Taxation

Muhammad Ammar Sarwar

I.D. 52543
PAF-KIET City Campus
Public Revenue
A Government has a number of sources to
collect its revenue.

Uses Of Revenue
Defence, enforcement of law and public order,
protection of property, economic infrastructure,
roads, welfare, education systems, health care
systems, transportation, energy, etc and the
operation of government itself.

Sources Of Revenue
1. Tax Revenue
2. Non-Tax Revenue
Tax Revenue

• The main source of government revenue comes

from taxation. Tax revenue derived from various
taxes.

• Direct Taxes
b. Indirect Taxes
Non-Tax Revenue
There are various other sources by
which a government collect revenue.
Non-Tax revenue is derived from
various sources.
• Fines, penalties and forfeitures
• Sale of goods and services
• Rent of government lands and property
• Fees and charges
• Licenses
• Income on investments, interest on
loans, dividend etc.
Pakistan Federal Government’s
Revenue of Year 2006-2007

Tax Revenue (a + b) RS. 852,866

a. Direct Tax Rs. 334,168
b. Indirect Taxes Rs. 518,698
Non-Tax Revenue Rs. 380,983
Total Revenue Rs. 1,233,849

(Rs. In millions)

Source: Ministry of Finance. Government of Pakistan

Taxes

Taxation is the most important and main

source of Government Revenue.
Taxes have three main functions
• to cover government spending,
• to promote stable economic growth,and
• to lessen inequalities in the distribution
of income and wealth.
Taxes are also used for non-fiscal reasons,
such as to encourage or discourage
certain activities.
What Is Tax?

• Taxes are general compulsory contributions of

wealth levied upon persons, natural or corporate,
to defray the expenses incurred in conferring
common benefit upon the residents of state”

• Income tax.
• Sales tax.
• Excise tax.
• Property tax.
• Water tax etc.
Classification of Taxes

There are three classifications of Taxes:-

3. Progressive Taxes
4. Regressive Taxes
5. Proportional Taxes
Progressive Taxes

• A progressive tax is a tax imposed so that the

effective tax rate increases as the amount to
which the rate is applied increases.
• The principle of a progressive tax is “higher
the income, higher the rate”
• For Example
• If income is 110,000 rate of tax is 0.5%
• If Income is 200,000 rate of tax is 4.0%
Regressive Tax

•The opposite of a progressive tax is a

regressive tax, where the effective tax rate
decreases as the amount to which the rate is
applied increases.

•The principle of regrassive tax is “higher the

income, lower the tax rate”.
Proportional Tax

• A proportional tax is in which, what ever size of

income, same rate and same percentage is
charged.
• For example in Pakistan the rate of tax on
property income is 5% of Gross Rent.
 (a)

Tax
Rate (C)

(b)

Income

a. Progressive b. Regressive c. Proportional

TYPES OF TAXES

There are two types of taxes:

• 1 Direct Taxes
2. Indirect Taxes.
DIRECT TAXES

Direct taxes refer to those taxes that are

collected from the people or organizations on
whom they are ostensibly imposed. For example,
income taxes are collected from the person who
earns the income. The man who pays it is also
intend to bear it. If I pay income tax. I have to
bear it. I cannot pass it to other persons.
e.g. Income tax, wealth tax, workers welfare tax
INDIRECT TAXES
Indirect taxes are collected from someone other
than the person ostensibly responsible for paying
the taxes. For example if a tax imposed on sugar,
the producer who first pays it, charges it from
the next buyer till ultimately it is borne by the
consumer of a sugar. The tax has been shifted. It
is called Indirect taxes.
e.g. sales tax, custom duty, excise tax
Advantages of Direct Taxes

• Equitable
• Economical
• Certain
• Elastic
• Civic Consciousness
• Reduction of Inequalities
Disadvantages of Direct Taxes

• Inconvenient
• Unpopular
• Evasion
• Arbitrary
Advantages of Indirect Taxes

• Convenient
• No Evasion
• Equitable
• Beneficial Social Effects
• Wide Coverage
• Productive
Disadvantages of Indirect Taxes

• No Civic Consciousness
• Uneconomical
• Inflationary
• Evasion
• Uncertain
Tax Rates

• Taxes are most often levied as a percentage,

called the tax rate. An important distinction when
talking about tax rates is to distinguish between
the marginal rate and the effective (average)
rate.
• The effective rate is the total tax paid divided by
the total amount the tax is paid on, while the
marginal rate is the rate paid on the next dollar of
income earned.
Example
• For example, if income is taxed on a formula of 5% from $0
up to $50,000, 10% from $50,000 to $100,000, and 15%
over $100,000, a taxpayer with income of $175,000 would
pay a total of $18,750 in taxes.
• Tax calculation
• ((0.05*50,000) + (0.10*50,000) + (0.15*75,000)) = 18,750
•  
• The "effective rate" would be 10.7%:
• (18,750/175,000) = 0.107
•  
• The "marginal rate" would be 15%.
Purpose of Taxes

• Revenue
The main purpose is revenue taxes raise money to spend on
roads, schools and hospitals, and on more indirect
government functions like good regulation or justice systems
• Redistribution
this means transferring wealth from the richer sections of
society to poorer sections
• Repricing
Taxes are levied to address externalities: tobacco is taxed,
for example, to discourage smoking.
Effects of Taxation on:

• Production
• Income Distribution
• Consumption
Types of Taxes in Pakistan

•Income Tax
•Sales Tax
•Federal Excise Duty
•Custom Duty
•Workers Welfare Tax
•Property Tax
•Wealth Tax
•Motor vehicle Tax
•Foreign Travel Tax
•Stamp Duties
CBR Tax Collection 2006-2007
CBR Tax Collection 2006-2007
Thank You