Taxation

Taxation Muhammad Ammar Sarwar I.D. 52543 PAF-KIET City Campus

Public Revenue

A Government has a number of sources to collect its revenue.

Uses Of Revenue

Defence, enforcement of law and public order, protection of property, economic infrastructure, roads, welfare, education systems, health care systems, transportation, energy, etc and the operation of government itself.

Sources Of Revenue 1. Tax Revenue 2. Non-Tax Revenue

Tax Revenue • The main source of government revenue comes from taxation. Tax revenue derived from various taxes. •

Direct Taxes

b. Indirect Taxes

Non-Tax Revenue

• • • • • •

There are various other sources by which a government collect revenue. Non-Tax revenue is derived from various sources. Fines, penalties and forfeitures Sale of goods and services Rent of government lands and property Fees and charges Licenses Income on investments, interest on loans, dividend etc.

Pakistan Federal Government’s Revenue of Year 2006-2007 Tax Revenue (a + b) a. Direct Tax b. Indirect Taxes Non-Tax Revenue Total Revenue

RS. 852,866 Rs. 334,168 Rs. 518,698 Rs. 380,983 Rs. 1,233,849

(Rs. In millions) Source: Ministry of Finance. Government of Pakistan

Taxes Taxation is the most important and main source of Government Revenue. Taxes have three main functions • to cover government spending, • to promote stable economic growth,and to lessen inequalities in the distribution • of income and wealth. Taxes are also used for non-fiscal reasons, such as to encourage or discourage certain activities.

What Is Tax? • Taxes are general compulsory contributions of wealth levied upon persons, natural or corporate, to defray the expenses incurred in conferring common benefit upon the residents of state” • • • • •

Income tax. Sales tax. Excise tax. Property tax. Water tax etc.

Classification of Taxes There are three classifications of Taxes:3. 4. 5.

Progressive Taxes Regressive Taxes Proportional Taxes

Progressive Taxes • A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is applied increases. • The principle of a progressive tax is “higher the income, higher the rate” • For Example • If income is 110,000 rate of tax is 0.5% • If Income is 200,000 rate of tax is 4.0%

Regressive Tax •The opposite of a progressive tax is a regressive tax, where the effective tax rate decreases as the amount to which the rate is applied increases. •The principle of regrassive tax is “higher the income, lower the tax rate”.

Proportional Tax •

A proportional tax is in which, what ever size of income, same rate and same percentage is charged.

•

For example in Pakistan the rate of tax on property income is 5% of Gross Rent.

(a) Tax Rate

(C) (b)

Income a. Progressive

b. Regressive c. Proportional

TYPES OF TAXES There are two types of taxes: • 1 Direct Taxes 2. Indirect Taxes.

DIRECT TAXES Direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. The man who pays it is also intend to bear it. If I pay income tax. I have to bear it. I cannot pass it to other persons. e.g. Income tax, wealth tax, workers welfare tax

INDIRECT TAXES Indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. For example if a tax imposed on sugar, the producer who first pays it, charges it from the next buyer till ultimately it is borne by the consumer of a sugar. The tax has been shifted. It is called Indirect taxes. e.g. sales tax, custom duty, excise tax

Advantages of Direct Taxes • • • • • •

Equitable Economical Certain Elastic Civic Consciousness Reduction of Inequalities

Disadvantages of Direct Taxes • • • •

Inconvenient Unpopular Evasion Arbitrary

Advantages of Indirect Taxes • • • • • •

Convenient No Evasion Equitable Beneficial Social Effects Wide Coverage Productive

Disadvantages of Indirect Taxes • • • • •

No Civic Consciousness Uneconomical Inflationary Evasion Uncertain

Tax Rates • Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate.

• The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned.

Example • For example, if income is taxed on a formula of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes. • Tax calculation • ((0.05*50,000) + (0.10*50,000) + (0.15*75,000)) = 18,750 •   • The "effective rate" would be 10.7%: • (18,750/175,000) = 0.107 •   • The "marginal rate" would be 15%.

Purpose of Taxes • Revenue The main purpose is revenue taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems

• Redistribution this means transferring wealth from the richer sections of society to poorer sections

• Repricing Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking.

Effects of Taxation on: • Production • Income Distribution • Consumption

Types of Taxes in Pakistan •Income Tax •Sales Tax •Federal Excise Duty •Custom Duty •Workers Welfare Tax •Property Tax •Wealth Tax •Motor vehicle Tax •Foreign Travel Tax •Stamp Duties

CBR Tax Collection 2006-2007

CBR Tax Collection 2006-2007

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