Taxation (History & Flaws)

Tax reforms firstly introduced by Hazrat Umar (R.A) in 7th century. Taxes collected in the treasury were used to provide income to needy including poor, elderly, orphans, widows and disabled.
In modern age Income Tax was introduced in 1798 by William Pitt as a means to raising further funds for the prosecution of the war against France. In the year 1816 the Income Tax ceased. It was not revived until the year 1842, when it was re-imposed by Sir Robert Peel’s government, not as a war tax, but for the purpose of repairing the deficit which then occurred in the revenue.
After Independence on 14 August 947, the Pakistan Government adopted the Income Tax Act, 1922. The Income Tax Act, 1922, was replaced by the Income Tax Ordinance, 1979 and was made effective from 1st July 1979. Self Assessment Scheme was further broad based. Changes were brought about every year through annual Finance Acts. The Income Tax Ordinance, 1979 remained in force 30th June, 2002.
Taxes are of 2 types’ direct taxation and indirect taxation.
Direct Taxation: is simply the tax that levied on income/wealth of individuals & Organizations
Indirect Taxation: Taxes that are place on Goods and services E.g. general sales Tax.
Pakistan’s tax regime consists of four main revenue sources:
1. General Sales Tax,
2. Central Excise Duty,
3. Customs Duty
4. Income Tax
Ordinance is applicable to whole of Pakistan except Tribal areas like, FATA (Federally Administered Tribal Areas) and PATA (Provincially Administered Tribal Areas) and Tribal Areas mentioned in article 246 of the Constitution.
Flaws in Pakistan Tax system
 According to World Bank report, there are some structural problems, such as a narrow tax base, tax evasion, distrust of taxpayers.
 The tax system of the country seems to have continuously benefited the elite. A huge amount of taxes comes from the poor through indirect taxes compared to the very little contribution of direct taxes from the affluent class.
 Administrative weakness is a key obstacle in tax collection as a former finance minister has admitted that corruption in the Federal Board of Revenue (FBR) eats up Rs500 billion annually.
 In agriculture, According to farmers, they do not have such infrastructure as the industrial sector is enjoying, then why the government expect to collect revenue from them according to the proportion of their income.
There is a need to rationalize taxes, widen the tax base, restructure the collection mechanism and improve institutional capability of FBR. These are measures which may lead to rapid improvement in taxes.

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