Taxation System Federal taxes in Pakistan like most of the taxation systems in the world are classified into

two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below: Direct Taxes Direct taxes primarily comprise income tax, alongwith supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads: 1. Salaries 2. Interest on securities; 3. Income from property; 4. Income from business or professions 5. Capital gains; and 6. Income from other sources. Personal Tax All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates randing from 10 to 35 per cent. Tax on Companies All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and exemptions 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 dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of 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 Investment Corporation of Pakistan. 2. Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue. 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. Agreement for avoidance of double taxation The Government of Pakistan has so far signed agreements to avoid double taxation with 39 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. The list of countries with which Pakistan has concluded tax treaties is given below: Austria Belgium Bangladesh Canada China Denmark Egypt France Finland Germany Greece India Indonesia Iran Ireland Italy Japan South Korea Lebanon Libya Malta Mauritius Saudi Arabia Singapore Poland Romania Switzerland Thailand Sri Lanka Sweden Turkmenistan U.K. Turkey Tunisia Kazakistan U.A.E. U.S.A Customs Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery 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 services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or 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 Coding system 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 carried on by him; there ia an in-built system of input tax adjustment and a registered person can

make adjustment of tax paid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies;

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Taxation System Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below: Direct Taxes Direct taxes primarily comprise income tax, alongwith supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads: 1. Salaries 2. Interest on securities; 3. Income from property;

4. Income from business or professions 5.Capital gains; and 6.Income from other sources. Personal Tax All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates randing from 10 to 35 per cent. Tax on Companies All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and exemptions 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 dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of 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 Investment Corporation of Pakistan. 2. Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue. 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.

Agreement for avoidance of double taxation The Government of Pakistan has so far signed agreements to avoid double taxation with 39 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. The list of countries with which Pakistan has concluded tax treaties is given below: Austria Belgium Bangladesh Canada China Denmark Egypt France Finland Germany Greece India Indonesia Iran Ireland Italy Japan South Korea Lebanon Libya Malta Mauritius Saudi Arabia Singapore Poland Romania Switzerland Thailand Sri Lanka Sweden Turkmenistan U.K. Turkey Tunisia Kazakistan

U.A.E. U.S.A Customs Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery 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 services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or 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 Coding system 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 carried on by him; there ia an in-built system of input tax adjustment and a registered person can make adjustment of tax paid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies; Reply With Quote

1. 03-07-2009 12:08 AM #2 Judas Iscariote

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3. 03-07-2009 12:15 AM #4 Judas Iscariote

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Taxation Structure Task by Mohammed Ashraf | Published on 5/3/2005 The Central Board of Revenue (CBR) has made a Task Force on improving taxation structure. The prime goal seems to broaden the tax base apart from increased revenue collection, educated taxpayer, improved tax-GDP ratio, improved tax system and decreased size of parallel economy. This article is an endeavour to have a birds eye view over the existing tax culture of Pakistan in the light of tax structure including impediments 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 the corrupt. I used to think of killing the tax advisor of my company, who used to keep quoting my company owner each of my mistakes, the most famous case law ignorance of law is no excuse and that case law shambles my job. When Allah [SWT] gave me some knowledge about taxation and at one instance, I quoted 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 taxation after being caught on the occurrence of an event and the simplest answer after sympathising with them is the above mentioned case law. After listening to that case law, they normally looks at me as something evil or a brother of taxman but thats the truth. I though hard about such attitude of the people and found some 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 tax rates, 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 has equated tax planning with the terms 'avoidance' and, by extension, evasion; however, I agree that there are some forms of tax avoidance

as "improper and immoral". CBR needs to be well-advised to remember the crucial difference between tax avoidance and tax evasion. Tax avoidance involves using the tax rules to one's own legitimate advantage. By contrast, tax evasion is the illegal reduction of one's tax liability, for example by understating income or overclaiming expenses. CBR people believe that accountants would have much to answer for if they failed to ensure that clients did not pay more tax than necessary being the culprit of nourishing the tax literate society. CBR may surely agree over the fact that as professional advisers, accountants should advise clients to claim available depreciation and initial allowances in order to maximise in-year loss relief, to bring forward unadjusted depreciation or initial expenditure for optimisation and, where appropriate, to incorporate to take advantage of lower rates of Taxes and exemptions available? This is entirely consistent with the function of the tax system to provide incentives to businesses; the reality is that the vast majority of accountants do their tax planning in a transparent, legitimate fashion and have little appetite or time to devise complex tax avoidance schemes. CBR is not correct to suggest that we are operating in an environment rich in taxavoidance, where legislation is filled with "loopholes and errors". If anything, the problem lies in the fact that the law is so intricate that it leads directly to the situation where the average taxpayer frequently over-pays or under-pays tax and misses deadlines for filing and for making elections for specific reliefs. The sheer complexity 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 the law. Few have bad intentions - all they want to do is get their tax calculations correct, pay the right amount of tax on time and get on with running their businesses. The problem is that CBR seems to see tax avoidance everywhere and each business has to waste a huge amount of time defending itself in the face of often commercially ignorant CBR probes. It should also be borne in mind that, in the current challenging economic environment, businesses do not even 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 imagine entering 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 these people do not recognise that they live in a glass house. The danger in the Government's fight against fraud and its aim to ensure that everyone pays their "fair share" of tax, is that the crackdown will fail to hit the correct targets. There is no question that tax evasion is wrong - apart from being illegal - and that

the Government should focus its efforts on its prevention. Any part of the additional CBR funding which clamps down on such behaviour is money well spent. I support any measures which prevent or combat fraud, but I am, however, concerned that tax inspectors looking for soft targets may concentrate on small businesses and individuals, rather than tackling serious and deliberate fraud. Furthermore, if the authorities try to erode the ability of firms to plan their tax affairs effectively under the law, this will be to the serious detriment of businesses and the economy and, ultimately, against the interests of Pakistan. However, tax literate society has remembered the following. Maktab-e-tax kadastoorniraladaikha Uskoappealoosaichuttinamilijisnaisabaqyaadkiya [School of tax has a unique rule. One who learns the lesson used not to get the leave from the appeals] Corruption has pervaded all sectors of our society. But in today's business environment, the implications of corruption 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 brings the integrity of professions and of business into question. It deprives government and regulators of credibility and weakens the forces of law and order. In such a scenario, public morale inevitably suffers and social hardship can be the inevitable result. Everyone has a moral duty to fight corruption. But no one can wage this battle alone. Governments must commit themselves to taking the first step in introducing a solid legislative and regulatory framework proscribing corrupt acts, dealing firmly with all who commit them, and protecting those who "blow the whistle" from the dangers of retaliatory action. What is corruption? Bribery, fraud, illegal payments, money laundering, and smuggling - all these come to mind as obvious examples. But corruption does not always involve money: it can present itself in the guise of special favours or influence. In today's complex and rapidly changing environment, the potential variations of corruption are as many as there are criminal minds to devise them. An all-purpose rulebook is inconceivable: the fight against corruption must take the broadest possible approach if it is to have real impact. As far as CBR is concerned, it failed to take advantage of a most famous case law of post second world war in relation to crime and corruption. During the Second World War a wine seller sold the wines to the enemy forces. At the end, a case of treason

has been filed against the wine seller for selling the wine. The evidence was concrete and the judge was about to penalize the culprit, suddenly, the Inland Revenue filed a claim that the profits of the wine seller needs to be calculated in order to collect the tax. The core reason is that income tax needs to be paid even over the illegal business profits but such payments do not legalize the business. 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 of taxman, literacy rate and lack of tax education, no intention to pay tax from the earnings, afraid of coming into tax net, loopholes tax legislation, competitive corporate tax rate under global tax competition, personal income 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 the scheme of Income Tax Ordinance, 2001. However, CBR is now moving towards Sales Tax and the most important step in this regard is the suspension of Sales Tax Audit for six months but this is not a long term solution. Legislators need to improve the basic structure of Sales Tax Act, 1990 to make it taxpayer friendly. Every problem in the Sales Tax Act, 1990 is solved either through a Circular or SRO which complicates the issue. It is suggested that the Sales Tax Act, 1990 need to be revamped right from the scratch bearing the existing Sales Tax Structure, Problems, Organisational Structure of Sales Tax Department, Long/Short term Macro and Micro Economic policies in mind. In furtherance, CBR need to work on Excise Tax and this requires a clear indication from the government either to abolish it and replace it with 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 is not mutually exclusive in the case of main cities like Karachi, Lahore, Peshawar, Islamabad etc. This situation requires two different strategies. In the small towns and cities, Government needs to increase the literacy rate as this is something beyond the ambit of CBR, however, in major cities CBR needs to increase the tax literacy rate. This does not only involve creation of taxpayer facilitation centre and the advertisement in the newspapers and television but something more than that like TV dramas, training by CBR to taxpayer Compliance expected by CBR, Avoid paying additional taxes, Be Safe and Secure in terms of Inadmissible taxes, The Direct/Indirect Tax Regime etc. TV Drama may include normal taxation problems, common misconceptions of peoples, problems normally faced 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 problem

without requiring a middle man. In future, there will be no need to revamp the law after a span of long time as 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 loophole in the taxation laws. This argument is based on the concept that when a law requires a person to get itself registered with the respective tax authority. For instance, there is no requirement in Income Tax Ordinance, 2001 for registration of a person under the law; however, the requirement is for filing of Income Tax Return. The Taxation Structure Task committee needs to look at the most common problem, from CBR point of view, of ascertaining the point of time of registration. I would suggest basis year rule of UK for improving the tax year concept and VATA 1994 for registration under Sales Tax law on advance stock basis at 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 of reasons. People are afraid about their past, this is their prime concern, as they do not know what will be going to happen with them about their past. However, a number of immunity schemes had been introduced for the taxpayers in the past but nothing specially have been planned for bringing the new taxpayers into the tax net. Taxation administrative and legislative loopholes are another grey area and much had been written by the experts over legislative aspects; hence, I am confining this to administrative aspect. Suppose, a person imports some goods and sells the same without altering its basics of the goods, that is, Import trading. Said person files his sales tax return and statement under section 115(4). The Sales tax department match the data with the import data input at the custom stage and get the closing stock figure by reconciling the same with the goods imported automatically. The Income Tax department verifies the statement under section with the custom stage input and sales tax input through an online verification on its integrated computer system on WAN. Such a setup will serve as deterrent to the fraudulent aspects apart from the fact that less botheration 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 has two aspects, micro and macro level. From micro aspect, what the benefits existing taxpayers is getting? And what the benefits will a prospective taxpayer may get? These two questions need to be answered in order to increase the tax GDP ratio. From macro aspect, what is the formula and basis of utilization of tax money? Is the Government authorized to use the money for debt servicing of the past loan or it needs to be utilized for the benefits of the citizens These key question are some sort of policy decisions which needs to be taken at the strategic governmental level not at tactical level CBR. Tax structure task

committee may submit these queries as part of their recommendation. Governments must recognise that corporation tax rates must be internationally competitive if they want to attract and retain companies and jobs. But cutting tax rates is an ongoing process in order to stay competitive. Pakistans corporation tax rates are much higher than the OECD averages. It is worthwhile here 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 rates around the world suggests that how countries are seeking to provide a competitive environment for business. In order to gain the advantage of geo strategic location of Pakistan, committee must suggest a drastic corporate tax rate reduction pre-requisite for seeking the requisite increase in share of international and European corporate headquarters. Middle and low income earners in particular have been hit hard over the past few years by the introduction of the goods and services tax (GST) and by bracket creep, as demonstrated by a recent OECD report into the taxation on wages. CBR thinks that any new tax credit or deduction from taxable income is a direct loss to the revenue which is just one side of the mirror. This was in part aimed at stimulating the economy by encouraging higher consumer spending. Committee should suggest the induction of medical expense without 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 government should firstly examine whether there are inefficiencies in the way it collects tax and monitors compliance. A thorough investigation into how efficient the government really is in collecting tax and identifying tax evaders would no doubt uncover significant additional revenue. Middle and low income earners should be the 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 the community Tax Collector and Tax Practitioners including the legend EbrahimSidat, however, I reserve my right to disagree with some past issues but I think a teacher is always happy with curious student. The committee is collecting the suggestions from the grass root of Tax Collectors while the problems of taxpayers are known by the tax practitioners. The key aspect in collecting the information and suggesting a conclusion lies in the balance between achieving the targets and on the other resolving the queries of the taxpayers including their current grievances.

1.

Pakistan - Tax Structure

Taxation System Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below: Direct Taxes Direct taxes primarily comprise income tax, alongwith supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads: 1. Salaries 2. Interest on securities; 3. Income from property; 4. Income from business or professions 5.Capital gains; and 6.Income from other sources. Personal Tax All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates randing from 10 to 35 per cent. Tax on Companies All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and exemptions 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 dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of 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 Investment Corporation of Pakistan. 2. Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue. 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. Agreement for avoidance of double taxation The Government of Pakistan has so far signed agreements to avoid double taxation with 39 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. The list of countries with which Pakistan has concluded tax treaties is given below: Austria Belgium Bangladesh Canada China Denmark Egypt France Finland Germany Greece India Indonesia Iran Ireland Italy Japan South Korea Lebanon Libya Malta Mauritius Saudi Arabia Singapore Poland Romania Switzerland Thailand Sri Lanka Sweden Turkmenistan U.K. Turkey Tunisia Kazakistan U.A.E. U.S.A Customs Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury

items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery 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 services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or 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 Coding system 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 carried on by him; there ia an in-built system of input tax adjustment and a registered person can make adjustment of tax paid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies; Reply With Quote

2. 03-07-2009 12:08 AM#2

Judas Iscariote

Banned Members

Join Date Nov 2005 Posts 272 Thanks 3,430 Thanked 3,679 Times in 2,382 Posts

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

Reply With Quote

3. 03-07-2009 12:11 AM#3

Judas Iscariote

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Join Date Nov 2005 Posts 272 Thanks 3,430 Thanked 3,679 Times in 2,382 Posts

Further detailed thesis: Taxation system of Pakistan: structure and trends Reply With Quote

4. 03-07-2009 12:15 AM#4

Judas Iscariote

Banned Members

Join Date Nov 2005 Posts 272 Thanks 3,430

Thanked 3,679 Times in 2,382 Posts

Taxation Structure Task

by Mohammed Ashraf | Published on 5/3/2005 The Central Board of Revenue (CBR) has made a Task Force on improving taxation structure. The prime goal seems to broaden the tax base apart from increased revenue collection, educated taxpayer, improved tax-GDP ratio, improved tax system and decreased size of parallel economy. This article is an endeavour to have a birds eye view over the existing tax culture of Pakistan in the light of tax structure including impediments 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 the corrupt. I used to think of killing the tax advisor of my company, who used to keep quoting my company owner each of my mistakes, the most famous case law ignorance of law is no excuse and that case law shambles my job. When Allah [SWT] gave me some knowledge about taxation and at one instance, I quoted 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 taxation after being caught on the occurrence of an event and the simplest answer after sympathising with them is the above mentioned case law. After listening to that case law, they normally looks at me as something evil or a brother of taxman but thats the truth. I though hard about such attitude of the people and found some 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 tax rates, 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 has equated tax planning with the terms 'avoidance' and, by extension, evasion; however, I agree that there are some forms of tax avoidance as "improper and immoral". CBR needs to be well-advised to remember the crucial difference between tax avoidance and tax evasion. Tax avoidance involves using the tax rules to one's own legitimate advantage. By contrast, tax evasion is the illegal reduction of one's tax liability, for example 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 did not pay more tax than necessary being the culprit of nourishing the tax literate society. CBR may surely agree over the fact that as professional advisers, accountants should advise clients to claim available depreciation and initial allowances in order to maximise in-year loss relief, to bring forward unadjusted depreciation or initial expenditure for optimisation and, where appropriate, to incorporate to take advantage of lower rates of Taxes and exemptions available? This is entirely consistent with the function of the tax system to provide incentives to businesses; the reality is that the vast majority of accountants do their tax planning in a transparent, legitimate fashion and have little appetite or time to devise complex tax avoidance schemes. CBR is not correct to suggest that we are operating in an environment rich in tax-avoidance, where legislation is filled with "loopholes and errors". If anything, the problem lies in the fact that the law is

so intricate that it leads directly to the situation where the average taxpayer frequently over-pays or under-pays tax and misses deadlines for filing and for making elections for specific reliefs. The sheer complexity 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 the law. Few have bad intentions - all they want to do is get their tax calculations correct, pay the right amount of tax on time and get on with running their businesses. The problem is that CBR seems to see tax avoidance everywhere and each business has to waste a huge amount of time defending itself in the face of often commercially ignorant CBR probes. It should also be borne in mind that, in the current challenging economic environment, businesses do not even 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 imagine entering 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 these people do not recognise that they live in a glass house. The danger in the Government's fight against fraud and its aim to ensure that everyone pays their "fair share" of tax, is that the crackdown will fail to hit the correct targets. There is no question that tax evasion is wrong - apart from being illegal - and that the Government should focus its efforts on its prevention. Any part of the additional CBR funding which clamps down on such behaviour is money well spent. I support any measures which prevent or combat fraud, but I am, however, concerned that tax inspectors looking for soft targets may concentrate on small businesses and individuals, rather than tackling serious and deliberate fraud. Furthermore, if the authorities try to erode the ability of firms to plan their tax affairs effectively under the law, this will be to the serious detriment of businesses and the economy and, ultimately, against the interests of Pakistan. However, tax literate society has remembered the following. Maktab-e-tax kadastoorniraladaikha Uskoappealoosaichuttinamilijisnaisabaqyaadkiya [School of tax has a unique rule. One who learns the lesson used not to get the leave from the appeals] Corruption has pervaded all sectors of our society. But in today's business environment, the implications of corruption 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 brings the integrity of professions and of business into question. It deprives government and regulators of credibility and weakens the forces of law and order. In such a scenario, public morale inevitably suffers and social hardship can be the inevitable result. Everyone has a moral duty to fight corruption. But no one can wage this battle alone. Governments must commit themselves to taking the first step in introducing a solid legislative and regulatory framework proscribing corrupt acts, dealing firmly with all who commit them, and protecting those who "blow the whistle" from the dangers of retaliatory action. What is corruption? Bribery, fraud, illegal payments, money laundering, and smuggling - all these come to mind as obvious examples. But corruption does not always involve money: it can present itself in the guise of special favours or influence. In today's complex and rapidly changing environment, the potential variations of corruption are as many as there are criminal minds to devise them. An all-purpose rulebook is inconceivable: the fight against corruption must take the broadest possible approach if it is to have real impact.

As far as CBR is concerned, it failed to take advantage of a most famous case law of post second world war in relation to crime and corruption. During the Second World War a wine seller sold the wines to the enemy forces. At the end, a case of treason has been filed against the wine seller for selling the wine. The evidence was concrete and the judge was about to penalize the culprit, suddenly, the Inland Revenue filed a claim that the profits of the wine seller needs to be calculated in order to collect the tax. The core reason is that income tax needs to be paid even over the illegal business profits but such payments do not legalize the business. 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 of taxman, literacy rate and lack of tax education, no intention to pay tax from the earnings, afraid of coming into tax net, loopholes tax legislation, competitive corporate tax rate under global tax competition, personal income 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 the scheme of Income Tax Ordinance, 2001. However, CBR is now moving towards Sales Tax and the most important step in this regard is the suspension of Sales Tax Audit for six months but this is not a long term solution. Legislators need to improve the basic structure of Sales Tax Act, 1990 to make it taxpayer friendly. Every problem in the Sales Tax Act, 1990 is solved either through a Circular or SRO which complicates the issue. It is suggested that the Sales Tax Act, 1990 need to be revamped right from the scratch bearing the existing Sales Tax Structure, Problems, Organisational Structure of Sales Tax Department, Long/Short term Macro and Micro Economic policies in mind. In furtherance, CBR need to work on Excise Tax and this requires a clear indication from the government either to abolish it and replace it with 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 is not mutually exclusive in the case of main cities like Karachi, Lahore, Peshawar, Islamabad etc. This situation requires two different strategies. In the small towns and cities, Government needs to increase the literacy rate as this is something beyond the ambit of CBR, however, in major cities CBR needs to increase the tax literacy rate. This does not only involve creation of taxpayer facilitation centre and the advertisement in the newspapers and television but something more than that like TV dramas, training by CBR to taxpayer Compliance expected by CBR, Avoid paying additional taxes, Be Safe and Secure in terms of Inadmissible taxes, The Direct/Indirect Tax Regime etc. TV Drama may include normal taxation problems, common misconceptions of peoples, problems normally faced 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 problem without requiring a middle man. In future, there will be no need to revamp the law after a span of long time as 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 loophole in the taxation laws. This argument is based on the concept that when a law requires a person to get itself registered with the respective tax authority. For instance, there is no requirement in Income Tax Ordinance, 2001 for registration of a person under the law; however, the requirement is for filing of Income Tax Return. The Taxation Structure Task committee needs to look at the most common problem, from CBR point of view, of ascertaining the point of time of registration. I would suggest basis year rule of UK for improving the tax year concept and VATA 1994 for registration under Sales Tax law on advance stock basis at 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 of reasons. People are afraid about their past, this is their prime concern, as they do not know what will be going to happen with them about their past. However, a number of immunity schemes had been introduced for the taxpayers in the past but nothing specially have been planned for bringing the new taxpayers into the tax net. Taxation administrative and legislative loopholes are another grey area and much had been written by the experts over legislative aspects; hence, I am confining this to administrative aspect. Suppose, a person imports some goods and sells the same without altering its basics of the goods, that is, Import trading. Said person files his sales tax return and statement under section 115(4). The Sales tax department match the data with the import data input at the custom stage and get the closing stock figure by reconciling the same with the goods imported automatically. The Income Tax department verifies the statement under section with the custom stage input and sales tax input through an online verification on its integrated computer system on WAN. Such a setup will serve as deterrent to the fraudulent aspects apart from the fact that less botheration 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 has two aspects, micro and macro level. From micro aspect, what the benefits existing taxpayers is getting? And what the benefits will a prospective taxpayer may get? These two questions need to be answered in order to increase the tax GDP ratio. From macro aspect, what is the formula and basis of utilization of tax money? Is the Government authorized to use the money for debt servicing of the past loan or it needs to be utilized for the benefits of the citizens These key question are some sort of policy decisions which needs to be taken at the strategic governmental level not at tactical level CBR. Tax structure task committee may submit these queries as part of their recommendation. Governments must recognise that corporation tax rates must be internationally competitive if they want to attract and retain companies and jobs. But cutting tax rates is an ongoing process in order to stay competitive. Pakistans corporation tax rates are much higher than the OECD averages. It is worthwhile here 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 rates around the world suggests that how countries are seeking to provide a competitive environment for business. In order to gain the advantage of geo strategic location of Pakistan, committee must suggest a drastic corporate tax rate reduction pre-requisite for seeking the requisite increase in share of international and European corporate headquarters. Middle and low income earners in particular have been hit hard over the past few years by the introduction of the goods and services tax (GST) and by bracket creep, as demonstrated by a recent OECD report into the taxation on wages. CBR thinks that any new tax credit or deduction from taxable income is a direct loss to the revenue which is just one side of the mirror. This was in part aimed at stimulating the economy by encouraging higher consumer spending. Committee should suggest the induction of medical expense without 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 government should firstly examine whether there are inefficiencies in the way it collects tax and monitors compliance. A thorough investigation into how efficient the government really is in collecting tax and identifying tax evaders would no doubt uncover significant additional revenue. Middle and low income earners should be the 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 the community Tax Collector and Tax Practitioners including the legend EbrahimSidat, however, I reserve my right to disagree with some past issues but I think a teacher is always happy with curious student. The committee is collecting the suggestions from the grass root of Tax Collectors while the problems of taxpayers are known by the tax practitioners. The key aspect in collecting the information and suggesting a conclusion lies in the balance between achieving the targets and on the other resolving the queries of the taxpayers including their current grievances. .

Pakistan's population is 150 million nearly half (40%) are bellow 18 and out of rest of population, 60% are based in rural area. there is no income tax on agriculture sector. Also one third of country's populaiton lives bellow poverty line. So practically 1.5 million(who pay tases) are out of some 20 million roughly. The largest number of tax payer belong to service sector (public and private). Avg. income in public sector varies, tax payers belong to grade 17 or above avg income for grade 17 is around Rs 150,000 ~ 200,000 /year (including allownces) for private sector, it is difficult, roughly we can take Rs.100,000 ~200,000 /year. but it goes up for managment level job, mostly in excess of 200,000 officially per capita income in Pakistan is $450/ year .. Pakistan Taxation To tax (from the Latin taxo; I estimate, which in turn is from tang?; I touch) is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. The same is the definition of tax in Pakistan. You have to pay or plan to avoid it , no other way out. Taxes in Pakistan consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). Tax in Pakistan is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority and is any contribution imposed by government, local government or municipal government of Pakistan under various names like toll, tribute, tallage, gable, impost, duty, custom, excise, subsidy, aid, supply, or other name. Governments of Pakistan uses different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business, or to redistribute resources between

individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working.

Objects of Taxation system in Pakistan

The main purpose is revenue. Taxes in Pakistan are levied to raise money in order to spend on Pakistan army (Improve defence), roads (Infrastructure development), schools and hospitals (Social Development of the people of Pakistan) , and on more indirect government functions(market regulation and so forth). A second object of government of Pakistan for levying tax is Redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections. Variable tax rates are basically done to achieve the same. A third purpose of taxation is Repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax. Masood&MasoodSpecialises in full range of tax services and is one of the leading firms giving full support from tax planning to tax litigation, from tax compliance Poor Tax System in Pakistan!

The ongoing corruption and terrorism in Pakistan indicates that Pakistan has plunged into anarchy and chaos. Law and order and poor tax system has put no stone unturned to further aggravate the situation. A country cannot be stable unless its tax collection system is streamlined but unfortunately Pakistan seems to have failed in implementing effective and strong tax collection policy. The tax collectors are themselves corrupt so how Pakistan can make progress. We can see that our corrupt bureaucracy and politicians have adopted tactics to evade from taxes.

However, a large number of Pakistanis still want to pay tax but their concern is the corrupt elements who are grabbing a huge amount in the name of tax collection. The situation of paying tax in private and non-governmental organizations is vice versa! The government has recently started collecting a huge amount in the name of tax per month from the salaries of the employees whose income is meager to make ends meet. I dont know why the government has started collecting tax from employees of such organizations in the name of so-called tax whereas the collection from its government organizations and business community is inactive. Of course, if a person is getting a handsome salary then it makes sense to collect tax. However if government is really sincere in bringing transparency in tax collection the people of Pakistan will really support them but there should be a fair and equal system applicable to all in the country without any discrimination. The government should review its vague policy and stop collecting money from low income employees and instead should focus on real tax evaders to save Pakistan from further economic instability. IBADAT KHAN Lahore

Effective taxation system stressed. (daily times)

ISLAMABAD: President of Islamabad Chamber of Commerce & Industry (ICCI), MahfoozElahi has said that the current system of taxation is completely ineffective which needs to be revolutionised by bringing more people in the tax-net. He said that in Pakistan just a handful of people pay taxes and the government is still following the policy of milking the same old cows. He was of the view that tax should be levied on the income basis and every sector of the economy should be taxed. MahfoozElahi said the recent foods have had a devastating impact on the countrys economy and the government stopping all development projects has shifted its entire focus to provide help to the affectees. He feared this policy would hurt the process of development and attracting foreign investment in the country. staff report