What is a “Tax”

What do we understand by the term “tax”? The term “tax” derives from the Latin verb
“taxare” meaning “to touch repeatedly”, which is exactly what taxes do – they touch us
repeatedly in every facet of our lives. There is a difference in law, however, between “taxes” and
“levies.” The meaning of “tax” is important because of constitutional restraints on provincial
powers to tax.

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or
legal entity) by a governmental organization in order to fund government spending and various public
expenditures.[2] A failure to pay, along with evasion of or resistance to taxation, is punishable by law.
Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. The first
known taxation took place in Ancient Egypt around 3000–2800 BC.

There are several very common types of taxes:

 Income Tax—a percentage of individual earnings filed to the federal government

 Corporate Tax—a percentage of corporate profits taken as tax by the government to fund
federal programs.
 Sales Tax—taxes levied on certain goods and services
 Property Tax—based on the value of land and property assets
 Tariff—taxes on imported goods imposed in the aim of strengthening internal businesses
 Estate tax—rate applied to the fair market value of property in a person's estate at the
time of death

Tax systems vary widely among nations, and it is important for individuals and corporations to
carefully study a new locale's tax laws before earning income or doing business there. 

The Importance Of Taxes

Governments impose charges on their citizens and businesses as a means of raising revenue,
which is then used to meet their budgetary demands. This includes financing government and
public projects as well as making the business environment in the country conducive for
economic growth.

Importance of Taxes in Society

Without taxes, governments would be unable to meet the demands of their societies. Taxes are
crucial because governments collect this money and use it to finance social projects.
Some of these projects include:

• Health

Without taxes, government contributions to the health sector would be impossible. Taxes go to
funding health services such as social healthcare, medical research, social security, etc.
• Education

Education could be one of the most deserving recipients of tax money. Governments put a lot of
importance in development of human capital and education is central in this development.
Money from taxes is channeled to funding, furnishing, and maintaining the public education
system.

• Governance

Governance is a crucial component in the smooth running of country affairs. Poor governance
would have far reaching ramifications on the entire country with a heavy toll on its economic
growth. Good governance ensures that the money collected is utilized in a manner that benefits
citizens of the country. This money also goes to pay public servants, police officers, members of
parliaments, the postal system, and others. Indeed, with a proper and functioning form of
government, there will be no effective protection of public interest.

Other important sectors are infrastructure development, transport, housing, etc.

Apart from social projects, governments also use money collected from taxes to fund sectors that
are crucial for the wellbeing of their citizens such as security, scientific research, environmental
protection, etc.

Some of the money is also channeled to fund projects such as pensions, unemployment benefits,
childcare, etc. Without taxes it would be impossible for governments to raise money to fund
these types of projects.

Furthermore, taxes can affect the state of economic growth of a country. Taxes generally
contribute to the gross domestic product (GDP) of a country. Because of this contribution, taxes
help spur economic growth which in turn has a ripple effect on the country’s economy; raising
the standard of living, increasing job creation, etc.

Governments also use taxes as a deterrent for undesirable activities such as the consumption of
liquor, tobacco smoking, etc. To achieve this, governments impose high excise levies on these
products and as a result, raise the cost of these products to discourage people from buying or
selling them.

Importance of Tax to Businesses

For business to flourish in the country, there has to be good infrastructure such as roads,
telephones, electricity, etc. This infrastructure is developed by governments or through close
involvement of the government. When governments collect money from taxes, it ploughs this
money into development of this infrastructure and in turn promotes economic activity throughout
the country.

The concept of taxation is also important to businesses because governments can fund this
money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living, the
stronger and higher the level of consumption most likely is. Businesses flourish when there is a
market for their product and services. With a higher standard of living, businesses would be
assured of a higher domestic consumption as well. Taxes are essential and every citizen is meant
to reap benefits of these taxes. This is why it is important that citizens endeavor to pay taxes and
understand that it is meant to be more than just a “money grab” from the government.

Objectives of Taxation:

The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation. But it is not the only goal. In other words,
taxation policy has some non-revenue objectives.

Truly speaking, in the modern world, taxation is used as an instrument of economic policy. It
affects the total volume of production, consumption, investment, choice of industrial location
and techniques, balance of payments, distribution of income, etc.

Here we will discuss the objectives of taxation in modern public finance:

ADVERTISEMENTS:

1. Economic Development

2. Full Employment

3. Price Stability

4. Control of Cyclical Fluctuations

ADVERTISEMENTS:

5. Reduction of BOP Difficulties

6. Non-Revenue Objective

Objective # 1. Economic Development:

One of the important objectives of taxation is economic development. Economic development of

any country is largely conditioned by the growth of capital formation. It is said that capital
formation is the kingpin of economic development. But LDCs usually suffer from the shortage of
capital.

To overcome the scarcity of capital, governments of these countries mobilize resources so that a
rapid capital accumulation takes place. To step up both public and private investment,
government taps tax revenues. Through proper tax planning, the ratio of savings to national
income can be raised.
ADVERTISEMENTS:

By raising the existing rate of taxes or by imposing new taxes, the process of capital formation
can be made smooth. One of the important elements of economic development is the raising of
savings- income ratio which can be effectively raised through taxation policy.

However, proper care has to be taken, regarding investment. If financial resources or investments
are channelized in the unproductive sectors of the economy the economic development may be
jeopardized, even if savings and investment rates are increased. Thus, the tax policy has to be
employed in such a way that investment occurs in the productive sectors of the economy,
including the infrastructural sectors.

Objective # 2. Full Employment:

Second objective is the full employment. Since the level of employment depends on effective
demand, a country desirous of achieving the goal of full employment must cut down the rate of
taxes. Consequently, disposable income will rise and, hence, demand for goods and services will
rise. Increased demand will stimulate investment leading to a rise in income and employment
through the multiplier mechanism.

Objective # 3. Price Stability:

Thirdly, taxation can be used to ensure price stability—a short run objective of taxation. Taxes
are regarded as an effective means of controlling inflation. By raising the rate of direct taxes,
private spending can be controlled. Naturally, the pressure on the commodity market is reduced.

But indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices,
on the one hand, discourage consumption and, on the other hand, encourage saving. Opposite
effect will occur when taxes are lowered down during deflation.

Objective # 4. Control of Cyclical Fluctuations:

Fourthly, control of cyclical fluctuations—periods of boom and depression—is considered to be

another objective of taxation. During depression, taxes are lowered down while during boom
taxes are increased so that cyclical fluctuations are tamed.

Objective # 5. Reduction of BOP Difficulties:

Fifthly, taxes like custom duties are also used to control imports of certain goods with the
objective of reducing the intensity of balance of payments difficulties and encouraging domestic
production of import substitutes.

Objective # 6. Non-Revenue Objective:

Finally, another extra-revenue or non-revenue objective of taxation is the reduction of
inequalities in income and wealth. This can be done by taxing the rich at higher rate than the
poor or by introducing a system of progressive taxation.

Assesse Assessment year Sec121

An assesse is any individual who is liable to pay taxes to the government against any kind of
income earned or any losses incurred by him for a particular assessment year. Each and every
person who has been taxed in the previous years for income earned by him is treated as an
Assessee under the Income Tax Act, 1961.

An Assessee may be any individual liable to pay taxes for himself or to pay tax on behalf of
somebody else. The Income Tax Act, 1961 has classified Assessee in different categories. An
Assessee may either be a normal Assessee, a Representative Assessee, a Deemed Assessee or an
Assessee in Default.

Gross world product/Total world income

The gross world product (GWP) is the combined gross national income of all the countries in
the world. Because imports and exports balance exactly when considering the whole world, this
also equals the total global gross domestic product (GDP).[nb 1] According to the World Bank, the
2013 nominal GWP was approximately US$ 75.59 trillion.[1] In 2017, according to the CIA's
World Factbook, the GWP was around US $80.27 trillion in nominal terms and totaled
approximately 127.8 trillion international dollars in terms of purchasing power parity (PPP).[2]
The per capita PPP GWP in 2017 was approximately Int$17,500 according to the World
Factbook.[2]

81. Resident and non-resident persons.-

(1) A person shall be a resident person for a tax year if the person is –
(a) a resident individual, resident company or resident
association of persons for the year; or
(b) the Federal Government.
(2) A person shall be a non-resident person for a tax year if the person
is not a resident person for that year.
82. Resident individual.- An individual shall be a resident individual for a tax
year if the individual –
(a) is present in Pakistan for a period of, or periods amounting in
aggregate to, one hundred and eighty-two days or more in the tax
year;
90
(b) is present in Pakistan for a period of, or periods amounting in
aggregate to, ninety days or more in the tax year and who, in the
four years preceding the tax year, has been in Pakistan for a period
of, or periods amounting in aggregate to, three hundred and sixtyfive
days or more; or
(c) is an employee or official of the Federal Government or a Provincial
Government posted abroad in the tax year.
83. Resident company.- A company shall be a resident company for a tax
year if –
(a) it is incorporated or formed by or under any law in force in Pakistan;
(b) the control and management of the affairs of the company is
situated wholly or almost wholly in Pakistan at any time in the year;
or
(c) it is a Provincial Government or local authority in Pakistan.
84. Resident association of persons.- An association of persons shall be a
resident association of persons for a tax year if the control and
management of the affairs of the association is situated wholly or partly in

Pakistan at any time in the year.