Tax Management

Assignment-1

Submitted to: Sir Tauseef

Submitted by: Rida Zahid (160023)
Class: BBA-7
 Introduction of tax (What, Who, Why, When & How)
What is Tax

If a person earns Rs.400,000 or more from his business or from a job, then he has to pay tax
accordingly. So tax is an amount of money that is to be paid to the state and then state uses that
money to provide us different services and tax is paid on annual basis.

As our State provides many public services to the local citizens, so tax ( compulsory amount of
money ) is paid as a contribution to state’s revenue. The amount of tax varies from person to
person, business to business and corporation to corporation.

There are different types and forms of taxes. Some of them are sales tax, custom duty, import
duty, income tax, property tax and excise duty etc. All the forms are under direct and indirect tax
which are considered as the two major types of tax.

Who to pay Tax

Tax is paid to the state or government.

Why to pay Tax

Tax is paid to the state because state/government provides different public services (courts,
electricity, education, emergency services, environmental protection, health care, military, public
transportation, public buildings and social services) to the local citizens of the state.

When to pay Tax

It is paid at the end of tax year under different tax paying schedules i.e. normal tax year, special
or transitional tax year schedules. Generally it is paid at the end of tax year and paid according to
your earning pertaining to the end of tax year.

Normal Tax Year: 1st of July 2017- 30th of June 2018 so tax is paid at 30th of June 2018.

How to Pay Tax

Basically Tax is paid according to four assessment procedures that are traditional tax payment
method, self-assessment scheme, deduction of tax at source and advance payment of tax.

The general method is as follows:

Earning-> File ( ROI ) -> Assessment by FBR -> Payment of tax

Explanation

First of all if you earn Rs.400,000 or more than you have to pay the tax. For this filing of ROI
(Return of Income) is done which is either in hard or soft form. Then FBR assesses and
calculates your tax and then you pay accordingly. If tax amount is more than your actual tax
amount then you will be offered refund and if you are a non filer then recovery of defaulter takes
place. This assessment procedure takes almost 18 months so it is not time saving procedure for
both the tax payer and government because government always wants to tax amount early as
possible.

Direct and Indirect Tax

Direct tax is totally and directly connected with a person’s income and wealth. It is not fixed
amount and progressive taxation is applied here which means as the income or wealth of a
person increases then the amount of tax also increases. It is totally inverse of indirect taxation.
Property tax is not included in direct tax but if you lend your property and earns some amount of
money then it is included in income tax which is included in direct tax.

Whereas Indirect tax is connected with excise duty, property tax, custom duty tax and sales tax
etc. It is not progressive in nature rather than regressive taxation is applied on indirect taxation
where tax amount is fixed which means that every individual of the state pays same amount
regardless of their status in the society. For example, if Javeria purchases a cake from the bakery
and the son of president also purchases cake, then both of us will be charged same sales tax
regardless of status.

Assessment Procedures
There are 4 types of assessment procedures:

1. Traditional Assessment Procedure

Earning-> File ( ROI ) -> Assessment by FBR -> Payment of tax

First of all if you earn Rs.400,000 or more than you have to pay the tax. For this filing of
ROI (Return of Income) is done which is either in hard or soft form. Then FBR assesses
and calculates your tax and then you pay accordingly. If tax amount is more than your
actual tax amount then you will be offered refund and if you are a non filer then recovery
of defaulter takes place. This assessment procedure takes almost 18 months so it is not
time saving procedure for both the tax payer and government because government always
wants to tax amount early as possible.
 2. Self-Assessment Scheme

Earning->ROI filing-> Payment of tax

It is done by tax payer and still there is much dependency on a person. It is quite time
saving and effective as compared to first procedure but still it takes round about 15
months. In short, under this scheme a tax payer measures and calculates the amount of
tax dictated by strict tax laws and after that he/she files ROI and in the end of the process
he/she pays the tax.

3. Deduction of Tax at source (TDS)

Earning -> Payment of Tax

It is one of a way to collect a tax. This scheme is used in order to reduce dependency on
person and to collect tax as early as possible. It is more effective and efficient tax
assessment procedure as compared to traditional assessment and self-assessment scheme.
Example of deduction of tax at source is quoted here, for instance tax is deducted from
the salaries of employees.

4. Advance Prepayment of Tax

I would like to quote an example of price bond here. According to this scheme, amount of
tax is deducted from the price bond by the government before the price bond is given to
the person who actually won price bond. Other example is pre-paid rent. But this tax
collection scheme is not applicable on all persons. This scheme is highly appreciated by
the government because the government is no more dependent on a person in the context
of collection of tax from a person.

Definition of Terminologies
1. ROI
ROI stands for “Return of Income”. It is basically a file which is in hard form or in soft
form. ROI tells FBR (Federal Board of Revenue) about how much a person ( company,
individual or associations of persons ) earned at the end of the tax year. Now a days, e-
filing means electronic filling of income tax is preferred and is widely used to file the tax
as it is time effective and convenient for both the tax payer and FBR. ROI procedure
starts when the earning is Rs.400,000 or above Rs.400,000.
2. Assessment
The word “assessment” means evaluation and judgement of something. In the context of
tax, assessment means to evaluate the earnings of person through business and job. It is
done after ROI filing by the tax payer. After the evaluation of ROI, tax is calculated from
the earned amount and it is determined what amount of tax should be calculated from the
tax payer. Furthermore, assessment is a procedure or a process of determining of the ROI
by the Income-Tax department. Moreover, there are 4 tax assessment procedures.

3. Tax Year and its Types

In a tax year, two calendar years are involved. For example, 1st of July 2017 - 31st- of
June 2018.
Types:

a. Normal Tax Year

Almost 90% of person are following Normal Tax year schedule to pay taxes. It starts
from first of july of a particular year to 30th of june of next year. And the cycle
repeats in the same pattern.
For instance,

1-7-2016 - 30-6-2017
1-7-2017 - 30-7-2018 ( next tax schedule )

b. Special Tax Year

Special tax year is totally different from a normal tax year and is totally applicable for
person whose business is related to crops i.e. sugar, cotton and wheat etc. And from
crop to crop special tax year is different.
Let’s consider an example of Sugar (crop)

1-10-2017 - 30-9-2018
1-10-2018 - 30-9-2019

c. Transitional Tax Year

This tax year is only applicable for certain individuals. Consider a person who is
currently doing a certain job to earn and is paying according to normal tax year. Now
he is planning to shift from job to a specific business. In other words he is trying to
change the tax year as he is switching from a job to a business. So for this situation,
he is assigned transitional tax year and should strictly follow it.

1-7-2016 - 30-6-2017
1-10-2017 - 30-9-2018
 Here it is clearly seen that the months ( july, august, September ) are skipped and next
tax year started from 1st of October 2017 and ends on 30th of September 2018.

4. Principal officer
Principal Officer plays an important role in Tax management. Basically he deals with the
tax and tax related procedures. He can be a treasurer, secretary or a manager and is
responsible for compliance.

5. Resident and Non-Resident

Let’s just consider an example of Pakistan. If a person who stays in Pakistan for 183 days
or more than 183 days in a tax year, then he is called a resident and they are taxed on
their worldwide income. If a person stays in Pakistan for less than 183 days in a tax year
then he is treated as a non-resident. They don’t need to pay any tax on an foreign earned
income. Thus, resident and non-residents are treated unequally in the context of payment
of tax, because they both are different from each other.