FIN623 Handouts by VUBuddy

Before moving on to Taxation Management, we must know what taxes are:

™ General Understanding of Tax:

¾ Literal meanings ----- Burden, Strain ¾ The long journey would be too much of a tax on my father’s strength. ¾ I found they were taxing my patience by asking irrelevant questions. ¾ Such a long rough journey would be very taxing for old man.

™ General Definition of Tax:

General compulsory contributions of wealth levied upon persons by the state, to meet the expenses incurred in providing common benefits upon the residents.

™ Statutory Definition of Tax

Tax means any tax imposed under chapter II includes a penalty, fee or other charge or any sum or amount levy able or payable under this ordinance.

™ Taxes Vs Fees:

Taxes are compulsory levy and it is the legal obligation of the person to pay the amount of tax which is required to pay under the law, where as payment of fee is the discretion of any person and when a fee is paid, the person becomes an entitled to claim counter benefits. ™ Taxes are important instrument of Fiscal Policy.

What is Fiscal Policy?

Fiscal policy is a discipline that deals with arrangements which are adopted by government to collect the revenue and make the expenditures so that social and economic stability could be attained / maintained.

™ Objectives of Fiscal Policy

¾ Economic Development ¾ Raising level of employment (Achieving full employment level) ¾ Influencing consumption patterns ¾ Price stability ¾ Redistribution of income ¾ Removal of deficit in Balance of Payments

™ Instruments of Fiscal Policy

¾ Government Expenditures ¾ Taxes ¾ Deficit Financing ¾ Subsidies ¾ Transfer Payments—like Unemployment Allowances etc. ¾

Sources for Revenue Generation for State

Taxes, Tariffs Internal & External Borrowing Penalties & Fines Aids & Grants

Canons of Taxation:

Simplicity

This principle implies that taxation system should be plain, and easily understandable by the tax payer.

Convenience

The convenience of tax payer as well as tax collector must be the bottom line of any taxation system. The time of payment of tax, mode of collection of tax, should be convenient for the tax payers.

Certainty

This cannon suggest that the amount of payment should be certain and there should not be any arbitrariness or ambiguity with respect to the amount of tax to be paid by the tax payer.

Judicious

The taxation system should be based on the principles of equity, fair play, and all known principles of natural justice.

Capacity to Pay

This principle suggests that taxation system must be based keeping in view the capacity to sacrifice by the person on whom the tax is levied, those who have more income should pay taxes at high rates/ proportions, where as those who have low income, they should pay taxes at lower rates or proportion.

Benefit principle

This principle suggests that taxes should be levied according to the benefits derived by the person from the state. Since more benefits are derived by lower income groups, hence according to this principle, those who derive more income but enjoy less benefits from the state should be taxed at the lower rates and those persons who derives less income but more benefits from State should be taxed at high rates.

Business Friendly

According to this principle, the taxation policy should be such as to boost business atmosphere and not discouraging the investment environment.

AN OVERVIEW OF TAXATION (CONTD…)

Type of Taxes:

Different types of taxes are explained below:

™ Direct taxes

Direct taxes are the taxes where incidence of taxation is on the person on whom levied. For example income tax

™ Indirect Taxes

Indirect taxes are the taxes where incidence of tax can be shifted by the person on whom levied to other persons. For example sale tax

™ Proportional Taxes

These taxes are levied with the same percentage. For example, sales tax is levied at the rate of 15%.

™ Progressive Taxes

This is based on the “capacity to pay” principle of taxation. In this type, the rate of tax increase as the income increase.

™ Regressive taxes

A Regressive tax is the opposite of a Progressive Tax. It is based on the benefits received principle. A type of tax that takes a larger percentage from the income of low-income people than the income of high-income people is called regressive tax. ™ Value Added Taxes. This type of tax is levied at each stage of value addition. For example sales tax

Taxation Structure of Pakistan:

™ Federal Taxes:

Federal taxes are the taxes which can be levied by the federal government and include among others the followings: ™ Income tax ™ Corporate tax ™ Customs duties/Tariffs ™ Sales tax

™ Provincial Taxes:

™ Stamps Duty ™ Registration Tax ™ Motor vehicle tax

Taxation Management—Explained

Taxation management is a strategy where by a person manages its business and other transactions/ activities in such a way so as to make maximum use of tax holidays, exemption, concession, rebates, tax credits, deductible allowances available under law and as a result is able to derive the benefit of minimizing his tax liability. To achieve this objective, clear understanding of respective laws and professional expertise of their application is of at most importance. Scope of taxation management is multi-dimension, while making choices among different opportunities available to a person, the tax factor among others also plays an important role. Taxation management covers a decision regarding available choice between an employment and selfemployment or available choice of a business as sole proprietorship, partnership, private company or public company. It is professional strategy to plan tax affairs of a person. It is of significant importance in business management decision. ™ Person includes a living person (natural) or artificial person (corporate person). ™ Scope of Taxation Management ranges from incorporation of a business to mergers, amalgamation, winding up, liquidation, dissolution etc of business