Taxation System Chapter- 01
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. It is important
to state that foreign source income of non residents in Pakistan is not taxable in Pakistan
under section 11(6) of the Income tax Ordinance, 2001.
Agreement for avoidance of double taxation and fiscal evasion with respect to Taxes
The Government of Pakistan has so far signed agreements to avoid double taxation with more
than 50 countries including almost all the developed countries of the world. These agreements
lay down the ceilings on tax rates applicable to different types of income arising in Pakistan.
They also lay down some basic principles of taxation which cannot be modified unilaterally.3. BASICS OF TAXATION LAWS
3 .1 Basics of tax laws
Adam Smith’s in his famous book “Wealth of Nations” has elaborated following canons of
Taxation:
Equality
Tax payments should be proportional to income and applied equally to all concerned
areas.
Certainty
Tax liabilities should be clear and certain. Convenience of payment
Taxes should be collected at a time and in a manner convenient for taxpayer.
Economy of collection
Taxes should not be expensive to collect and should not discourage business.
3 .2 Principles for levy of tax
Accordingly, following are broader principles for levy of taxes:
The Benefit Principle
This principle holds the individuals should be taxed in proportion to the benefits they
receive from the governments and that taxes should be paid by those people who receive
the direct benefit of the government programs and projects out of the taxes paid.
The Ability-to-Pay Principle
This principle holds that taxes should relate with the people’s income or the ability to pay,
that is, people with greater income or wealth and can afford to pay more taxes should be
taxed at a higher rate than people with less income or wealth. The Equal-Distribution Principle
This principle that income, wealth, and transaction should be taxed at a fixed percentage;
that is, people who earn more and buy more should pay more taxes, but will not pay a
higher rate of taxes.
3 .3 Structure of taxes A tax is proportional
Meaning that the government takes an amount of money from a person which is indirect
proportion to his income. Rashid income is Rs 100,000 and the employer is deducting
10% of his salary for tax. After a year his income increases to Rs 150,000 and employer
deducts 12% of his salary for tax. The said tax is proportional.