
• Sales taxes are commonly charged on sales of
goods, but many sales taxes are also charged
on sales of services.
 CORPORATE TAX
• When the tax is levied on the income of
companies, it is often called a corporate tax,
corporate income tax, or profit tax.
 CORPORATE TAX STRUCTURE*

A financial manager for making investment

decisions, must have general understanding
of the corporate tax structure,
•Corporate tax rate schedule
•Interest and dividend income
• Interest and dividends paid by a corporation
•Capital gains and losses etc
 EXAMPLES
If a firm has $20,000 in taxable income, the
tax liability is $3,000
($20,000 x 15%)=3000

If a firm has $20,000,000 in taxable income,

the tax is calculated as follows
Income ($) X Marginal TaxRate(Yo) = Taxes ($)
50,000 15 7,500
25,000 25 6,250
25,000 34 8,500
2,35000 39 91,6500
9,665,000 34 3,286,100
5,000,000 35 1,750,000
3,333,333 38 1,266,667
1,666,667 35 583,333
20,000000 7000,000
• Average Tax Rate = Tax Due/Taxable Income
• The average tax rate for the corporation in
Example is 35% (7,000,000/20,000,000). The
• marginal tax rate for the corporation in is
35%.
 CORPORATE TAX STRUCTURE*

• taxes are imposed at the following tax rates:

• 15% on the first $50,000
• 25% on the next $25,000
• 34% on the next $25,000
• 39% on the next $235,000
• 34% on the next $9,665,000
• 35% on the next $5,000,000
• 38% on the next $3,333,333
• 35% on the remaining income
 EXAMPLE
• Yukon Corporation has an operating income of
$200,000, pays interest charges of $50,000, and
• pays dividends of $40,000. The company’s
taxable income is:
• $200,000 (operating income)
• -50,000 (interest charge, which is tax-deductible)
• $150,000 (taxable income)
 EXAMPLE

• Montgomery Enterprises, Inc., had operating

earnings of $280,000 for the year just ended.
• - During the year, the firm sold stock that it
held in another company for $180,000, which
was $30,000 above its original purchase price
of $150,000, paid 1 year earlier.
 EXAMPLE
• a) What is the amount, if any, of capital gains
realized during the year?
• b) How much total taxable income did the firm
earn during the year?
• c) Use the corporate tax rate schedule given in
Table to calculate the firm’s total taxes due.
• d) Calculate both the average tax rate & the
marginal tax rate on the basis of your findings
• Answer – a
• Capital Gains = $30,000 ($180,000 Sale price -
$150,000 purchase price)
• Answer – b
• Total Taxable Income = Operating Earnings +
Capital Gains
• Total Taxable Income = $280,000 + $30,000 =
$310,000
• Answer – c
• Total Taxes Due = Base Tax + (Marginal Rate X
Amount over base bracket)
• Total Taxes Due = $22,250 + [0.39 X ($310,000
- $100,000)]
• Total Taxes Due = $22,250 + (0.39 X $210,000)
• Total Taxes Due = $22,250 + $81,900 =
$104,150
 Example
• Answer – d
• Average Tax rate = a firm’s taxes divided by its
taxable income
• Average Tax rate = $104,150 / $310,000 =
33.6%
• Marginal Tax rate = the rate at which
additional income is taxed.
• Marginal Tax rate = 39%