Taxation

 M A C R O E C O N O M I C S ± P R O J E C T

TAXATION

Submitted to: Madam Maryam Haseeb

Submitted By: Haris Ashfaq 10017 21st Dec. 2010

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Table of Contents

Sr. #

Topic

Page #

1

Introduction

3

2

Purpose of Taxation

3

3

Types of tax

4

4

Importance of taxation

6

5

Tax system in Pakistan

7

6

Conclusion

10

7

References

12

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1-Introduction

Taxation means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Although, principally, taxation should be neutral in its effects on the different sectors of an economy, governments use it to encourage or  discourage certain economic decisions. For example, reduction in taxable personal (or  household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs. See also taxation principles

In other words, taxation is imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well. Some of the characteristics of sound taxation are: 

Fairness



Clarity and Certainty



Convenience



Efficiency

2- Purpose of Taxation The main purpose of taxation is to accumulate funds for the functioning of the government machineries. No government in the world can run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. In other words, a government can run its administrative set up only through public funding which is collected in the form of tax. Therefore, it can be well understood that the purpose of taxation is very simple and obvious for proper functioning of a state. Taxes are charges levied against a citizen's personal income or on property or for some specified

activity.

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Further, the other important purposes of taxation are as follows -

y

Increase in effectiveness and productivity of the nat ion

y

Increase in the quantum of revenue collection

y

Improvement in services of the government

y

Improve employment at all industry verticals

y

Induction of modern technology in to the system

y

Rationalization of terms and condition of the eco nomic system

y

Rationalization of employment terms and conditions

3-Types of tax There are basically two types of taxes, like y

Direct

tax

y

Indirect tax

Further, it is sub-divide into major groups like y

Income tax

y

Wealth

y

Gift

y

Expenditure tax

y

Interest tax

y

Taxes Paid by the Individual

tax

tax

There are 7 types of taxes that are paid for by an individual.

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a. Income Taxes: These taxes are paid out by anyone who earns an income by any

means. April 15th is the day that income tax filings are due in the United States, and anyone earning income needs. Income taxes are subject to deductions and tax credits; they are usually not paid by people under a certain income or who have special situations such as a disability. b. Property Taxes: These are paid by anyone who owns property such as land, a home or 

commercial real estate. These taxes are often collected by the state and county to help fund their budgets.

While

income taxes are subject to deductions or credits, these taxes

are often fairly rigid. Licensing fees on cars, recreational vehicles and watercraft are  property taxes as well. c. Consumptive Taxes: These are taxes on sales goods or items that are subjected to

 being used by either an individual or business. While everyone understands that a small amount of money is added on to the purchase of goods in the stores, many people overlook other taxes. A fishing or hunting license is a tax. Toll road fees are a tax, even if  they call it a user fee. So are travel fees.

y

Taxes Paid by Businesses

Some of the other 7 types of taxes are those paid by businesses a. Corporate Taxes: All business structures pay taxes on the income made in that

  particular business. Tax consequences are important when structuring a business. For  example, sole proprietorships will pay their taxes through their regular income taxes, while a S-corporation pays quite differently. A C-corporation is best held by shareholders  because of tax implications. Of all of the seven types of taxes, this one is usually the one that requires the use of a professional to figure out the complicated tax requirements. b. Payroll Taxes: These taxes are taken out by the businesses before income is

distributed to the individual in exchange for the work that was done. These are commonly called "FUDA" and "FICA" and businesses need to match a certain amount of these   payroll taxes. This is an additional cost of having an employee, and one reason why

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"independent contractors" have become so popular. These payroll taxes must be paid by the individual contractor if the regular business is not pa ying them.

y

Main

Types of Taxes: Other Taxes

a. Capital Gains taxes are paid on investments that have appreciated. Frequently these

investments have been sold. Examples would be stocks, bonds, and real estate. Most losses can be "written off" on the federal income tax level, and like corporate taxes, these are usually best handled by professional tax preparers. b. Inheritance or Estate Taxes: Of the 7 types of taxes, this is the only type where a tax

can happen because of a death. A certain amount of estate money that may be passed on with no tax consequence. Once that level is met, however, the taxes are usually quite steep. Life insurance is often used to offset inheritance taxes, and is one reason insurance is so critical in estate planning. While

few people relish paying taxes, everyone enjoys having good schools, roads and

services. In the end, taxes improve our overall quality of life.

4-Importance

What

is taxation?

of Taxation

Why

is taxation so important in a particular nation or state?

What

makes it a very significant aspect of governance? Cooley defines taxation as the process or means by which the sovereign, through its law-

making body, raises income to defray the necessary expenses of government. Expressed in another way, it is a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens. Malcolm

explains that taxation is the power vested in the legislature to impose burdens

or charges upon persons and property for the purpose of raising revenue for public  purposes.

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The nature of the state¶s power to tax is two-fold. It is both an inherent power and a legislative power. It is inherent in nature being an attribute of sovereignty. It has been argued that it is literally impossible for the state to run its affairs without taxes. Its existence and operations are dependent primarily from the revenues and charges imposed from various sources. It is a legislative power because it involves promulgation and implementation of rules. Taxation is a set of rules, how much is the tax to be paid, who  pays the tax to whom and when it should be pa id. Government

financial operations are well-nigh impossible without taxation. Apart from

this, taxation can be a powerful means in order to achieve the goals of social progress and the objectives of economic development. It serves as a device to encourage the growth certain activities by way of giving exemptions, discourage use of certain products by way of imposing heavier charges like those sin taxes which are imposed upon tobacco   products, or strengthen anemic enterprises, also by way of tax exemptions. Local industries may be protected through taxation by imposing high customs duties to foreign goods. Moreover, taxation can also be used to reduce inequities or inequalities in wealth and income by progressively higher taxes as in the case of estate and income tax. So based on the foregoing premises, it is clear that taxation is indeed the lifeblood of the state, without which the existence of the stat e will be put to jeopardy. A research has shown that tax cuts are disastrous for the well-being of a nation's citizens. Findings from this study show that high-tax countries have been more successful in achieving their social objectives than low-tax countries. Interestingly, they have done so with no economic penalty. 5-Tax

system in Pakistan

Taxation System

Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below:

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y

Direct

Direct

Taxes

taxes primarily comprise income tax, along with supplementary role o f wealth

tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads: 1. Salaries 2. Interest on securities 3. Income from property 4. Income from business or professions 5. Capital gains; and 6. Income from other sources. y

Personal Tax

All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates ranging from 10 to 35 per cent. y

Tax on Companies

All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ  on account of allowances and exemptions related to industry, location, exports, etc. y

Inter-Corporate

Dividend

Tax

Tax on the dividends received by a public company from a Pakistan company is  payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inert-corporate dividends declared or distributed by power  generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to withholding tax o f 10% which is treated as a full and final discharge of tax liability in respect of this source of inco me.

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y

Treatment of  Dividend Income

Dividend

income received as below enjoys tax exemption, provided it does not exceed

Rs. 10,000/-. 1. Dividend received by non-resident from the state enterp rises Mutual Fund set by the Investment Corporation of Pakistan. 2. Dividends received from a domestic company out of income earned abroad  provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue. y

Unilateral

Relief 

A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief  is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower. y

Agreement

for avoidance of double taxation

The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countries including almost all the developed countries of the world. These agreements lay down the ceilings on tax rates applicable to different types o f income arising in Pakistan. They also lay down so me basic principles of taxation which cannot be modified unilaterally. The list of countries with which Pakistan has concluded tax treaties is given below: y

Goods

Customs

imported and exported from Pakistan are liable to rates of Customs duties as

 prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of  customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lo wer than those on consumer goods.

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Central Excise

y

Central Excise duties are livable on a limited number of goods produced or  manufactured, and services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or retail price. So me items are, however, chargeable to duty on the basis of weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding system which is being used all over the world. All exports are exempted from Central Excise Duty. y

Sales Tax

·

Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on:

·

all goods imported into Pakistan, payable by the importers;

·

all supplies made in Pakistan by a registered person in the course of furtherance of any

 business carried on by him; ·

there is an in-built system of input tax adjustment and a registered person can make

adjustment of tax paid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies.

6-Conclusion Everyone agrees, more or less, that the Federal Government which in case o f Pakistan is, Central Bank, has the po wer to print money. That's what fiat money means b y definition. Since the Federal Government can print its own money, in whatever quantity it chooses, have you ever wondered why it taxes at all? In fact, if you chose to mail in your 2009 taxes in crisp Federal Reserve Notes, the Government would take that paper money and shred it. The Federal Government does not need taxes in order to spend. At the Federal level,  because the Fed is a currency issuer, the sole purpose of taxes is to extinguish money,

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reduce aggregate supply, and t herefore limit inflation to a tolerable level.

Since Federal taxation is about extinguishing money, not raising revenue, then efficient taxation may be the wrong approach. Efficient taxation looks to tax so that the Government

raises as much money as possible but distorts behavior, which reduces

growth and creates waste, to a minimal degree. Maybe the goal, at t he Federal level, should solely be behavior modification. After all, if Federal taxes are important to extinguish money, then they should target money in circulation, as savings are e ffectively extinguished--taken out of the money supply--anyway. Money in circulation is money that people are acting on.

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References y

http://www.scribd.com/doc/18236639/the-principles-of-political-economy-andtaxation-by-david-ricardo-preview

y

http://www.scribd.com/doc/23601256/Taxation-in-the-Global-Economy

y

http://www.emeraldinsight.com/journals.htm?issn=0958868X&volume=4&issue=1&articleid=845692

y

http://digg.com/news/politics/why_tax_cuts_for_the_rich_killed_the_economy_in  _1929_and_are_killing_us_again

y

http://www.oecdobserver.org/news/fullstory.php/aid/2943/

y

www.Wekipedia.com/taxation

y

www.google.com/taxation

y

http://www.google.com.pk/images?um=1&hl=en&rlz=1R2RNSN_enPK406&biw =1003&bih=539&tbs=isch%3A1&sa=1&q=charactersitics+of+taxation&aq=f&a qi=&aql=&oq=&gs_rfai=

y

http://www.emeraldinsight.com/journals.htm?issn=10569219&volume=11&issue=2&articleid=1673297&show=abstract

y

http://www.fbr.gov.pk/newdt/forms/Forms.asp

y

http://www.highbeam.com/doc/1G1-14980257.html

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