taxlaw

PROJECT REPORT 2 012

Income Tax Law

Definition:

Income Tax is all income other than agricultural income levied and collected by the central government and shared with the states.

Why People don’t pay taxes in Pakistan??

Following are the points with explanations that why people don’t pay taxes:

Ruling class don’t pay taxes: The reason people quote is that the people sitting at the top don't pay taxes themselves which is true. Other than that people don't trust the government, they believe taxes will go in pockets of the politicians in power. Instead people (some people I know) choose to pay the same amount extra in charity. Barely 1% of Pakistan's population pays taxes (2% is registered to pay).

Corruption: According to a 2010 study, 99% of 256 respondents reported facing corruption with regard to taxation. Furthermore, 32% of respondents reported paying bribes to have their tax assessment lowered, and nearly 14% reported receiving fictitious tax assessments until a bribe was paid.

Press Report by Finance Ministry: ISLAMABAD, June 4 2011: Minister for Finance Dr. Hafeez Shaikh on Saturday said that there were around 2.3 million tax-evaders out of which 0.7 million had been properly identified with the help of latest technology. “The identified non-taxpayers are residing in high-class areas of the country, but not paying a single penny as tax” he said at a post-budget news conference here. He said the non-taxpayers had at least two foreign currency accounts in the country. They often travel abroad and every year spends two months out of the country for business or visiting purposes. But they don’t have even Tax ID numbers, he added. He said around 70,000 such people had been issued notices, while the others would be issued by June end. He informed that at present only 1.5 million people are paying taxes.

Reference: Associate Press of Pakistan (Pakistan’s Premier). www.app.com.pk

INCOME TAX LAW

http://www.app.com.pk/


Tax Evasion by the Country’s Elite:

Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24 per cent, Americans pay 28 per cent and Swedes pay a fat 50 per cent.”The main reason behind Pakistan’s low tax-to-GDP ratio is tax evasion by the country’s elite. Federal officials, including ministers (even PM Gilani), only pay taxes on their government salaries and not on their personal assets. Although the government promises to take steps toward tax reform, it continues to dodge the issue every chance it gets.

Taking from the poor, giving to the rich:

It is an embarrassment that we continue to beg others to come to our help when the solution is available within our own borders. As a solution to this economic crisis, President Zardari has proposed a one-time tax. Naturally, his proposal sparked an outcry all over Pakistan as it was perceived to be another opportunity to rob the middle and lower classes, while handing the ruling elite a free pass. Zardari chooses to ignore the fact that unless the entire tax structure is reformed, Pakistan will continue raking in debt and will be unable to meet the demands of its citizens. While Zardari and the PPP are not finding any success, a more promising effort toward reform has been undertaken by another element of the Pakistani government.

Back Breaking Government fake Expenditures:

The expenses of the President House have been increased by 12.88 per cent for the upcoming fiscal year. The expenses of the staff household and the allowances of the president exceeded the allocation by 8.31 per cent in the outgoing fiscal year. As a result, the expenses of the President House have been increased by 12.88 per cent for the upcoming fiscal year.

The budget of the President’s House was set at Rs427.25 million at the time budget 2010-11 was approved but the actual expenditures of the President house ended up at Rs462.81 million. So for the upcoming fiscal year the expenditures have been earmarked at Rs482.63 million. It is noteworthy that the major chunk of the increase will go to pay for the increase in the salaries of the staff.

Expanding the tax base:

The current tax structure in Pakistan has tremendous room for improvement. While the new bill specifically addresses land redistribution and agricultural development, it will indirectly play a great role in the expansion of the Pakistani tax base. Right now there is a critical need for discourse on this issue between all parties because Pakistan needs a strong combination of land and tax reform in order for any chance at economic recovery.

INCOME TAX LAW


Some societal beliefs:

There is a strong, and quite well-founded belief, that a large part of the tax collected will not be spent on the welfare of the public at large, but rather on the politicians’ personal needs/wants, or the needs/wants of these politicians’ favorites. Second, due to the above problem, people simply do not expect that paying taxes will lead to any increase in the quantity and quality of public goods and services provided by the state. Hence, they have nothing to gain from paying taxes.

Lack of Balance:

The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line. A report recently submitted to the Economic Coordination Committee admits that owing to heavy taxation of consumer items, the share of indirect taxes have registered a growth of 26.8 percent. General sales tax registered a growth of 28.3 percent, customs duty collection witnessed surge of 18 percent and federal excise duty went up to 33.9 percent.

The central goal of Tax Administration Reforms Project (TARP), funded by World Bank and Department for International Development (DFID), was to improve the direct taxation collection and minimize the indirect taxes to make the taxation system just and fair. However, at the far end of completion of TARP, the result is just the opposite. This is how we implement our programs and then blame IMF, the World Bank and other donors for our own wrongdoings.

Burden only upon poor:

Due to wrong policies of the successive governments — civil and military alike — the poor have been burdened with more and more taxes. What makes the situation more painful is the fact that taxes collected are wasted by the rulers on their personal comforts and luxuries and the masses get nothing back out of what they pay to the State.

The State has miserably failed to discharge its basic obligation of protecting life and property of its people, what to talk of extending social services free of cost. Taxes collected are largely being used to provide for debt serving for the security and foreign tours of the rulers, besides regressive taxation the government is resorting to borrowing money from wherever available to run the day to day affairs.

INCOME TAX LAW


Our Opinion

Inflation:

In recent years, the record inflation has reduced the purchasing power of the consumers and the government instead of giving any relief to the poor has been resorting to heavy indirect taxes to add further to their miseries

Wasteful Expenses:

The worsening plight of the poor is largely due to wasteful expenses on the part of rulers and is hand-picked bureaucracy who is not answerable to courts or masses.

Failures of FBR:

The real potential of tax collection for FY 2007-08 was not less than Rs.2.5 trillion. The FBR failed to reach even the Rs.1.5 trillion mark by granting generous exemptions and concessions to the wealthy segments of society (exemption under one head alone i.e. capital gains on stock markets was Rs. 112.45 billion according to government’s own admission at page 262 of Economic Survey 2006-07).It proves beyond any doubt that the tax system is directly contributing to growing poverty as people who possess enormous income and wealth are not being subjected to income taxation in Pakistan and poor people are subjected to heavy taxation e.g. 16 percent sales tax. Thus, the very purpose of redistribution of wealth as the main object of taxation is being defeated.

Burden of Indirect Taxes:

The burden of indirect taxes is always passed on the end consumers. These kinds of taxes take a very small portion of a rich man’s enormous income and a very large slice of poor man’s meager earning. The rulers controlling the state and its resources are not ready to pay income tax on their colossal incomes from agriculture, which they earn as absentee landlords. They are not willing to cut non-development expenditure at least by 50 percent. They are not inclined to live like a common man and surrender all the perks and privileges they are enjoying at the cost of taxpayers’ money. On the contrary, they are burdening the masses with more and more indirect taxes.

INCOME TAX LAW


Unfair Tax System:

The existing ill-directed, illogical, regressive and unfair tax system is widening the existing divide between the rich and the poor. The sole stress on indirect taxation (even under the garb of income taxation through presumptive tax regime on goods and services) without evaluating its impact on the economy and the life of poor masses is a lamentable policy. In the name of higher growth in tax collection, the economic and social fabric of society is being destroyed.

Politicians among top Tax Dodgers:

Prime Minister Yousaf Raza Gilani’s nomination papers show that while his assets are worth millions of rupees, he did not pay any income tax from 2004 to 2007. The reason for this given by his spokesperson is that he spent most of the period in jail and thus did not pay income tax. Since becoming the prime minister, though, he has paid Rs82, 000 annually, which is deducted from his salary.

Sharif, too, with declared assets in and outside Pakistan worth billions of rupees, did not pay anything to the national exchequer during the same period.His party’s excuse is that he was in exile during that time. However, it did not share how much income tax he is paying as chief minister Punjab.

Asfandyar Wali and Fazlur Rehman also did not pay any tax during the period between 2004 and 2007. Sindh Chief Minister Qaim Ali Shah, who also has declared assets amounting to billions of rupees, paid Rs8,000 in income tax in the three-year period and Rs10,000 as land revenue for the same period.

Balochistan Chief Minister Nawab Aslam Raisani paid Rs16,000 as income tax and Rs0.6 million as land revenue during the period in question. Leader of the opposition in the National Assembly, Chaudhry Nisar Ali, and former Punjab chief minister Pervaiz Elahi, who both have assets worth billions of rupees, paid only Rs0.2 million in income tax between 2004 and 2007. And Rehman Malik, while he did not pay any income tax, paid a measly Rs194 as land revenue in the three years.

Day by day increasing Poverty:

Poverty in Pakistan is a continued source of concern. Although the middle-class has grown in Pakistan to 40 million nearly one-quarter of the population is classified poor. 17.2% of the total population lived below the poverty line, which is the lowest figure in the history of Pakistan.

INCOME TAX LAW

http://en.wikipedia.org/wiki/Pakistan


Unpaid Taxes:

The sovereignty of Pakistan rests on the unpaid taxes of these 2.3 million affluent citizens. Consider the following numbers: if the very rich tax evaders are charged a nominal annual tax of $2,500, and the remaining 1.6 million not-so-wealthy evaders are charged $1,500 annually, this would generate an additional $4.2 billion in tax revenue.Remember that the US is offering Pakistan annually $1.5 billion (in aid) through the Kerry Lugar Bill, in exchange for drone attacks on its own people. The $4.2 billion from the wealthiest tax-evaders could buy Pakistan its freedom from the United States.

Thinking of a true Pakistani:

All Pakistanis, irrespective of their political or religious persuasions, hate their country’s dependence on handouts from the United States, the IMF, the World Bank and other similar institutions. The easiest and surest way to break free of this economic dependency is for Pakistanis to pay their taxes.

American Insurgency:

In Pakistan, the lack of a workable tax system feeds something more menacing: a festering inequality in Pakistani society, where the wealth of its most powerful members is never redistributed or put to use for public good. That is creating conditions that have helped spread an insurgency that is tormenting the country and complicating American policy in the region.

“This is a system of the elite, by the elite and for the elite,” said Riyaz Hussain Naqvi, a retired government official who worked in tax collection for

38 years. “It is a skewed system in which the poor man subsidizes the rich man.”

The problem starts at the top. The average worth of Pakistani members of Parliament is $900,000, with its richest member topping $37 million, according to a December study by the Pakistan Institute of Legislative Development and Transparency in Islamabad.

INCOME TAX LAW

http://www.pildat.org/Publications/publication/Democracy&LegStr/How%20Rich%20are%20Pakistani%20MNAs%20December%202009.pdf


Relationship between the State and the Citizen

The relationship between the State and the citizen is defined by the citizen’s willingness to pay taxes. Withholding taxes weakens the State. A weakened State has no alternative but to compromise. In Pakistan’s case, it is not the politicians alone who have pushed the State to beg from the IMF or the United States. Instead, it is the citizens of Pakistan who refuse to buy a stake in the country’s future by paying taxes, have forced the State to borrow from IMF and other lenders.Due to such poor unstable planning and policies the Tax Revenue percentage of GDP in Pakistan is the least as compared to other countries. Following is the very clear but sad percentage chart that shows how it is damaging our country’s economy.

INCOME TAX LAW


This poor GDP progress has come to an alarming stage and is affecting immensely on the economy and increasing poverty day by day. Another graph represents the poverty level in our country.

INCOME TAX LAW


Recommendations

What must a government do to achieve this goal?

I. First, make clear, credible promises for improvements and increases in public goods and services: infrastructure, public transportation, education, health, social security. If people see improvements in their standard of living by paying taxes, they’ll be more inclined to pay. Governments should show people that if they pay more through taxation, then their expenses will be reduced by the state.

II. Second, governments should be more transparent about how much tax is collected, from whom it is collected (geography, profession-wise), and where it is eventually spent. This will instill greater confidence among the public in the government’s initiatives, such as the ones listed above. It can also be useful in ensuring greater equality in terms of the tax burden, so that one powerful group does not evade taxation easily.

III. Third, ensure that filing in taxes is easy, and that help is available for those finding it difficult. Make tax evasion hard in the first place. This can be done by ensuring cross-checks between various data between agencies, and different levels of administrative (local, provincial, federal, etc). Penalties for tax evasion must be swiftly implemented without fear or favor. An honest, competent bureaucracy, including the police service, would be a great help here.

IV. Fourth, reduce the tax burden on the lower and middle classes. This can obviously be done by lowering the income tax rate, but also by shifting the focus of taxation from indirect, consumption taxes to wealth taxes. Such a reduction, from a pure tax collection perspective, can be beneficial by giving people a much greater incentive to pay tax, instead of trying to evade it. It’s very much possible that the government may collect more tax revenue at lower rates but higher compliance, as compared to higher tax rates, but higher evasion as well.

V. Fifth, increase the tax net to include untaxed and low taxed activity, such as agriculture. Apart from the above measures, the government can sell these reforms by explaining to the people that the high rate of inflation is due to some fundamental issues in the agriculture market, some malfunction in markets and the state bank printing too much money.

VI. Sixth, the last problem can be dealt with by reducing money printing through higher tax revenue and a reduction in borrowing needs. A major problem of the government and the public will be solved this

INCOME TAX LAW


way. This will provide yet another boost to the purses of ordinary Pakistanis.

INCOME TAX LAW

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