Basic Concepts of Taxation

Prof. Javed Anwar

 Basic Concepts of Taxation
• In the Previous chapters, we discussed the basics of
Taxation system and Constitutional provisions of
Pakistan pertaining to levy and legislation of tax
laws.
• This chapter deals with basic concepts contained in
the Income Tax Ordinance, 2001, which is the
primary source of legislation for charging income tax.
• Federal Board of Revenue working under the
Ministry of Finance is responsible to monitor its levy,
collection and dealing with all other procedural
matters.
 Basic Concepts of Taxation
• Scope of tax
• Income tax law deals with the levy of tax on
the income of a person. The scope of income
tax law is defined in section 4 of the Income
Tax Ordinance, 2001 in the following manner:
“Tax shall be imposed for each tax year on every
person who has taxable income, as per the
applicable tax rates”
 Basic Concepts of Taxation
• Perusal of the aforesaid provision of law rises
following questions in our minds:
1. What is a tax year?
2. What is taxable income and how it is computed?
3. Who is person?
4. What are applicable rates of tax?
5. What is the procedure for levy of tax?
 TAX YEAR
• Tax year (Sec-74)
– There are three kinds of tax years as stipulated in Section
74 of the Income Tax Ordinance, 2001:
1. Normal tax year
2. Special tax year
3. Transitional tax year

• Normal tax year

– Normal tax year is a period of twelve months, starting on
1st day of July and ending on the 30th day of June and is
denoted by the calendar year in which the said date falls.
 TAX YEAR
• Special tax year
– Where a person’s income year is different from the normal
tax year, or where, by an order, a person has been allowed
by the Commissioner Inland Revenue to use a twelve
months’ period different from normal tax year, such income
year or such period shall be that person’s special tax year
and shall be denoted by the calendar year relevant to
normal tax year in which the closing date of the special tax
year falls.
– The Board has authority to prescribe any special tax year in
respect of any particular class of taxpayer. For example in
respect of certain classes of assesses following special tax
years are specified by the Board.
• In addition to above, a taxpayer may get permission to adopt
special income year subject to fulfillment of following
conditions laid down in section 74 ibid:

• A person may apply to the Commissioner for change of tax

year from normal tax year to special tax year or from special
tax year to normal tax year and the same can be granted
subject to any conditions that may be imposed by the
Commissioner .
 TAX YEAR
• Transitional tax year
– Where the tax year of a person changes as a result of an order by the
Commissioner of Income tax either from the normal tax year to special
tax year or vice versa, the period between the end of the last tax year
prior to change and the date on which the changed tax year commences
shall be treated as a ‘transitional tax year’.
• Example
– The normal tax year of ABC Limited was the period from 01 July 2012
to 30 June 2013. On an application by ABC Limited, Commissioner
granted approval to adopt special tax year of 30 September each year.
The period from 01 July 2013 to 30 September 2013 will be treated as
transitional tax year.