pakistan budget tax effecs Report

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Business Economics Report


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Letter of TransmittalJuly 8, 2013

Course Instructor Business Economics

Dear Madam:

Dr. Alam Raza

IQRA University,

Karachi.

Dear Madam:

I feel immense pleasure in presenting the project report on "Theeffects of tax on demand & supply". This report is the outcome ofthe conducted research which outline the results of "increasedtaxes".In this report Tax is defined with its different aspects. Thediscussion then focuses on the Impact of Tax on our demand andsupply. The crux of my report is based upon the findings from thebudged document (2013-2014).

I have tried my level best to complete this report as in accordancewith the desired requirements. Kindly accept it; I hope this reportwill prove to be satisfactory.

Yours Sincerely

Ushair Fareed (20988)


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Acknowledgement

First of all, I would like to express my gratitude to IQRA

University for giving me an opportunity to pursue Masters in

my field of studies. I am heartily thankful to our teacher, Dr.

Alam Raza, whose encouragement, guidance and support from

the initial to the final level enabled me to understand the

various steps involved in conducting a Project report.

Furthermore, I would like to thank all my friends, my brother

and especially my teacher for their kind cooperation and

efforts to assist me in every helpful way they can. I must admit

that this semester I had the best studying experience and will

always cherish this year for my whole academic life.


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ReportEVALUATION OF TAX AND ITS

EFFECTS ON DEMAND & SUPPLYSUBMITTED TO:

Dr. Alam Raza

Individual: Signatures

Ushair Fareed (20988)

BUSINESS ECONOMICS

MONDAY & THURSDAY 12:00 PM TO 3:00 PM

DATE OF SUBMISSION

8-july-2013


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Table of ContentsEXECUTIVE SUMMARY .................................................................................. 7

INTRODUCTION ............................................................................................... 8

LITERATURE REVIEW ................................................................................ 10

OBJECTIVES ................................................................................................... 14

PROBLEM STATEMENT .............................................................................. 15

HYPOTHESIS DEVELOPMENT .................................................................. 15

METHODOLOGY ........................................................................................... 16

Sample Size and Design .............................. Error! Bookmark not defined.

Research Period: ....................................... Error! Bookmark not defined.Research Instrument: ................................ Error! Bookmark not defined.

Variable .............................................................................................. 16

Data Collection ................................................................................... 17

Secondary Source: ................................................................................. 17

Data Analysis: ........................................................................................ 17

CONCLUSION ................................................................................................. 18

REFERECNES .................................................................................................. 26


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Executive SummaryThe data and the report which I have conducted is primarily focused

on the newly imposed taxes and its effects on demand and supply

with its implications. Most states impose tax on some goods and

services as a means of generating revenue. However, taxes also

influence consumer behavior. These influences, along with the

basic financial impact of tax, are evident on supply and demand

curves when tax rates increase or a state imposes new taxes as

happened in recent budget of (2013-2014).

The current crisis in Pakistan needs to be fixed for the jump startof

economy but the new budget had failed to make bold decisions of

extending tax net thus forced austerity on poor by raising tax

which will ultimately increase the prices.

The tax rate has been increased manifold which will affect the

already suffering poor people of Pakistan. The people who are

already paying tax would be paying more than what they were

paying before but those who are out of tax net will again enjoy the

benefits of this budget as they are still out of the tax net.


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IntroductionTax is the amount paid to the taxing authority as direct cash

payment or paid indirectly through purchase of goods or services.The tax is not paid for any specific service rendered by the taxauthority to the taxpayer. The tax paid becomes revenue and isused to provide public goods and services to all citizens.Taxation is the part of public Finance that deals with the means bywhich the government raises revenue from the public by imposingtaxes which revenue is used by the government to provide goodsand services to the public or its citizens (to carry out government

functions)

Prof. Sellingman (American psychologist, educator, and author)Defined a tax as "a compulsory contribution from a person to thegovernment to defray the expenses incurred in the common

interest of all without reference to special benefits conferred".

Purpose of Taxation:

to raise revenues for public needs so that persons can live in a

civilized society

The government increase taxes in order to stabilize prices and

stimulate greater production.

An instrument of fiscal policy influences the direction and

structure of money supply, investments, credits, production,

interest rate, inflation, prices and in general, of the national

economy.

Characteristics of Tax:

A compulsory contribution, all eligible must pay tax.

Tax is a non quid pro quo payment i.e. there is no direct

reward upon payment of tax.


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Penalties are imposed where a person fails to contribute tax.

Tax is a payment made by the tax payers for common benefit.

Tax is charged in relation to income generating activity,

consumption or expenditure.Effects of Taxation:

Personal Income Tax which is presumed to fall entirely on the

legal taxpayers influences decisions to work, save, and invest.

These decisions affect other people.

Corporate Income Tax may simply result to lower corporate profits

and dividends. It may reduce their income of all owners of property

and businesses. The company may move toward raising the prices

of their products.

Tax Evasion:

When there is fraud through pretension and the use of other

illegal devices to lessen ones taxes, there is tax evasion

Under-declaration of income

Non-declaration of income and other items subject to tax

Under-appraisal of goods subject to tariff

Over-declaration of deductions

The incidence of Tax:When a tax is imposed, or its rates etc, are changed, the effects arefelt in different spheres of the economy. The incidence of tax is theresulting changes in the distribution of income available for private

usesIncidence of tax is judged in terms of the money burden ofthe tax.Incidence lies upon that final source from which the tax moneycomes.


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LITERATURE REVIEWBefore going deeply into core of "Tax" let us first start with theanswer to the question that "What is tax in economics?".

A tax (from the Latintaxo; "rate") is a financial charge or other levy

imposed upon a taxpayer (an individual orlegal entity) by a state or

the functional equivalent of a state such that failure to pay is

punishable by law. Taxes are also imposed by many administrative

divisions. As mentioned above taxes consist ofdirect orindirect

taxes and may be paid in money or as its labor equivalent.

so in other words Taxes reduce both demand and supply, and drive

market equilibrium to a price that is higher than without the tax and

a quantity that is lower than without the tax.

whereas tax also leads to tax incidence which is the analysis of the

effect of a particulartax on the distribution ofeconomic welfare. Tax

incidence is said to "fall" upon the group that ultimately bears the

burden of, or ultimately has to pay, the tax. The key concept is that

the tax incidence or tax burden does not depend on where the

revenue is collected, but on the price elasticity of demand and price

elasticity of supply.

So in other words, If buyers have many alternatives to a good with a

new tax, they will tend to respond to a rise in price by buying other

things and will, therefore, not accept a much higher price. If sellers

easily can switch to producing other goods, or if they will respond to

even a small reduction in payments by going out of business, thenthey will not accept a much lower price. The incidence of the tax will

tend to fall on the side of the market that has the least attractive

alternatives and, therefore, has a lower elasticity.
http://en.wiktionary.org/wiki/en:taxo#Latinhttp://en.wiktionary.org/wiki/en:taxo#Latinhttp://en.wiktionary.org/wiki/en:taxo#Latinhttp://en.wikipedia.org/wiki/Legal_personhttp://en.wikipedia.org/wiki/State_(polity)http://en.wikipedia.org/wiki/Administrative_divisionhttp://en.wikipedia.org/wiki/Administrative_divisionhttp://en.wikipedia.org/wiki/Direct_taxhttp://en.wikipedia.org/wiki/Indirect_taxhttp://en.wikipedia.org/wiki/Indirect_taxhttp://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Welfare_economicshttp://en.wikipedia.org/wiki/Price_elasticity_of_demandhttp://en.wikipedia.org/wiki/Price_elasticity_of_supplyhttp://en.wikipedia.org/wiki/Price_elasticity_of_supplyhttp://en.wikipedia.org/wiki/Price_elasticity_of_supplyhttp://en.wikipedia.org/wiki/Price_elasticity_of_supplyhttp://en.wikipedia.org/wiki/Price_elasticity_of_supplyhttp://en.wikipedia.org/wiki/Price_elasticity_of_demandhttp://en.wikipedia.org/wiki/Welfare_economicshttp://en.wikipedia.org/wiki/Taxhttp://en.wikipedia.org/wiki/Indirect_taxhttp://en.wikipedia.org/wiki/Indirect_taxhttp://en.wikipedia.org/wiki/Indirect_taxhttp://en.wikipedia.org/wiki/Direct_taxhttp://en.wikipedia.org/wiki/Administrative_divisionhttp://en.wikipedia.org/wiki/Administrative_divisionhttp://en.wikipedia.org/wiki/Administrative_divisionhttp://en.wikipedia.org/wiki/State_(polity)http://en.wikipedia.org/wiki/Legal_personhttp://en.wiktionary.org/wiki/en:taxo#Latin


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Cigarettes are one example where buyers have relatively few

options; we would therefore expect the primary burden of cigarette

taxes to fall upon the buyers.Tax authorities usually require either the buyer or the seller to be

legally responsible for payment of the tax. Tax incidence is the way

in which the burden of a tax is shared among the market

participants ("who bears the cost?"). Taxes will typically constitute a

greater burden for whichever party has a more inelastic curve

e.g., if supply is inelastic and demand is elastic, the burden will be

greater on the producers.

The following are the general types of tax.

Income taxtax imposed on annual gains or profits earned by

individuals, limited companies, business and other organizations.

e.g. Corp tax, withholding tax,

Value added tax (V.A.T.)A type ofconsumption tax that isplaced on a product whenever value is added at a stage of

production and at final sale. The amount of value-added tax that the

user pays is the cost of the product, less any of the costs ofmaterials used in the product that have already been taxed.Turnover Tax-Turnover tax is a simplified tax system aimed at

making it easier for small businesses to comply with their tax duties.

The turnover tax system replaces Income Tax, VAT, Provisional

Tax, Capital Gains Tax and Dividends Tax. A small business that is

registered for turnover tax can, however, choose to remain in the

VAT system.Sales tax A tax imposed by the government at the point of sale

on retail goods and services. It is collected by the retailer and

passed on to the state.
http://www.investopedia.com/terms/c/consumption-tax.asphttp://www.investopedia.com/terms/c/consumption-tax.asp


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2. Certainty Proper provision for the payment of taxes on times,easy for the State to make financial plans .3. Elasticity The yield from direct tax increases with an increase in

wealth and population.4. Social effects & Distributive justice Redistributes the fruits of

developments, develop civic consciousness among tax-payers. Reduce the glaring inequalities in the distribution of wealthand income. Income tax and inheritance taxes are useful inthis direction.

Indirect Taxes

A tax that increases the price of a good so that consumers areactually paying the tax by paying more for the products. An indirect

tax is most often thought of as a tax that is shifted from one

taxpayer to another, by way of an increase in the price of the good.

Fuel, liquor and cigarette taxes are all considered examples of

indirect taxes, as many argue that the tax is actually paid by the end

consumer, by way of a higher retail price. It further include the

following: sales tax

specific tax

value added tax (VAT)

goods and services tax (GST)

INDIRECT TAXES :ADVANTAGES

1 Convenience Indirect taxes are convenient to the tax payers andthe State both. The taxpayer makes the payment when hepurchases commodities in small amount and he does not feel them.The State can collect them in bulk from importers, exporters andproducers.
http://en.wikipedia.org/wiki/Sales_taxhttp://en.wikipedia.org/wiki/Per_unit_taxhttp://en.wikipedia.org/wiki/Value_added_taxhttp://en.wikipedia.org/wiki/Value_added_taxhttp://en.wikipedia.org/wiki/Value_added_taxhttp://en.wikipedia.org/wiki/Value_added_taxhttp://en.wikipedia.org/wiki/Per_unit_taxhttp://en.wikipedia.org/wiki/Sales_tax


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PROBLEM STATEMENT"To which extent does Tax could effect and what are the changes it

could bring in demand and supply as whole."

HYPOTHESIS DEVELOPMENTH1: There is significant relationship between Tax and its effect on

demand & supply.


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METHODOLOGYUnder the research design, the following titles will helps us

providing details about the study.

variable

Data Collection

Variable

Comparative method investigates relationship of an independent

variable on a dependent variable. To bring my research into

consideration I related the causes and effects of the problem

involved.


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Data Collection

The data, which is collected for the purpose of research report, is

divided into following two bases:

Primary Source:

The primary data comprises information is conducted from

"budget do cument (2013-2014)"

Secondary Source:

The secondary data was collected from internet, consulted articles

and references from Library.

Data Analysis:

The data is analyzed on the basis of suitable graphs by using

mathematical techniques.


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Budget data (2013-14)Federal Minister for Finance Ishaq Dar had announced PakistanBudget 2013-14. Salient features of Budget 2013 are as follows.

Budget size: Rs 3.591 trillion

Project Gross Domestic Product (GDP) growth: 48 percent

Fiscal Deficit: 8 percent

Inflation Target: 9.5 percent

Ishaq Dar claimed that Budget 2013 is business friendly. However,

he failed to mention that the increase of GST from 16% to 17% will

open the floodgates for inflation.

New Imposed Tax List

1 Tax exemption for luxury cars was proposed to be abolishedwhile 1200 CC hybrid cars are being exempted from importduty. A concession of 50 percent has been proposed for1200 to 1800 CC cars while Rs 20,000 in tax will beapplicable on purchase of 1000 CC cars.

2 A withholding tax on wedding ceremonies being held atcommercial venues has also been proposed.

3 Tax proposed on foreign movies and dramas

4 Taxes on cigarettes, pan and chaliya have also beenincreased.

5 Minimum tax increased from 0.5% to 1%

6 Taxation of construction sector: A minimum tax on buildersand developers is proposed. The tax will be paid at a therate of Rs.50 per sq.ft. of the constructed area; or Rs.100per square yard of the developed land.


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7 Rate of tax on Business individuals and AOPs will begradually increased from current maximum of 25% forincome exceeding Rs.2.5 million to 35% for income aboveRs.6 million.

8 Taxing Education: An adjustable withholding tax of 5% maybe imposed on annual tuitions fee of Rs.200,000 paid to aneducational institution.

9 Tax on movable assets of Non Resident Pakistanis: A 0.5%tax is proposed on earnings of nonresident Pakistanis.Earnings from this tax will be used for the income supportprogram of the government.

10 5% sales tax is imposed on electricity and gas bills of those

having commercial or industrial connections but remainunregistered. Once they get registered, the sales tax will beremoved from their bills.

11 All taxable supplies made to unregistered persons willinclude 2% further tax, for encouraging registration. Oncethey get registered, they will no longer have to bear thischarge.

12 Finished goods and items having multi-purpose use are

taken out of the reduced rate regime.13 To address the grievances of oil importers, locally producedoil and imported oilseed are being subjected to the similartax regime as imported edible oil.

14 A federal excise duty of 40 paisa per kilogram is imposed onimported canola seed.

15 Federal Excise Duty is imposed at the same rate on personsproviding financial services that are offered by banking andnonbanking institutions.

16 Custom duty on betel nuts (chalia) and betel leaves isincreased


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analysis of dataAlthough the list of increased tax list is very vast and it is difficult toexplain each and everyone in detail. therefore I would primarily will

focus on the basics of those taxes that has large implications on the

economy and specially on demand and supply.

Effects of raised tax:The following are those large Pakistani sectors which will be

effected negatively by the above mentioned taxes that have

increased:

Effects on Automobiles sector:

A very interesting fact about imported 1200 CC hybrid cars which

are exempted from the tax that, there is no existence of 1200 CC

hybrid car in the world at this very moment as they have not

launched yet.

The government revised different tax slabs for the registration of

motor vehicle that range from Rs 12,000 to Rs 80,000 depending

on engine capacity. Similarly, the government proposed to

introduce tax on the purchase of cars and jeeps, which range

between Rs 10,000 and Rs 150,000 depending on engine capacity.

Research believed that they will follow the same trend, which will

result in increase in the range of Rs 5,000 to Rs 65,000 in car

prices.

Now moving to the next part i.e. increased tax on local cars

manufacturers. The Pakistan Suzuki Motor Company (PSMC) will

remain on safe harbor as the company doesn't offer any car in this

segment, whereas Indus Motor Company and Honda will become


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victims of the newly imposed tax as they generate around 14

percent and 1.0 percent of sales, respectively from cars above

1800cc engine capacity which will had a following effect on the

demand and supply.

where:

p1 is equilibrium price

p2 is buyers price

p3 is sellers price

triangle A,B,C is indicating deadweight loss

Therefore as an industry of having elastic demand and supply the

buyers and seller will suffer equally. whereas there is might a

chance that the consumer may switch to imported if they offer lessthan the local market price.

P1

Q1

P2

Effects on Demand & Supply of Local Pakistani

Automobile industryS1

D1

A

B

CP3


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Q2

S1

D1

P1

Q1

S2

P2

Quantity demanded

Decrease in supply due to increase in GST

Effects of increased GST:

The Government increased GST from 16% to 17% which will

ultimately leads to prices.

Effects on priceOne of the most immediate and clear effects of sales tax on supply

and demand involves an increase in the price of consumer goods.

This occurs because businesses must pay more for the products

they buy, including machinery, office furnishings and computer

equipment. The higher cost of doing business translates into higher

prices for new products. Since price serves as the vertical axis of a

supply-and-demand graph, this rising price from sales tax causes

the supply curve to move inward so that reductions in supply

correspond to existing prices, reflecting the fact that businesses can

now produce less for the same amount of money.

Effect on Equilibrium

As sales tax causes the supply curve to shift inward, it has a

secondary effect on the equilibrium price for a product. Equilibrium

price is the price at which the producer's supply matches consumer

demand at a stable price. Since sales tax increases the price of


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S1

P1

P2

P3

D1

Q1

Increase GST for inelastic demand

where they are and simply earn less profit per sale. Businesses

also can choose to pass these taxes along to customers through

increased prices, which can have a significant impact on supply and

demand. Governments examine these issues before imposing newtaxes, and businesses work flexibility into their pricing structures to

account for slight changes to sales tax rates.

For items such as medicines, fuel, cooking oil, wheat or any items

with having an inelastic demand the above graph represent the

effect on increased GST on it.

conclusion


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Recommendations


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What needs to be done is to restore the faith of the people and

implement a multi-dimensional tax reforms where:

1 Taxpayers are encouraged and their faith restored by stemming

out corruption.2 Tax Net is constantly widened.3 More focus is given to direct taxation.4 Meaningful tax rebates and reliefs are introduced for the less

able sections of the society.

5 Tax structure are introduced to encourage foreign/localinvestments in Key Sectors with tax-breaks for transfer of

technology, e.t.c. as may be required in a particular sector.6 Tax rates structure are created so as to tax people according to

their means with more affluent contributing more to the

treasury.

REFERECNESSales Tax Effect on Supply & Demand. available at (http://smallbusiness.chron.com/sales-tax-effect-supply-

demand-20815.htmldate 27 June at 5:50 pm
http://smallbusiness.chron.com/sales-tax-effect-supply-demand-20815.htmlhttp://smallbusiness.chron.com/sales-tax-effect-supply-demand-20815.htmlhttp://smallbusiness.chron.com/sales-tax-effect-supply-demand-20815.htmlhttp://smallbusiness.chron.com/sales-tax-effect-supply-demand-20815.htmlhttp://smallbusiness.chron.com/sales-tax-effect-supply-demand-20815.htmlhttp://smallbusiness.chron.com/sales-tax-effect-supply-demand-20815.html


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Tax details. available at (http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/tax-

effects.asp) date 27 June at 6:10 pm

Tax definition available at(http://en.wikipedia.org/wiki/Tax_incidence) date 27 June at 6:30 pm

Direct tax details available at (http://urdumail.wordpress.com/tag/indirect-tax/) date 27 June at 8:40 pm

Detail about automobileshttp://www.dailytimes.com.pk/default.asp?page=2013%5C06%5C14%5Cstory14-

6-2013_pg5_3date 4 July at 9:13
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