Taxation Structure in Pakistan

(Federal, Provincial and District)

by
Mr. Muhammad Abdullah Yusuf
Former Chairman
Federal Board of Revenue
 Format of Presentation
Historical Prospective of Federal Board of Revenue
Revenues Collection Philosophy
Types of Taxes
Provincial Taxation System
Subsidiarity in Tax Collection
The IMF, WTO and Donor Conditionalities
Role of Taxation System in Pakistan
Revenue Collection
Historical Tax Collection (Federal)
Tax to GDP Ratio
Reasons for Low Taxation Performance
Remedies & Recommendations
The Federal Board of Revenue Historical
Perspective
Created on April 1, 1924 through enactment of the Federal Board of
Revenue Act, 1924.
In 1944, a full-fledged Revenue Division was created under the Ministry of
Finance. After independence, this arrangement continued up to 1960
On 31 August 1960, on the recommendations of the Administrative Re-
organization Committee, FBR was made an attached department of the
Ministry of Finance.
In 1974, the post of Chairman FBR was created with the status of ex-
officio Additional Secretary.
On October 22, 1991, status of Revenue Division was given to FBR. This
arrangement still continues.
 Revenue Collection Philosophy

Why taxes are needed

The divisible pool
Share of Provinces in Federal Taxes 58 %
Debt Service of local & foreign loans
Defense & Civil Administration Expenditure
Subsidies of Public Sector Enterprises
Development Expenditure
 Federal Taxes
Direct Taxes
Corporate Tax
Withholding Tax
Advance Income Tax
Turn Over Tax

Indirect Taxes
Sales Tax
Customs Duties
Other Import Duties (e.g. anti dumping duties etc.)
Regulatory Duties
Federal Excise Duty
 Tax Collection Procedures

Direct Taxes
Income Tax on individuals
Corporate Tax payable at end of financial year on
profits of a company
Withholding Tax payable on each payment for goods
or services.
Advance Income Tax payable quarterly when Income
exceeds a prescribed limit
Turnover Tax payable on the turnover of a company
 Tax Collection Procedures Indirect Taxes

Sales Tax
Collected at Import stage on imported goods
Collected at each stage of value addition on
domestically produced goods
Adjustment of Sales Tax paid at previous stage allowed
Collected from the final purchaser at the point of
sale
Also leviable on Professional Services.
Payable to provincial governments.
 Tax Collection Procedures Indirect Taxes

Customs Duties
Customs Duties - Levied on Import of goods at the
port of entry
Deferred payment allowed to Private & Commercial
Bonded Warehouses
Deferred payment on units manufacturing under
customs Bonds Scheme
No Customs Duties levied for imported raw material
for export.
 Tax Collection Procedures Indirect Taxes

Excise Duty
levied on import of certain items
Levied on manufacturing of certain goods.
Major portion emanates from domestic sector
Federal excise duty has contributed 8.8% of total tax
collection during 2010-11.
It is a dying tax and would be eventually replaced
with Sales Tax
 Provincial Taxation System
Every province has its own taxation system
Taxation systems of Punjab and Sindh are more developed
than KPK while Balochistan has weak tax system.

Revenue Authorities in Provinces

Punjab Revenue Authority (PRA) and Sindh Revenue Board (SRB)
were established to collect sales tax on services from Punjab and
Sindh respectively.
Standard rate of GST is 16%, however in certain cases there are
reduced rates from 4% to 10%.

List of services generally included is attached

 Type of Provincial Taxes implemented on Services Sector

Hotels, Clubs, Caterers

Electronic Media Advertisements including Cable TV

International Freight Forwarders
Custom Agents, Ship Chandlers, Stevedores

Sea Port Management Services
Courier Services

Internet Services
Telecommunication

Contractual execution of work or furnishing of supplies
Insurance
Foreign Exchange Dealers/Exchange
Banks & Non-banking Financial Institutions

Companies/Money Changers/Money Exchangers
Stock Brokers
Software on IT-based system development
Shipping Agents

consultancy
Restaurants

Technical scientific & Engineering Consultancy
Advertisements on Hoarding Boards, Pole Signs and

Tour Operators
Manpower Recruitment Agency

Sign
Security Agency

Boards
Mining & Exploration Services

Franchise
Advertising Agents
Motels, Guest Houses, Marriage Halls & Lawns
Share Transfer Agents

(including pandal & shamina services)

Business Support Services

International Incoming Calls

Property Dealers

Property developers/promoters
Fashion Designers
Personal Care Services of Beauty Parlors, Clinics,
Architects, Town Planners & Interior Decorators

Sliming Clinics including Cosmetic & Plastic Surgery

Rent-a-Car
Management Consultancy including Fund/Asset
Car/Automobile Dealers

Management
Port Services
Toll manufacturing Services (industrial vending)
Excise and Taxation Department of Provinces

Provinces are generally having following taxes in addition to

GST on Services
Property Tax
Motor Vehicles Tax
Entertainment Duty
Professional Tax
Hotel Tax
 Subsidiarity in Tax Collection
Tax collection authority delegated to
Provincial Governments
Appropriate powers delegated to various
officials in respective statutes
Large Taxpayers units and Regional Tax Offices
delegated full powers
Customs, Excise and Sales Tax officials
delegated appropriate powers down to circle
level
IMF, WTO and Donor Conditionalities
Imposition of Sales Tax
Removal of Import controls & Reduction of Import
Duties
Reduces protection to local industry
Reduces quantum of import duties collected
Increases trade flow from developed to developing
economies
Devaluation of Pakistani Currency
Increases government expenditure
Increases poverty
Increases cost of living
Role of Taxation System in Pakistan
In Pakistan role of taxation is very important in economic development. The
Role of taxation in the development strategy has to be viewed in the
background of the functions which a taxation system performs. Its main
functions in relation to economic development are as follows.

Functions of Taxation in Relation to Economic

Development
Revenue Collection-Primary Function of Taxation
The primary function of a tax system is to raise revenue for the government
for its public expenditure. So the first goal in the development strategy as
regards taxation policy is to ensure that this function is discharged
adequately.
 Revenue Collection in Pakistan
Tax revenue in Pakistan contributes about 76% towards total revenue
In Pakistan, indirect taxes have major contribution towards public revenue,
with its heads like sales tax, custom duty and excise duty etc. which
workout to 61% of the total taxes.
Breakdown of the total collection from year 2005-06 to 2013-14 is under;

Structure of Federal Tax Revenue (Rs. Billion)

Indirect Taxes Tax Rev as %
Year Direct Taxes Total FBR
Customs Sales Excise of GDP
2005-06 225 138 295 55 714 9.4
2006-07 334 132 309 72 847 9.2
2007-08 388 151 377 92 1008 9.5
2008-09 444 148 452 118 1161 8.8
2009-10 526 160 516 125 1327 8.9
2010-11 603 185 633 137 1558 8.5
2011-12 738 217 805 123 1883 9.4
2012-13 743 240 843 121 1946 8.7
2013-14 890 255 962 152 2259 8.7
Federal Board of Revenue
Tax-wise Share (%) in Collection 2013-14
Federal Excise
6.7 %

Direct Taxes
39.4 %

Sales Tax
42.6 %

Customs Duty
11.3 %
 Annual Revenue Collection
(1996-97 to 2013-14) (Rs. in Billion)
Growth in Target
YEARS Target Collection Tax to GDP ratio
Collection (%) Achieved (%)
1996-97 286.0 282.1 5.2 98.6 11.6
1997-98 297.6 293.6 4.1 98.7 11.0

1998-99 308.0 308.5 5.1 100.2 10.5

1999-00 351.7 347.1 12.5 98.7 9.1

2000-01 406.5 392.3 13.0 96.5 9.3
2001-02 414.2 404.1 3.0 97.6 9.1
2002-03 458.9 460.6 14.0 100.4 9.4
2003-04 510 520.8 13.1 102.1 9.2
2004-05 590 590.4 13.4 101.8 9.1
2005-06 690 713.4 20.8 103.4 9.4
2006-07 835 847.2 18.8 101.5 9.8
2007-08 1,000 1008.1 18.9 100.8 9.8
2008-09 1,179 1157.0 14.8 98.1 8.9
2009-10 1,380 1,327.4 14.7 96.0 9.0
2010-11 1,667 1587.0 19.6 95.2 8.8
2011-12 1952.3 1883.0 18.2 96.5 9.1
2012-13 2007 1939.0 3.0 96.6 8.8
2013-14 2275 2259 16.5 99.2 8.7
 Tax Revenue ratio to GDP
The ratio of tax revenue to GDP is an essential and regular parameter to
measure and judge the success of a country's fiscal management.
In Pakistan, tax to GDP ratio is 8.7% in 2013-14.
This is one of the lowest in the World, lower than even Afghanistan
(9.4%) and Ethiopia (10%). Tax to GDP ratio of other relevant countries is:
Thailand 17%, India (16%), South Korea (16%), Malaysia (15%), Philippine
(14%) Indonesia (14%) and Sri Lanka (13%).
Tax to GDP-Ratio of developed countries ranges from 25% to over 50% in
Sweden, Tax-to-GDP ratio is over 50% with 50% of the population paying
income tax similarly Tax to GDP-Ratio of Turkey is 32.5%.
It is obvious that Pakistan, one of the best endowed countries in the
World, is performing sub-optimally economically.
 Reasons for low Taxation Performance
Pakistans tax system underperforms because of a the following reasons;
Complexity
The taxpayer system is complex. Most of the countrys revenues-customs
and general sales tax (GST)are generated by trade. Customs regulatory
duties are an example of complexity (as are sales and income taxes)
Ineffective System and Procedure, consequently lack of
enforcement. Due to these reasons there is tax gap of 79%.
The Inequitable Tax Policy
There is a total disconnect in the tax policy, the poor are heavily taxed but
the rich are spared. Due to discriminatory taxes, a narrow tax base and
indirect taxes which put the tax burden on the poor.
Pakistan Economic Outlook
Pakistan continues to lag significantly behind other countries of the region
in advancing tax reform. The social and political instabilities are a constant
hindrance in stabilizing macroeconomic environment.
 Demography of Pakistan
Demographic trends of a country play important role in tax to GDP ratio.
More professionals and people in employment, higher is the tax to GDP
ratio. However demographic trends in Pakistan are not favorable for
revenue collection.
Socio Economic Factors & low Tax to GDP ratio in Pakistan
Socio economic problem facing Pakistan are glaring. Law and order
situation, terrorism, poverty and unemployment are some of the social
problems which are taking toll over the revenue collection of Pakistan.
Low Compliance
Pakistan has a very poor tax filing record. Less than 1 percent of Pakistans
population files for taxes, well below 5 percent of India or 16 percent of
Argentina. Taxpayers evade taxes by simply not filing tax returns or by
paying low taxes due to special privileges obtained through legal
concessions. As a result, tax payments are concentrated among few
taxpayers as only 1.8 million file tax returns out of 4.2 million registered
taxpayers.
 Narrow Tax Base
Greatest threat posed to revenue collection in our country is our narrow tax base
which has a direct correlation with low tax-to GDP ratio. Measurement of narrow
tax base is important because the mobilization of tax revenue has a direct nexus
with the number of taxpayers participating actively in the system set up to levy
and collect taxes.
Faulty Tax Policy
Tax policy is the government's approach to taxation, both from the practical and
normative side of the question. Countries with high tax to GDP ratios follow a
policy with focus on progressive taxes (taxation at rates which rise with income)
so for as it corrects income inequality and precludes enduring differences in
society. But in Pakistan whole emphasis is on Indirect taxes. Even direct taxes are
being collected in shape of indirect taxes.
Tax Amnesty Scheme
One of the incentives available for tax delinquents in our country is the frequent
announcements of tax amnesty scheme which on one hand encourage the tax
evaders, and on the other hand let down the honest taxpayer who have
diligently paid their due taxes. The tax amnesty and money whitening scheme
are acts of betrayal and cheating with the honest taxpayers and the nation.
 Inefficient Tax Administration
The big tax gap and low productivity ratios are symptoms of weak tax
administration. Pakistans tax administration is constrained by poor
management, low capacity due to weak human resources, and a lack of
effective key supporting information technology (IT) systems, which all
together provide enough scope for discretion and corruption. The incidence
of bribes paid to tax officers is high, particularly by large firms.

Low and declining Sub-national Tax Revenue

The revenue effort by provinces is extremely weak, is worsening, and falls
well short of their new expenditure responsibilities under the 18th
Amendment to the constitution approved in 2010. In the last two decades,
the provincial tax to GDP ratio has oscillated between 0.35 and 0.55 percent
of GDP but on a declining trend.
 Undocumented economy of Pakistan
The undocumented economy is undeclared income earned through
some economic activity over a period of time. A large size of the
undocumented economy includes cases of non-declaration of income
due to ignorance, fear from harsh attitude of tax collector, and low
literacy rate.

Weak audit and enforcement

One of the major problems in Pakistan which also hinders the smooth
audit and examination procedure is the lack of documentation
particularly in the case of individuals and also pertains to the firms and
small corporations. It implies that incomplete and inaccurate data is
provided by the taxpayer with poor record keeping

Corruption
Corruption is considered the root cause of all social problems including
lack of good governance and low tax to GDP ratio in Pakistan.
 Tax Exemptions
Section 53 of the Income Tax Ordinance 2001, section 13 of sales tax act
1990 and section 16 of Federal Excise Act 2005 etc. empowers the Federal
Government to exempt from tax any income or classes of income, or
person. Tax exemptions are granted under restrictive set of conditions but
take many shapes with far reaching revenue implications. In certain cases
these are granted to promote investment, exports and growth, in other
cases privileged personalities are entitled to such exemption, or they are
allowed to vulnerable groups to preserve equity in the tax system.

Sectoral Discrepancy in Tax Collection

A sectoral analysis to determine the real factors responsible for creating
the gap between tax to GDP ratio shows that services and agriculture
sectors are the major tax non compliant sectors. The number of
subsectors whose tax contribution does not match with their contribution
to GDP is far too many. These include wholesale and retail sector,
transport, construction, hotels/restaurants and commission agents.
 Remedies & Recommendations
Tax to GDP ratio is low and has to be enhanced. There are two areas
which need to be focused;
Tax Administration Reforms
Tax Policy Reforms
Following are the remedies and recommendations which have been divided
under two broad heads:
A. Tax Administration Reforms
A lot of efforts have been made but unfortunately it has been one step
forward and two steps backward approach. Serious focus need to be made
in this area. Stability in tenure of senior tax managers, investment in key soft
infrastructure (IT) and qualified human resources, and governance
improvements are all urgently required. These actions have been on the tax
reform agenda for years, if not decades. Their success depends largely on
the decision power and sustained implementation capacity of the political
leadership. The following steps would help;
 Consider converting the FBR into a fully autonomous institution
This is consistent with best practices worldwide. It would help prevent
political interference, foster accountability, and support its move into a
performance-based institution.

Strengthen the information and reporting at FBR

Management tools including annual and monthly action plans, regular
review of key performance indicators, performance reporting as a
monitoring tool, and stringent internal controls, and defined policies and
procedures according to function will strengthen the department. Transfers
and postings before end of the term results in reducing staffs competency,
therefore stability of tenure is essential for capacity building coupled with
rigorous training in the relevant fields.
 Data Warehousing
The concept of a data warehouse is vital for broadening the tax base. NADRA is
the primary custodian of the data of persons living in Pakistan. This data should
be used as primary identifier and linked with the data of the tax payers available
with the FBR including the records related to customs, sales tax, income tax, and
federal excise duty.

The CNIC number of a person should be the identifier for all tax transactions,
both at the Federal and the Provincial level. National Tax Numbers should be
restricted to the companies only. A central number will make filing easy for the
tax payers, and will provide access to all information to all the relevant tax
collection authorities.

The complete filing and assessment process must be computerized, with proper
authorization checks and internal controls built into the system. Notices and
other communication made with the tax payers should be numbered, dated and
generated through the system. The system should provide audit trail of each and
every assessment, starting from filing till completion of the assessment; even
including the proceedings of the cases referred to the tribunals and the Courts.
 Inland revenue (I/Tax, S/Tax and FED)
For Inland Revenue Integrated Management System (IMS) is required which is
already in advance stage of development. The concept of Data Warehouse
which collects and stores third party information of each and every person based
on his CNIC. This data is then compared with the return filed or not filed by the
Tax payers and non-taxpayers. After the automatic data mining there is an audit
tracking system which would track the actions taken for record purpose. One
latest part of the data warehouse information being used by a large number of
countries is online access to each and every transactions taking place in the
banks. If this is introduced, then this will take care of the huge tax gap that we
have of Tax to GDP ratio of almost 79%.
Computerized Information System
Efficiency and cost effectiveness can only be achieved if the available technology is
properly utilized. FBR has embarked upon a colossal computerization program,
which will bear fruit only when a central data warehouse links all departments
within FBR, and acquire and disseminate information from and to third party
sources especially Financial Institutions. Data mobilization with an integrated
database system linked with NADRA will facilitate in coordination and sharing of
information between the federal, provincial and local governments.
 Strong Audit
In Pakistan the Universal Self Assessment scheme has not shown the desired results
because of lack of tax culture and effective and comprehensive audit to create
deterrence for the tax payers, so it must be backed by strong audit. There is now a
need to pursue planned and professionally supervised audits starting from LTUs
going down to RTOs. Care should be taken not to harass genuine tax-payers.
Moreover, audits of W.H. Agents have to be undertaken. In addition to own staff of
FBR, outsourcing of special audits should be considered again.
Public Awareness
Public awareness campaigns be launched on regular basis in order to facilitate the
public in understanding the complex tax laws besides emphasizing the positive
effects of tax compliance and inculcation of tax culture.
To Build Tax Revenues, Build New Businesses
New technology based firms entail risk, but they also represent the greatest
promise for value creation and a growing tax base. New businesses require not only
direct financial support from the country, but also greater access to early stage
private capital, business connections and insights, and competitive business costs.
 Modernize Tax Administration
Stability in tenure of senior tax managers, investment in key soft
infrastructure (IT) and qualified human resources, and governance
improvements are all urgently required. These actions have been on the tax
reform agenda for years, if not decades. Their success depends largely on the
decision power and sustained implementation capacity of the political
leadership.
Consider presenting a bill to the Parliament converting the FBR into a
fully autonomous institution.

Fully integrate automated computerized systems

Invest in human resource capacity building.

Improve management and human resource policies.

Strengthen the FBR along functional lines.

 B. Tax Policy Reforms
Taxation has to be equitable based on GDP contribution of respective
sectors;
Presently taxation is disproportionate to its contribution to GDP
Manufacturing sector contributes 20% to GDP while it pays 2/3rd to the
taxes
Services sector contributes 56% to GDP while it pays 1/3rd to the taxes and
Agriculture sector contributes 24 % to the GDP and pays less than 1% to the
taxes

In order to make tax base as broad as possible the above guidelines have
to be followed by enforcement of system. Moreover, Exemption under
S.III (on foreign remittances) needs to be reviewed and Agriculture
Income tax beyond minimum threshold needs to be taxed like any other
source of income. Furthermore some of the tax rates need
rationalization.
 Activate Tax Policy and Broaden the Tax Base
This reform aims to increase collection (tax policy) and buoyancy (broadening) by
removing exemptions. The latter agenda covers the sales tax, income tax, and
customs duties. The decision about the final mix of these measures would
involve political considerations.
Tax policy. Publishing a tax expenditure annex in the annual budget would
identify and facilitate gradual removal of most tax exemptions and zero ratings,
along with their projected fiscal. Position creating a joint FBR-Ministry of Finance
unit on tax policy would support sound policy design and solid revenue forecast
Corporate and individual income taxes. In the medium term, the high CIT needs
to be lowered from 35 percent to a 25-30 percent international benchmark and
its base widened with new registrations, as current coverage is low. A lower CIT
would encourage investment and attract new businesses to file.
Other Measures. A complementary measure to include reintroducing special
excise duties; introducing a retail tax similar to that introduced successfully by
China, which favors lottery tickets for new registered sales taxpayers; bringing in
a capital gains tax on property transfers; and increasing levies like those on
petroleum and gas.
 Tax Amnesty and Money Whitening
Amnesty schemes are not be encouraged. These much hyped schemes
encourage the tax evaders on one hand, while lets down the diligent tax
payers who have been dutifully paying their share to the nation.

The result of previous experiences with such schemes shows that they result
in dismal collection, with almost no increase in the tax base. To discourage
the hopefuls that amnesty will not be announced in future, the power to
announce such schemes should be entirely abolished in the relevant
provisions of the law.

The hard work and effort put up by our countrymen in foreign lands is highly
commendable, and the remittances they send to support their families in
Pakistan are the backbone of the economy. However, these immunity
provisions in unscrupulous hands lead to large scale tax evasion. These
loopholes must be closed on a priority basis.
 Incentives through tax rates
Developed economies use tax rates to attract investments. Schemes to provide higher
tax depreciation and capital allowances are introduced in the years of recession, with
the aim to stir up the economy. Different jurisdictions reduce corporate rates to
attract investment by foreign companies.
Similarly, to increase corporatization and documentation, tax rates applicable to
companies are to be made lower than those applicable to the individuals. Public
should be encouraged to do business through a corporate entity rather than by
themselves.

Rationalization of tax rates

The concept of taxing income in separate blocks i.e. for interest and property should
be done away with. A single rate of tax should be applicable to all income, irrespective
of its source. The only exception is dividends received from a company, as these are
appropriations out of profits of the company which have already been taxed.
Simplify Taxes and Make Compliance Effective and Non-compliance
Expensive
A simple tax system that does not rely on only a few people or sectors for revenues
and that has low rates encourages voluntary compliance and reduces the incentives
for tax evasion. Recent improvements in tax administration allowing a high percentage
of e-filers are encouraging, but further gains are needed;
 Fixed and Presumptive Schemes
The fixed tax and presumptive tax is not levied on the income of a person.
Resultantly, certain sectors of the economy pay comparatively lower taxes on
their income, whereas other sectors pay a higher share. To address this disparity,
these regimes should be done away with, and income of a person taxed under
similar principals to create equity.
Value Added Tax (VAT)
Sales tax is an important collection tool, as it taxes consumption rather than
income. However, a higher rate increases cost of purchase for a common man,
who is already burdened due to decreased purchasing power. The generally held
public perception that indirect taxes are becoming a burden could be alleviated
by rationalizing the sales tax rates to a lower acceptable level.
The sales tax system applicable in the country does not meet the true definition
of a value added system. The numerous exemptions given to manufacturers and
retailers due to their powerful lobby must be withdrawn to make the system
truly value added.
 Custom and Excise Duty

The custom duties on imports are applicable through various SROs,

which are issued on and off on whims of powerful lobbies. The SRO
culture must be abolished to create equity so that every importer has
to pay similar amount of duties.

Excise duty is a tool which enables the government to discourage

production and sale of goods in the interest of general public i.e.
tobacco. However, this duty should not be used to increase collection
short falls, therefore limited only to a few industries.
 Increase Provincial Tax Revenues
To enhance tax to GDP ratio it is important that provinces design and implement
robust collection system of Provincial Taxes. After the eighteenth amendment,
provinces are required to generate revenues through their own sources, and should
not be relying on grants and aids from the Federal Government.

The government probably needs to step back and look at the entire
intergovernmental fiscal system, which is broken and unbalanced, and its revenue
mobilization, which has a narrow lens. At the heart of the tax problem is that
provinces have the wrong incentives to collect taxes, though from the pure
perspective of raising taxes, the provincial agenda is quite straight forward.

Approve a provincial tax-friendly fiscal transfer mechanism.

Enhance capacity of provincial tax administration.
Broaden the base of GST on services.
Enhance collection efficiency of the motor vehicle tax.
Revamp the urban property tax
Eliminate the myriad minor provincial taxes that generate little revenue
Thank you