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03-07-2009 12:06 AM

Pakistan - Tax Structure

Taxation System

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

Direct Taxes

Direct taxes primarily comprise income tax, alongwithsupplementary role of wealth tax. For the purpose of thecharge of tax and the computation of total income, all incomeis classified under the following heads:

1. Salaries2. Interest on securities;3. Income from property;4. Income from business or professions5. Capital gains; and6. Income from other sources.

Personal Tax

All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates randing from10 to 35 per cent.

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Tax on Companies

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

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. Inetr-corporate dividendsdeclared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Othercompanies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companiesare subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respectof this source of income.

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 enterprises Mutual Fund set by the InvestmentCorporation of Pakistan.2. Dividends received from a domestic company out of income earned abroad provided it is engaged abroadexclusively in rendering technical services in accordance with an agreement approved by the Central Boardof Revenue.

Unilateral Relief

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

Agreement for avoidance of double taxation

The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countriesincluding almost all the developed countries of the world. These agreements lay down the ceilings on taxrates applicable to different types of income arising in Pakistan. They also lay down some basic principles oftaxation which cannot be modified unilaterally. The list of countries with which Pakistan has concluded taxtreaties is given below:

AustriaBelgiumBangladeshCanadaChinaDenmarkEgyptFranceFinlandGermanyGreeceIndiaIndonesiaIranIrelandItalyJapanSouth KoreaLebanonLibyaMaltaMauritiusSaudi ArabiaSingaporePolandRomaniaSwitzerlandThailandSri LankaSwedenTurkmenistanU.K.TurkeyTunisiaKazakistanU.A.E.U.S.A

Customs


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Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in PakistanCustoms Tariff. Customs duties in the form of import duties and export duties constitute about 37% of thetotal tax receipts. The rate structure of customs duty is determined by a large number of socio-economicfactors. However, the general scheme envisages higher rates on luxury items as well as on less essentialgoods. The import tariff has been given an industrial bias by keeping the duties on industrial plants andmachinery and raw material lower than those on consumer goods.

Central Excise

Central Excise duties are leviable on a limited number of goods produced or manufactured, and servicesprovided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of valueor retail price. Some 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 Codingsystem which is being used all over the world. All exports are exempted from Central Excise Duty.

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 carriedon by him;· there ia an in-built system of input tax adjustment and a registered person can make adjustment of taxpaid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at any stage doesnot exceed 15% of the total sales price of the supplies;

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03-07-2009 12:08 AM

Please download this file: PAKISTAN'S TAX SYSTEM STRUCTURE, ELASTICITY, INCIDENCE ANDFISCAL EFFORT

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Further detailed thesis: Taxation system of Pakistan: structure and trends

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03-07-2009 12:15 AM

Taxation Structure Taskby Mohammed Ashraf | Published on 5/3/2005

The Central Board of Revenue (CBR) has made a Task Force on improving taxation structure. The primegoal seems to broaden the tax base apart from increased revenue collection, educated taxpayer, improvedtax-GDP ratio, improved tax system and decreased size of parallel economy. This article is an endeavour tohave a bird’s eye view over the existing tax culture of Pakistan in the light of tax structure includingimpediments in broadening the tax base and suggestions for improvement.

Tax Culture

In terms of taxation, the Pakistani society can be categorized as the ignorant, the tax literate and thecorrupt. I used to think of killing the tax advisor of my company, who used to keep quoting my companyowner each of my mistakes, the most famous case law – ignorance of law is no excuse – and that case lawshambles my job. When Allah [SWT] gave me some knowledge about taxation and at one instance, Iquoted the same case law to my father – I got a slap in return for making him afraid like the taxman.

During the practice period of decade and half, I found a lot of people coming with the problem of taxationafter being caught on the occurrence of an event and the simplest answer after sympathising with them isthe above mentioned case law. After listening to that case law, they normally looks at me as something evilor a brother of taxman – but that’s the truth. I though hard about such attitude of the people and foundsome reasons. I think the reasons of such ignorant attitude are harsh attitudes of taxmen, low literacy rate,lack of tax education, lack of intention to pay tax, afraid of coming into tax net, uncompetitive corporate taxrates, mishandled personal tax structure and the utilization of tax money.

The tax literate societyis the most horrified portion of our society. The core reason is that the law hasequated tax planning with the terms 'avoidance' and, by extension, ‘evasion’; however, I agree that thereare some forms of tax avoidance as "improper and immoral". CBR needs to be well-advised to rememberthe crucial difference between tax avoidance and tax evasion. Tax avoidance involves using the tax rules toone's own legitimate advantage. By contrast, tax evasion is the illegal reduction of one's tax liability, forexample by understating income or over-claiming expenses.

CBR people believe that accountants would have much to answer for if they failed to ensure that clients didnot pay more tax than necessary being the culprit of nourishing the tax literate society. CBR may surelyagree over the fact that as professional advisers, accountants should advise clients to claim availabledepreciation and initial allowances in order to maximise in-year loss relief, to bring forward unadjusteddepreciation or initial expenditure for optimisation and, where appropriate, to incorporate to take advantageof lower rates of Taxes and exemptions available? This is entirely consistent with the function of the taxsystem to provide incentives to businesses; the reality is that the vast majority of accountants do their taxplanning in a transparent, legitimate fashion and have little appetite or time to devise complex taxavoidance schemes.

CBR is not correct to suggest that we are operating in an environment rich in tax-avoidance, wherelegislation is filled with "loopholes and errors". If anything, the problem lies in the fact that the law is sointricate that it leads directly to the situation where the average taxpayer frequently over-pays orunder-pays tax and misses deadlines for filing and for making elections for specific relief’s. The sheercomplexity of the tax system actually helps the CBR to pocket untold hundreds of millions in tax receipts,interest payments and penalties.

In the complex world of tax, the overwhelming majority of businesses are trying to operate fully within thelaw. Few have bad intentions - all they want to do is get their tax calculations correct, pay the right amountof tax on time and get on with running their businesses. The problem is that CBR seems to see taxavoidance everywhere and each business has to waste a huge amount of time defending itself in the face ofoften commercially ignorant CBR probes.

It should also be borne in mind that, in the current challenging economic environment, businesses do noteven get the chance to utilise all their tax depreciation allowances, because they have insufficient profits.They do not manage to offset all their group or single entity losses and they certainly cannot imagineentering into any arrangements or schemes to reduce their tax liabilities.

It is not even a case of people who live in glass houses throwing stones. It is more the case that thesepeople do not recognise that they live in a glass house. The danger in the Government's fight against fraud

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and its aim to ensure that everyone pays their "fair share" of tax, is that the crackdown will fail to hit thecorrect targets. There is no question that tax evasion is wrong - apart from being illegal - and that theGovernment should focus its efforts on its prevention. Any part of the additional CBR funding which clampsdown on such behaviour is money well spent. I support any measures which prevent or combat fraud, but Iam, however, concerned that tax inspectors looking for soft targets may concentrate on small businessesand individuals, rather than tackling serious and deliberate fraud. Furthermore, if the authorities try toerode the ability of firms to plan their tax affairs effectively under the law, this will be to the seriousdetriment of businesses and the economy and, ultimately, against the interests of Pakistan. However, taxliterate society has remembered the following.

Maktab-e-tax ka dastoor nirala daikha

Usko appealoo sai chutti na mili jis nai sabaq yaad kiya

[School of tax has a unique rule. One who learns the lesson used not to get the leave from theappeals]

Corruption has pervaded all sectors of our society. But in today's business environment, the implications ofcorruption at a local level reach far beyond national boundaries. Corruption has become a major concern.The impact of corruption on our society cannot be overstated. It increases the risks and costs of business,damages investor confidence, hampers economic development, and reduces country credit ratings. It bringsthe integrity of professions and of business into question. It deprives government and regulators ofcredibility and weakens the forces of law and order. In such a scenario, public morale inevitably suffers andsocial hardship can be the inevitable result.

Everyone has a moral duty to fight corruption. But no one can wage this battle alone. Governments mustcommit themselves to taking the first step in introducing a solid legislative and regulatory frameworkproscribing corrupt acts, dealing firmly with all who commit them, and protecting those who "blow thewhistle" from the dangers of retaliatory action.

What is corruption? Bribery, fraud, illegal payments, money laundering, and smuggling - all these come tomind as obvious examples. But corruption does not always involve money: it can present itself in the guiseof special favours or influence. In today's complex and rapidly changing environment, the potentialvariations of corruption are as many as there are criminal minds to devise them. An all-purpose rulebook isinconceivable: the fight against corruption must take the broadest possible approach if it is to have realimpact.

As far as CBR is concerned, it failed to take advantage of a most famous case law of post second world warin relation to crime and corruption. During the Second World War a wine seller sold the wines to the enemyforces. At the end, a case of treason has been filed against the wine seller for selling the wine. The evidencewas concrete and the judge was about to penalize the culprit, suddenly, the Inland Revenue filed a claimthat the profits of the wine seller needs to be calculated in order to collect the tax. The core reason is thatincome tax needs to be paid even over the illegal business profits but such payments do not legalize thebusiness. CBR has tilled now failed to work over this area.

SUGGESTION FOR IMPROVEMENT

As stated earlier, I think the reasons of non-payment of taxes and ignorant attitude are harsh attitude oftaxman, literacy rate and lack of tax education, no intention to pay tax from the earnings, afraid of cominginto tax net, loopholes tax legislation, competitive corporate tax rate under global tax competition, personalincome tax structure and utilization of tax money.

CBR is now improving in the area of harsh attitude of taxman only in relation to Income Tax owing to thescheme of Income Tax Ordinance, 2001. However, CBR is now moving towards Sales Tax and the mostimportant step in this regard is the suspension of Sales Tax Audit for six months but this is not a long termsolution. Legislators need to improve the basic structure of Sales Tax Act, 1990 to make it taxpayerfriendly. Every problem in the Sales Tax Act, 1990 is solved either through a Circular or SRO whichcomplicates the issue. It is suggested that the Sales Tax Act, 1990 need to be revamped right from thescratch bearing the existing Sales Tax Structure, Problems, Organisational Structure of Sales TaxDepartment, Long/Short term Macro and Micro Economic policies in mind. In furtherance, CBR need to workon Excise Tax and this requires a clear indication from the government either to abolish it and replace itwith Sales tax or Continue with Excise Tax.

Literacy rate and tax education are mutually exclusive in the case of small cities and towns. The problem isnot mutually exclusive in the case of main cities like Karachi, Lahore, Peshawar, Islamabad etc. Thissituation requires two different strategies. In the small towns and cities, Government needs to increase theliteracy rate as this is something beyond the ambit of CBR, however, in major cities CBR needs to increasethe tax literacy rate. This does not only involve creation of taxpayer facilitation centre and theadvertisement in the newspapers and television but something more than that like TV dramas, training byCBR to taxpayer – Compliance expected by CBR, Avoid paying additional taxes, Be Safe and Secure interms of Inadmissible taxes, The Direct/Indirect Tax Regime etc.

TV Drama may include normal taxation problems, common misconceptions of peoples, problems normallyfaced by the ordinary taxpayers etc. The training will serve two purposes for the tax management purposes.CBR will get first hand information from the taxpayer and their representatives to solve their problemwithout requiring a middle man. In future, there will be no need to revamp the law after a span of long timeas this process will continue to educate the two actors of a process – Taxman and Taxpayer.

Another most common problem is the lack of intention to pay taxes. This lack of intention is based on the


5 of 10 17/04/2013 02:26

loophole in the taxation laws. This argument is based on the concept that when a law requires a person toget itself registered with the respective tax authority. For instance, there is no requirement in Income TaxOrdinance, 2001 for registration of a person under the law; however, the requirement is for filing of IncomeTax Return. The Taxation Structure Task committee needs to look at the most common problem, from CBRpoint of view, of ascertaining the point of time of registration. I would suggest basis year rule of UK forimproving the tax year concept and VATA 1994 for registration under Sales Tax law on advance stock basisat the time of induction of capital.

The most common problem of CBR is that people are afraid of coming into the tax net owing to variety ofreasons. People are afraid about their past, this is their prime concern, as they do not know what will begoing to happen with them about their past. However, a number of immunity schemes had been introducedfor the taxpayers in the past but nothing specially have been planned for bringing the new taxpayers intothe tax net.

Taxation administrative and legislative loopholes are another grey area and much had been written by theexperts over legislative aspects; hence, I am confining this to administrative aspect. Suppose, a personimports some goods and sells the same without altering its basics of the goods, that is, Import trading. Saidperson files his sales tax return and statement under section 115(4). The Sales tax department match thedata with the import data input at the custom stage and get the closing stock figure by reconciling the samewith the goods imported automatically. The Income Tax department verifies the statement under sectionwith the custom stage input and sales tax input through an online verification on its integrated computersystem on WAN. Such a setup will serve as deterrent to the fraudulent aspects apart from the fact that lessbotheration for the taxpayers also. I will discuss this idea in greater depth in my next article.

Tax utilization is the most critical area which needs some thought with the passage of time. This aspect hastwo aspects, micro and macro level. From micro aspect, what the benefits existing taxpayers is getting? Andwhat the benefits will a prospective taxpayer may get? These two questions need to be answered in order toincrease the tax GDP ratio. From macro aspect, what is the formula and basis of utilization of tax money? Isthe Government authorized to use the money for debt servicing of the past loan or it needs to be utilized forthe benefits of the citizens – These key question are some sort of policy decisions which needs to be takenat the strategic governmental level not at tactical level – CBR. Tax structure task committee may submitthese queries as part of their recommendation.

Governments must recognise that corporation tax rates must be internationally competitive if they want toattract and retain companies and jobs. But cutting tax rates is an ongoing process in order to staycompetitive. Pakistan’s corporation tax rates are much higher than the OECD averages. It is worthwhilehere to note that between 1996 and 2003, average corporate tax rates in EU member states fell from 39%to 31.68%, and in OECD countries from 37.5% to 30.79%. This overview of trends in corporate tax ratesaround the world suggests that how countries are seeking to provide a competitive environment forbusiness.

In order to gain the advantage of geo strategic location of Pakistan, committee must suggest a drasticcorporate tax rate reduction pre-requisite for seeking the requisite increase in share of international andEuropean corporate headquarters.

Middle and low income earners in particular have been hit hard over the past few years by the introductionof the goods and services tax (GST) and by bracket creep, as demonstrated by a recent OECD report intothe taxation on wages. CBR thinks that any new tax credit or deduction from taxable income is a direct lossto the revenue – which is just one side of the mirror. This was in part aimed at stimulating the economy byencouraging higher consumer spending. Committee should suggest the induction of medical expensewithout ceiling and re-introduction of books and children education allowance.

To help pay for any reduction in income tax rates for middle and low income earners, the governmentshould firstly examine whether there are inefficiencies in the way it collects tax and monitors compliance. Athorough investigation into how efficient the government really is in collecting tax and identifying taxevaders would no doubt uncover significant additional revenue. Middle and low income earners should bethe ones to benefit from any additional tax revenue identified through this process.

Tax Structure Task Committee

The most beautiful aspect of the committee is its composition. It is a group of people from two actors of thecommunity – Tax Collector and Tax Practitioners including the legend Ebrahim Sidat, however, I reserve myright to disagree with some past issues but I think a teacher is always happy with curious student. Thecommittee is collecting the suggestions from the grass root of Tax Collectors while the problems oftaxpayers are known by the tax practitioners. The key aspect in collecting the information and suggesting aconclusion lies in the balance between achieving the targets and on the other resolving the queries of thetaxpayers including their current grievances.

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Composition and tax efforts in Pakistan

Like many developing countries, Pakistan also has very low tax – GDP ratio and mostly relies onconsumption taxes. Large majority remain out of tax net because of overall low average incomes. Lowrevenue collection then results in inflation tax as an alternative to raise revenues. Various programs withIMF has special focus on tax reforms including improved tax governance, increasing share of direct taxes,expanding the tax net, imposition of sales tax on wider scales and improving the tax elasticity andbuoyancy. Tax reforms efforts since 1990s are quite visible from significant increase of the share of directtax in total tax revenues (17.3 percent in 1990-91 and 29.4 percent in 2005-06) and share of sales tax intotal tax revenues (15.4 percent in 1990-91 and 41.3 percent in 2005-06). Despite visible changes in taxstructure of Pakistan, total tax – GDP ratio is little above 12 percent.Share of indirect taxes in total tax revenues is more than direct taxes, however, since 1990-91 this trend ismoving in opposite direction, i.e., share of indirect taxes in total tax revenue was 82 percent in 1990-91which is now reduced to 68.5 percent. Direct tax is comprised of income tax mainly. Share of direct taxes intotal tax revenues has been substantially increasing from under 20 percent to 31.5 percent since 1990-91.The sole contribution is through income taxes, i.e., 93 percent of the total direct taxes in 2005-06. Indirecttaxes are comprised of sales tax, custom duties and federal excise tax. After the structural adjustmentprogram in 1987-88 Pakistan has started reducing custom duties (50.4 percent in 1987-88 and 19.4percent in 2005-06). Custom duties were replaced by sales tax, which increased from 11.6 percent of totaltax revenues in 1987-99 to 41.3 percent of total tax revenues in 2005-06. Share of excise tax has alsodeclined to 7.7 percent of total tax revenues in 2005-06 from 22.3 percent of total tax revenues in1987-88.

It is generally believe that sales tax is a regressive tax but a rigorous study by Sadia Refaqat in 2005published in Pakistan Development Review concluded that sales tax in Pakistan is not clearly a regressivetax, however 1990s reforms are slightly welfare reducing because sales tax on items such as vegetableghee, sugar and basic fuels are hurting poor. This is also stated in a study by Faiz Bilquees in 2004published in the Pakistan Developmetn Review that introduction of sales tax on the petroleum products, gasand electricity directly affects the consumption of poor because they lowered the consumption of othergoods. Contrary to this it is theoretically proved that sales tax is difficult to avoid/evade thus to improveefficiency and equity sales tax/VAT is better tax than other.

In my recent study on the long run determinants of tax efforts, I concluded that per capita income andsectoral share of value added sectors are the main determinants of long run tax efforts in Pakistan.However, increase in revenues from sales tax is due to inclusion of new products under the sales tax net. Itis also concluded that indirect taxes are difficult to evade.


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03-07-2009 12:20 AM

Need to redouble tax collection efforts

EDITORIAL (March 06 2009): Tax collections in the first eight months (July-February 2009) of the currentfiscal year would appear to be quite impressive in nominal terms but are woefully short of the expenditurerequirements of the country and lag much behind the target fixed for 2008-09.

According to the provisional figures released by the Federal Bureau of Revenue (FBR) on 3rd March, taxcollections during this period amounted to Rs 706.4 billion or 20.7 percent higher than Rs 585.3 billion inthe corresponding period of 2007-08.

The details of the data reveal that direct tax collections rose by 20.1 percent to Rs 260.3 billion, sales taxby 24.3 percent to Rs 283.4 billion, federal excise duty by 29.1 percent to Rs 69.7 billion and withholdingtax on imports by 7.3 percent to Rs 92.9 billion. The FBR paid refunds amounting to Rs 49.69 billion orabout 10 percent more compared to Rs 45 billion paid during the same period last year.

Tax managers believe that monthly provisional collection of Rs 75 billion for February 2009 may cross Rs 80billion on finalisation of updated figures which may push up the total tax collections during the year so far toabout Rs 711 billion but such a small increase would not make much difference on the overall picture.Based on the above figures, fiscal authorities of the country may try to portray the rate of tax collections assatisfactory or justify the sluggish growth on the ground of lower growth rate of the economy anddepressed level of imports and exports.

However, such arguments would not be convincing. In current rupee terms, tax collections as a percentageof GDP are likely to be lower than last year due mainly to excessive inflation. In other words, an increase ofabout 22.5 percent in nominal GDP during 2008-09 (real GDP growth estimated at 2.5 percent and inflationrate at 20.0 percent) as against the current rate of 20.7 percent increase in tax collections would naturallyresult in a lower tax to GDP ratio during the current year.

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In fact, Advisor to the Prime Minister on Finance Shaukat Tarin, hinted at such a possibility on 2nd March,2009 when he said in a press briefing that tax-to-GDP ratio of 10.2 percent fixed for the current fiscal is notlikely to be achieved. This is a far cry from his earlier optimistic statements when he seemed confident toraise the tax-to-GDP ratio of the country to 15 percent in the next five years or so.

Also, as the year progresses, it is becoming increasingly clear that the tax target of Rs 1,360 billion fixed for2008-09 is almost impossible to achieve. The monthly average of Rs 88 billion realised so far cannot beraised to Rs 162 billion, or almost the double of present level, in the remaining four months of the currentfiscal year unless some revolutionary steps are taken in fiscal management of the country.

However, revolutionary steps are neither in the offing nor seem to be possible to undertake under theprevailing socio-economic conditions. The current political uncertainty in the country has also made the taskof the tax managers much harder. Another difficulty is the commitment with the IMF to bring down thefiscal deficit of the country from 7.4 percent of GDP to 4.3 percent during the current year and further to3.3 percent in 2009-10.

The overall fiscal situation has almost forced the government to rely increasingly on tariffs on POL productsand slash the PSDP to keep the budget deficit within limits agreed with the Fund. Not only has this seriousimplications for inflation rate, infrastructure development, employment rate and poverty level, but has alsodistorted price signals in the economy.

Obviously, there is an urgent need to redouble the tax collection efforts by expanding the tax net anderadicate tax evasion from the system. The FBR has been claiming all along to make the needed moves but,as the data indicate, the results of such efforts have not been encouraging and tax elasticity continues to bevery poor. With a tax-to-GDP ratio hovering around 10 percent, the country cannot expect to attain areasonable degree of development and avoid debt accumulation.

Alas, everybody in the country is raising the roof about his patriotic credentials but hardly anybody isprepared to pay his taxes. The tax culture in the country obviously needs to be overhauled in a big way toget out of the present morass. This is all the more important when the frontiers of the country are facing aserious challenge and increasing level of poverty calls for more fiscal space to meet urgent requirements ofthe economy.

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03-07-2009 12:43 AM

Re: Pakistan - Tax Structure

For comparison,Pakistan's tax to GDP ratio is 10-11pc, target this year is 13.5 pcTarin for improving tax-to-GDP ratio -DAWN - Business; January 18, 2009India's is 12.5 pc, expected to be 13 pc this year.http://in.reuters.com/article/busine...34312720080701The above are for central or federal governments.(correct me)

IMF asked Pakistan to maintain it above 12.5 pc

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Ruby!!!!Why did you leave me?Why ...

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-- PDF 2.0

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This is really old piece.From 70sI dont think this will be relevant now


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Originally Posted by Neo

Please download this file: PAKISTAN'S TAX SYSTEM STRUCTURE, ELASTICITY, INCIDENCE ANDFISCAL EFFORT

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03-07-2009 12:57 AM

Ohh...I ddin't realise that you asked for data in the light of IMF texture.I'll do some research.

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07-09-2009 11:10 AM


The agreements lay down the ceilings on tax rates applicable

to different types of income arising in Pakistan...

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Pakistan - Tax Structure

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