options for pro poor taxation policy in pakistan (presentation).pdf

8/9/2019 OPTIONS FOR PRO POOR TAXATION POLICY IN PAKISTAN (PRESENTATION).pdf

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OPTIONS FOR PRO-POORTAXATION POLICY

IN PAKISTAN


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REVENUE AND EXPENDITURE(percent age of GDP)


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GOVERNMENT REVENUE TYPOLOGY

The revenue derived by the Government is categorised as TaxRevenue and Non-Tax Revenue.

The Tax revenue is further segregated into Direct Taxes and

Indirect Taxes, which are separately enforced by the FederalGovernment and Four Provincial Governments.

The Non-tax revenue comprises of income from property andenterprises, civil administration income and miscellaneous

receipts. The major component of Governments revenue, however,

comprises of tax revenue levied and enforced by the FederalGovernment through Federal Board of Revenue (FBR).


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GOVERNMENT REVENUE TYPOLOGY

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (B)Tax 10.60 10.50 10.70 11.40 11.00 10.10 10.50 10.20 10.60 9.50 10.20 10.50

Non-Tax 2.80 2.60 3.30 3.40 3.20 3.70 3.60 4.70 4.40 5.10 3.90 3.80

Percent of GDP

Years

Figure 2: Revenue Typology

Tax Non-Tax


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FEDERAL TAXES

Federal taxes primarily consist of direct and indirect taxes. Direct Taxes are those taxes whose incidence is borne by the

person from whom the tax is collected. The major direct taxes

enforced by the Federal Government are Income Tax, Workers Welfare Fund, Workers Profit Participation Fund and CapitalValue Tax.

Indirect Taxes are those added to the cost of goods or services

and ultimately borne by the consumers. These are GeneralSales Tax, Federal Excise Duty and Customs Duty.


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HEAD WISE SHARE IN FEDERAL TAXES


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DIRECT TAXES

Conceptually direct taxes are those taxes whose incidence is borne bythe person from whom the tax is collected.

The largest share of direct taxes in Pakistan comprises of Income Tax,which accounts for almost 97 per cent of total direct taxes.

The other forms of direct taxes are the Workers Welfare Fund andWorkers Profit Participation Fund, which are primarily labour leviespaid by the Industrial Undertakings and enforced by the FBR.

Capital Value Tax (CVT) was also being collected by FBR, which wasapplicable on transfer of certain properties, however, the same is nowtransferred to Provinces by virtue of amendments made in theConstitution of Pakistan through Eighteenth Amendment Act, 2010.


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INCOME TAX LAW

Income Tax is payable by every person (subject to the exemptionsand exceptions given in the law) with regard to his taxable incomefor the tax year (period of 12 months ending on June 30 th ) underthe two tax regimes viz. Net Income Basis (NIB) and Final Tax

Regime (FTR). NIB is the conventional basis of taxation whereby a person is liable

to pay tax on net taxable income arrived at after deducting alladmissible deductions and allowances from the gross revenues /receipts for a particular tax year. Generally, under this basis, aperson is only liable to pay tax when he derives profit for the yearas computed under the tax rules whereas no tax is payable in caseof loss. Losses are also allowed to be carried forward foradjustment against future tax profits.


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NET INCOME BASIS

For income covered under NIB (i.e. Salary, Business Income andCapital Gains on certain assets), persons are required to file adetailed return of income on a yearly basis, alongwith the auditedfinancial statements (only for companies) which is then assessed

under self assessment scheme. The tax authorities are, however, empowered to conduct a tax

audit by scrutinising the accounts and if they found anyinadmissible deductions or under-declaration of income, they areempowered to pass assessment orders by making adjustments tothe declared income.

In case of any disputes, the taxpayers are permitted to challengethe action of the tax authorities in further appeals or throughadministrative hierarchy of the FBR.


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INCOME TAX RATES UNDER NIB

CLASS OF TAXPAYER / NATURE OF INCOME APPLICABLE TAX RATESSalaried Individuals (whose Salary Income ismore than 50 per cent of their total income)

Taxable Threshold Rs 400,000Slab rates maximum rate is 20%

Non-Salaried Individuals and Association ofPersons (Partnerships) Taxable Threshold Rs 400,000Slab rates maximum rate is 25%

Small companies having annual turnoverbelow Rs 250 Million

25 per cent

Companies (other than small companies) 35 per cent

Capital gains on sale of securities (includinglisted shares)

Holding period upto 6 months 10 per centHolding period upto 12 months 8 per centHolding period above 12 months 0 per cent


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FINAL TAX REGIME

FTR was introduced in 1991, which prescribed a transaction basedtax liability and, therefore, a major shift from the traditionalincome tax, which was always based on NIB.

FTR is a flat tax regime, whereby tax is charged on the basis of grossreceipts / turnover for the year, irrespective of whether or not theperson ultimately derived any profits from the respective activity.By nature, FTR is akin to transaction tax and, therefore, its impact isregressive.

No adjustment for any deduction or losses is allowed under thisregime. Usually, tax under FTR is paid by way of withholding tax.

A person covered by FTR is only required to file a simplifiedstatement in lieu of return, which is not scrutinized.


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INCOME TAX RATES UNDER FTR

NATURE OF INCOME RATE OF TAX

Dividends 10%

Commercial Imports 5%

Interest on bank deposits (Individuals) 10%

Contractors 6%

Sale of goods (other than manufacturers) 3.5%

Brokerage and Commission 10%

Income from Property 5 10%Petrol Pump Operators commission 10%

CNG stations 4%

Goods transport vehicles Varied rates

Non- residents technical fees and royalty 15%


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ADJUSTABLE WITHHOLDING TAXES

In addition to the withholding taxes levied as final taxes,following further withholding taxes are applicable which areadjustable against the payers ultimate tax liability.

Nature of payments Rate of withholding tax

Telephone users 10%

Sale of property by auction 5%

Purchase of air tickets 5%

Electricity bills of commercial Various ratesCash withdrawal above Rs 25, 000 0.2 to 0.3 per cent

Purchase of Motor cars & Jeeps Rs 7,500 to Rs 50,000

Distributors, wholesalers ofmanufacturing sector

0.5% of purchase value ofgoods


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TAX COLLECTIONS UNDER NIB AND FTR


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MAJOR EXEMPTIONS IN INCOME TAX

Agricultural Income having wide scope; Foreign exchange remitted through normal banking channel and

encashed in Pak Rupees; Pension received by former Government and Armed forces

employees; Capital gains from sale of listed shares and other securities held for

more than one year; Capital gains from sale of immovable properties held for more than

two years; Income of Funds, Board of Education, Universities; Income of Religious and Welfare trusts; and Income of Power Project Companies.


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GENERAL SALES TAX

GST was a provincial subject at the time of Pakistans Independence, however, itwas subsequently converted into Federal Subject and extended to imports anddomestic sale of goods by manufacturers and wholesalers;

In 1995-96, GST was converted into a full-fledged Value Added Tax model and in1997 the scope was extended to importers and in 1998 to wholesalers andretailers;

There are various distortions and exemptions in GST regime e.g. the services wereoutside the purview of GST with certain exceptions.

Since the Constitutional right to GST on services vest with the Provinces, thescope of GST was extended to certain services through Provincial Sales Tax in

2000, however, the collection was administered by the FBR. until 2011 when theProvince of Sindh started collecting sales tax on a wide range of services throughits own revenue Board called Sindh Revenue Board.

Punjab has also introduced its own Sales Tax law and established Punjab RevenueAuthority to collect sales tax from July 1, 2012.


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SCOPE OF GST

GST in its present form was introduced in Pakistan at the standard rate of12.5 per cent in 1992, however, to meet the conditionality of theStructural Adjustment Program of the IMF for reducing the budget deficit,the rate of GST was raised to 18 per cent in 1995 with a reduced rate of 2

per cent introduced to bring the small businessmen into the tax net. Thesaid rate was, however, subsequently curtailed to 15 per cent due to thepressure from the taxpayers. In 1999, further tax of 3 per cent wasintroduced on supplies made by registered persons to unregisteredpersons. By 2004, GST was administered at five different rates i.e. 2 per

cent, 15 per cent, 18 per cent, 20 per cent and 23 per cent. Finally, theanomaly of different rates was removed by introducing a uniform rate of15 per cent with effect from July 2004. The said rate was subsequentlyincreased to 16 per cent in 2007 and 17 per cent in 2009.


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SCOPE OF GST CONTD

With effect from July 1, 2011, the rate of GST was again reduced to 16 percent, which is now presently applicable on the value of goods importedinto Pakistan and taxable supplies made by following persons (subject tocertain exemptions and concessions).

Manufacturers; Retailers having annual turnover of Rs 5 Million and above; Importers; Wholesalers and distributors; and Certain services.

On a broader basis, the components of GST can be segregated into importsand domestic consumption. The collection trends of GST into these twocomponents can be seen in the next slide.


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CONTRIBUTIONS TO GOVERNMENTS TAX REVENUE


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COMMODITY-WISE GST COLLECTION ON IMPORTS(Last two years average)


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GST COLLECTION ON DOMESTICSALES AND SERVICES


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Commodity-wise GST collections Domestic(2 years average)

45%

16%

6%

6%

2%

4%

3%

3%

2%2%

11%

0

GST Collection on domestic sales

POL ProductsTelecom SectorNatural GasOther ServicesElectrical EnergyCigaretteBeveragesSugarTeaCementOthers


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FEDERAL EXCISE DUTY

FED is levied on domestic production, imports andservices rendered in the country. The FED is animportant component of Indirect taxes, whose main

objective in addition to generation of revenue is also toregulate the consumption of certain commodities andservices.

Prior to 2005, the Excise Duties were governed by the

Central Excise Act, 1944, which was replaced by FederalExcise Act, 2005.


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SCOPE OF FED

The FED is collected both at domestic and import levels as perspecified rates. The FED is payable on-

Excisable goods produced or manufactured in Pakistan; Goods imported into Pakistan; and

Such goods as notified, which are produced or manufactured in non-tariff areas and are brought into tariff area for sale or consumptiontherein; and

Services rendered or provided in Pakistan. There is a list of goods and services annexed with the FE Act, which

are chargeable to FED alongwith the rate applicable. The standardrate of FED is in line with the rate of GST i.e. 16 per cent, however,for certain goods and services, there are special rates.

It was envisaged that FED will be gradually repealed as the scope of FEDis presently confined to a very limited number of commodities.


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Commodity-wise FED collection 2 years average


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CUSTOMS DUTY

Customs Duty is levied under the Customs Act, 1969 on goodsimported into Pakistan. Despite broad-based tariff reduction in lasttwo decades, customs duty is still one of the most importantsources of tax collection of the Federal Government as it has

contributed around 12 per cent in total federal tax receipts duringthe last fiscal year 2010-11. Since the collection of GST and IncomeTax on imports is based upon the Customs landed value ofimported goods as enhanced by the amount of Custom Duty leviedthereon, the volume of Customs Duty collection forms basis for

calculation of such taxes. The composition of gross customs duty collection consists of Import

duties, Warehouse Surcharge, Export Development Surcharge andMiscellaneous.


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COMMODITY-WISE CUSTOMS DUTY COLLECTION(2 years average)


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KEY RECOMMENDATIONS


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PROVISION OF ESSENTIAL SHAREDSERVICES TO THE TAXPAYERS

Whilst it is not necessary that the amount of taxes paid by aparticular taxpayer would exactly correspond to the services hereceived from the State but in the longer run, the taxpayersshould be satisfied that their contributions to the GovernmentExchequer are being pooled to fund essential shared services,such as education, health care, law and order, social services, etc.Again, under the democratic rule, the citizens have a right to voteagainst the Government which did not utilise the tax money in theright direction.

In order to achieve the Exchange Equity and Fairness in the tax

system of Pakistan, it is most important that measures should betaken by the GOP to invest in Infrastructure, and other essentialshared services so as to justify the collection of taxes from thetaxpayers.


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TAX ADMINISTRATION

The Government may, therefore, consider an option of convertingFBR into an Independent revenue agency providing morecompetitive salaries to attract and retain staff; greater flexibilityover pay structures, particularly for management and scarce skills

and greater freedom to hire and fire besides an ability to recruitfrom outside the civil service. In order to bring process equity and fairness, it is important that

the tax administration should be professionally competent andfair in terms of their dealings with the taxpayers. Merelyimplementing the Information Technology systems of the tax

administration are not enough to achieve process equity andfairness rather there is a need to change the mind-set of taxadministrators.

EQUITABLE TAXATION OF


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EQUITABLE TAXATION OFALL ECONOMIC SECTORS

There are various segments of Economy, such as Agriculture,wholesalers, distributors and retailers, real estate, stock exchange,etc. which are not contributing towards the tax revenue inproportion to their contribution in Economy. There is a dire need to

make necessary corrections in the tax system to have equitabledistribution of tax incidence on all sectors of the Economy ratherthan a concentration on some selective sectors as the same wouldresult in achievement of horizontal equity.

The taxation of all economic sectors on equitable basis would

automatically remove the present distortions in the tax systemwhereby the honest taxpayers are being compelled to pay morethan their ability, which instigates even the compliant taxpayers toadopt tax avoidance measures.


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AGRICULTURAL INCOME TAX

Agricultural sector represents almost 21 per cent of the totalGDP of Pakistans Economy, however, there is no contributionin Federal Income tax because of the specific exemptions givenin the Income Tax Ordinance, 2001.

Measures should be taken to ensure that Agricultural sector istaxed on equitable grounds and in this regard, Provincial lawson Agricultural Income Tax are required to be amended (by therespective Assemblies) to remove the anomaly in the tax rates.An Independent agency should be formed with the assistancefrom World Bank or other foreign donors to collect the relevantinformation on the agricultural income, which should beaccessible to the FBR and other Government agencies to havethe definite information on the income derived fromagriculture sector.


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REAL ESTATE SECTOR

There is a need to review the local and provincial laws relating totransfer of immovable properties so as to provide for payment oftransfer related taxes either on the basis of fair valuation of the

properties at the time of sale and not on the declared value. Also, the Income tax authorities should scrutinize the transactions

relating to immovable properties to identify those who are in thebusiness of selling such properties and escaping tax on such gainsunder the garb of income tax exemption, which is now availableon immovable properties held for more than two years.


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FOREIGN EXCHANGE REMITTANCES

The Income tax authorities are empowered to impose tax andpenalties on person, who are not able to explain the source of theirvaluable assets or income. This provision is a major check to catchthose taxpayers, who own assets out of the money not earlier

offered to tax. There has been a demand from some Professional associations

(such as Institute of Chartered Accountants of Pakistan) to abolishthe above provision, however, the same has not been done by theFederal Government as yet.

It is suggested to link the immunity of foreign exchange remittanceswith the payment of a small percentage of tax on such remittance,which would further enhance the documentation.


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FTR

The overall contribution of taxes collected under FTR is more than 40 per cent of thetotal income tax collections, however, the same is resulting in encouragement of non-documented sector and a disincentive for the documented sector. Also, the FTR ismostly operating as a transaction based tax and, therefore, in practice, the effect ofthe tax chargeable on FTR is embedded in the transaction cost resulting in a higher cost

of business. Considering the higher contribution of FTR, it is very difficult decision to completely

eliminate the FTR, however, at least those sectors, which should otherwise maintainproper books of accounts (such as Commercial Importers, Traders, Contractors, etc,)should be taken out of the FTR and taxed on NIB.

In the Budget for 2012-13, the Government has given a conditional option toCommercial Importers, Exporters and Traders to opt for the normal tax regime. This isa positive step, however, the FTR should be eventually phased out in a gradual mannerfor all such sectors where documentation can be maintained.


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TAXATION OF SERVICES SECTOR

Services sector contributes almost 53 per cent of the countrys GDP andcomprises of various sub-sectors including wholesale and Retail Trade,Transport Storage and Communication, Finance and Insurance, etc. Out of theabove, the biggest contributor is the Wholesale and Retail Trade, which

constitutes almost 32 per cent of the total services sector. The tax contribution by Services sector is, however, very negligible. Various

measures have been taken by the Government in the past, such as UniversalSelf Assessment Schemes for income tax and minimum / fixed tax regimes forretail sector; however, no significant improvement has been achieved. Even

for GST, varied regimes were introduced; however, it appears that there is nosignificant contribution of taxes from this sector. There is, therefore, a need for all the Provinces to jointly formulate a policy

framework to extend the scope of GST on those services, which are notpresently taxed either due to expressed exemptions or due to evasions.


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ACKNOWLEDGEMENT

The research was carried out byMansoor Raza and Muhammad Raza for

Church World Service Pakistan/Afghanistanwith financial and technical support

by Christian Aid

options for pro poor taxation policy in pakistan (presentation).pdf

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