This blog is written by Mr. Ajmal Khan, Director Khilji & Co, Chartered Accountants. Please read this blog and provide your valued comments.
This is the first part of this blog. During the coming weeks, the continuation series will also be published
Brief History of Income Tax Laws
The history of taxation evolved from ancient Egypt, pharaohs who used tax collectors – called scribes – to collect money from their citizens to meet expenditure of their Government. This wasn’t typically an income tax instead it was tax on consumption of specific type of goods such as cooking oil. The concept of taxation was also found in the Ancient Greece. They called it the eisphora to fiancé wartime expenditures and nobody was exempted from tax.
Taxes in the Roman Empire:
The Romans introduced the concept of customs duties on imports and exports. These duties were called portoria. They introduced the concept of publicani a public contractor to whom tax collection from a particular area of jurisdiction was assigned. They are agents of the central government who traveled across the Roman Empire to collect taxes from public and pay to the government. Publicani are more influential group of people they become involved in malpractices, such as fraudulent activities misuse of power for personal interest and crude conduct toward slavery. Caesar Augustus wasn’t just known as a great Roman leader for his wartime abilities; he was also known for his brilliant tax strategies. He eliminated the concept of “publicani” and handed over the reins to the cities and colonies. Caesar Augustus’s inheritance tax system had been adopted by British and Dutch invaders who created their own tax laws centuries later.
Taxes in Ancient Great Britain:
Great Britain inherited its tax history from Romans empires. In fact, there had been massive wars on taxes against corrupt Roman tax collectors. After the fall of Rome, Saxon kings imposed their own taxes on the people of Great Britain. These taxes were called “danegeld”, and they were assessed based on the value of land and property.
Taxes and wars were a common theme throughout the middle Ages in France and Great Britain. The invention of world first income Tax was typically attributed to the Great Britain. In the 1800s, England was best known for introducing its own income tax to help deal with Napoleon. That tax would later be repealed after 1816 – one year after Napoleon was finally defeated at the Battle of Waterloo.
Taxes in Colonial America:
In Colonial America taxation was first introduced by the ruling British Government in 1733 through Molasses Act in the territories under its occupation. The Act was modified from time to time and tax net was extended to generate more revenues for the Government. Ultimately, these taxes would lead Americans to revolt against the British in 1773. After the revolutionary war the new nation of America didn’t want to tax its people. For most of America’s early history, the country was tax-free. However, the government from time to time levy different types of taxes to fight wars against France and England in 1790s and 1812. Even though these taxes was greatly opposed in the US by internal rebellion.
America Implements Its First Income Tax for the US Civil War in 1861 through Revenue Act 1861 subjected all incomes above $800 to tax. The Government collected income taxes during the civil war all the way up to 1872 when the revenue act was repealed. Nevertheless the foundation were laid for the modern US tax system.
World Wars and Income Taxes:
World Wars have been the most expensive wars ever in the history. To finance the war, the United States introduced three Revenue Acts, 1916 Revenue Act and War Revenue Act of 1917 cranking up tax rates and increasing the number of taxpayer Americans to 5% of total population. The same strategy was followed by Great Britain and other European Allies as well. After the First World War, taxes were gradually rolled back.
However the Second World War has a profound impact in the history of taxation. Hitler destroyed the economies of colonial powers, Great Britain and France to such extent that they are no longer capable to maintain their military presence in colonies outside their home land. The adjustment from war economy to civil economy was painful because the goods (Weapons) over produced in war times were no more required in civil economies become worthless. Britain incurred huge debt to finance the war against Germany. There was a complete economic recession after the war was ended that resulted political turmoil in the British occupied territories. Britain had to retreat mostly from all occupied territories, (in 1947 from the Subcontinent, 1946 from Jordan, 1948 from Sri Lanka and Myanmar and 1952 from Egypt) purely on financial reasons. Thanks to Hilter otherwise the people of these countries would have to wait for another thirty years to independence.
The physical and economic recovery of Europe was, despite the enormous damage done to the infrastructure, industry, agriculture and commerce, to be quicker than most observers expected. To disentangle the effect of Second World War new economic developments emerged in the Europe and in the newly born economies/countries as a result of divide & rule think tank. Taxation is one of the best revival strategies to escape from the post war financial crises. During Second World War, Europe was entirely ruined as millions of people were dead and paralyzed. Residential areas, Factories, schools and hospitals were completely devastated. There was an immediate need for food, medicines and homes for war affectees to survive. Substantial amount of fund was required to spend on rebuilding of schools, hospitals and homes for homeless people. The economists and strategic planners to introduce new taxes and progressive tax rates to support the rehabilitation work.
The economy of subcontinent who participated in the Second World War as ally of the British -Government was badly affected the Second World War. The British Government had to elevate tax rates and levy additional taxes both within the UK as well as in its overseas possessions to overcome the financial repercussions of war.
Brief History of Income Tax laws in Pakistan
Income Tax Act 1860:
In the undivided India, Income Tax was for the first time in the history introduced in 1860 by the British Government through Income Tax Act 1860 (James Wilson First Finance member of India) to overcome the financial difficulties after 1857 war of independence. In the This Act, exactly the same pattern was followed as that was prevailing in those day in the United Kingdom. The Act was enforced effective from July 1, 1860 and was continued for a period of five years up to 1st August 1865. Then it was withdrawn in 1865.
One of the main features is that agricultural income from land, above the rental value of Rs. 690 per annum was taxable.
Tax was levied on persons earning income from Rs. 200 to Rs. 500 @ 2% and from Rs. 500 and above @ 4%.
Exemption was available to persons earns income below Rs. 200 including agriculture income. To all Government properties,
Exemption was also granted to cultivation of land whose rental value is below Rs. 600 per annum.
Religious &charitable institutions.
Rates was changed from time to time.
Although Income Tax of 1860 was not successfully operated but the procedure concerning levy and collection of taxes was continued under different nomenclature.
License Tax Act 1867:
Income Tax was not applicable for next two years thereafter license tax was introduced viz “ The License Tax Act of 1867” which was abandoned the next year. Income earned up to Rs.200 per annum was not taxable under this law. Amounts earned above this limit were taxable at the rate of 2 per cent. In this Act, agricultural income was exempted from license tax under License tax Act 1867 and Act no VI of 1880.
Certificate Act 1868:
Later on in 1868, the license tax act name was changed to ‘The Certificate Act, 1868” and the exemption limit was raised to Rs.500, but the rate of tax was also reduced to 1.6 percent. The act was abandoned the next year.
General Income Tax Act-II:
In 1869 Certificate Act was converted in to General Income Tax Act II and agricultural income was again brought under taxation. But this time different rates of tax were proposed on different types of income. The Act was enforce for only one year time and in next four years, tax was levied by annual legislation. In 1972 Exemption limit was raised to Rs.1,000. In 1877 further developments came-in in the form of License Act, 1877 wherein tax on trade and access on land was proposed. The Act of VI of 1880 and other local Acts continued till 1886 to the whole of India.
Income Tax Act 1886:
Income Act 1886 was an important landmark in the history of taxation of the Subcontinent. This was the first systematic tax legislation in the subcontinent which brought remarkable improvements to the tax system. A proper definition of agricultural income for the first time was made in the Act and complete exemption and Concession in payment of tax was granted to a person paid life insurance premium. Income Tax Act, 1886, itself continued up to 1918 and during its life of 32 years, only one major amendment was made in it in the year 1903.
There were only four heads of income;
- Income From Salaries & Pensions
- Profit of Companies
- interest on securities
- Income From other sources including property income
Tax was levied on individual different sources of income separately not on aggregate basis (Total income). Flat rate of 5 pie in the rupee of 192 pie (2.6%) was applied on income above Rs. 2,000. Rate of 4 pie (approx. 2.083%) on salary income between Rs. 500 and Rs.2,000 was applied. Basic exemption was Rs. 500.
Interest on securities was taxed on the same rate.
Exemption was raised to Rs. 1000 in 1903.
Later on enhanced rates of taxation by gradation and graduation were introduced in 1916. Eight different tax rates were introduced for different income brackets. The increase in tax rates was caused due to the first World War 1914. Additional income tax was also introduced in 1917 for the first time in the form of super tax.
Till 1916 there was no penalty for late filing of return except companies but in 1917 it was made obligatory for all taxpayers whose income exceeds Rs. 2,000. Act 0f 1886 stood enforce for 32 years till 1918 with a number of amendments made from time to time which are imperative part of the Act.
Graduated Super Tax on income over Rs. 50,000 on undistributed profit of corporation and other entities was introduced through Super Tax Act 1917 which was subsequently modified into super tax Act 1920.
Income Tax Act no VII of 1918:
Act no VII of 1918 was introduced to recast the entire tax laws of 1886. New concepts of total income Accrues, arises, or received has been introduced in the law for the first time in British India to determine the rate. The levy was imposed in respect of taxable income in the year of assessment based on income of previous year. There were six heads of income under the Income Tax Act 1918.
- Salary income
- Interest on securities
- Income from House Property
- Business Income
- Income from professional earning
- Other sources.
Still there was no capital gain tax. Rates of taxes was from four pie to twelve pie in a rupee of 192 pie.
Income Tax Act of 1922:
The Act continue enforce till 1922 which was replaced with The Income Act no XI of 1922 on recommendation of All India Income Tax committee appointed in 1921. The Income Tax Act 1918 and Super Tax Act 1920 was consolidated into Income Tax Act 1922.
In the Income Tax Act 1922, Administration of Income Tax was shifted from the hands of provincial Governments to the Central Government of India. Another remarkable feature of this Act was that the rates were to be enunciated by annual finance Acts instead of Basic enactments.
This Act like Act of 1918 was applicable to all Incomes except Capital Gain, Casual income and income in kind not convertible into money except rent free accommodation. Tax was levied in the year of assessment on the basis of earning of previous year.
In Income Act 1922 set of loss again profit or gain under one head of income against the other one was permitted provided that the loss was relating to the same assessment year. This Act was amended as many as twenty times between 1922 and 1939.
Income Tax Act no VII of 1939:
The increasing need to finance the growing annual expenditure and fiscal deficit resulted from Second World War, the British Government had to take steps to generate more tax revenues to overcome the financial crisis. In 1935 an expert committee (AIYER) was formulated to investigate the existing income tax system from all possible angles and to submit a report on tax incident and efficiency of tax administration. The Act 1939 unleashed a new era in the history of Indian income tax system. The Act No VII of 1939 was an amended Act recommended by the committee in their report in 1936.
In the new tax enactment the basic tax structure was carried from 1922 and ushered into a new era introducing new concepts and definitions in the law;
For the first time residential status was defined in the law, receipt basis was converted into accrual basis. Carried forward of business loss was permitted for six years.
Slab rates were introduced splitting income into slabs and progressive higher tax rates was charged on successive slabs of income.
In 1944, “Pay as You Earn” scheme was introduced. (This scheme which still continues in a little different. shape requires an early depositing of tax by certain persons.) • In 1945, distinction between “Earned” and “Unearned” income was made and some concession was provided on the ‘Earned Income”.
Promulgation of Income Tax Act, 1922:
After Independence both the Governments of India and Pakistan in 1947, adopted the Income Tax Act, 1922 as its official income tax laws. The provisions of the Act were extended to the whole of Pakistan except the special areas.
Formation of the Taxation Inquiry Committee:
In June 1958 a special taxation inquiry committee was formed to review the existing income tax system and submit recommendation to the CBR for amendments in current tax laws. The Committee consists of officials and representatives of trade and commerce. The recommendations of the committee were accepted and income Tax Act, 1922, was amended accordingly.
Abolition of Super Tax:
In 1959, Super Tax was abolished on income of all persons except registered firms and companies. The rates of each slab were expressed as a percentage of income.
Change of Fiscal Year:
In 1960 financial year was changed to commence on 1st July and end on 30 June. Previously, it used to start on 1st April and end on 31st March.
Income Tax Committee:
In 1961 the Central Board of Revenue (CBR) Introduction Income Tax Committee for simplification of Income Tax laws 1922 and procedures.
In 1965 “Self-Assessment scheme was introduced. • Before 1965, an assessment officer was assessed the income and determined the tax liability of the person.
Promulgation of the Income Tax Ordinance, 1979:
Between 1922 and 1979 as many as 71 amendment acts were passed by the legislature. As a result of these amendments the Act become a complicated law and difficulties arose in its working. Keep these difficulties in view, the government promulgated a new tax law namely “Income Tax Ordinance, 1979” through finance ordinance June 28, 1979 and included all the basic concepts of the repealed Act, so that the benefits of the whole case laws built over the last 57 years is not rendered useless. The Ordinance replaced the Income Tax Act 1922 and was enforced it effective from 1st July 1979.
Formation of National Tax Reform Commission:
In 1985, the Federal Government formed a National Tax Reform Commission consist of members of Senate and National Assembly, high government officials and renowned industrialist. In 1985, the government set up a National Tax Reforms Commission to suggest ways and means to improve the existing tax structure in the country.
Income tax survey 1999-2000:
Under income tax ordinance 1979 the income tax survey was conducted in 1999-2000. Purpose of the survey to critically review prevailing taxation structure and submit recommendations to revamp the taxation system in according to the international standards.
Introduction of Tax Amnesty Scheme:
Many tax amnesty schemes were introduced under the Income Tax Ordinance, 1979. These schemes were introduced to provide a chance to black money holders, so that they can change their black money into white money. Latest scheme was introduced in the year 2002.
Promulgation of income tax ordinance, 2001:
After 22 years of the promulgation of the Income Tax Ordinance, 2001, there was continuous criticism from the major foreign donors IMF and world Bank that the existing Income Tax laws of the country is not aligned with the international standards the Government of Pakistan on the dictation of IMF introduced a new income tax law namely, “The Income Tax Ordinance, 2001” as a precondition of the loan program with IMF. The Ordinance was promulgated on September 13, 2001 by the Government of General Pervez Musharraf. It was published in the Extraordinary Gazette of Pakistan at pages bearing Nos. 969 to 1217. The Income Tax Ordinance, 2001: to overrides other laws enforceable in Pakistan.
The Federal Government, vide its notification No. S.R.O. 381 (1)/ 2002, dated 15th June, 2002, announced that the Income Tax Ordinance, 2001 shall came into force on the first day of July, 2002.
Income Tax Rules 2002:
The FBR under the authority of section 237 of the Income Tax Ordinance, 2001 made the Income Tax rules, 2002. These rules were published on July 1, 2002 in Extraordinary Gazette of Pakistan at pages 1819 to 1966.
The new Income Tax Ordinance which was written by an Australian Law practitioner and Assistant Professor Mr. Lee Burns there have been so many criticism from different quarters of Government, legal and professional experts, court of laws including the Supreme Court of Pakistan for the poor drafting and typographical errors, inconsistencies and conceptual fallacies & contradictions dichotomies. More than 2000 amendments so far have been made since inception.
To be Continued……………………….