Important Points of Tax Administration/Reforms in Pakistan:

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Introduction

Pakistan: Federal Taxes ƒ

• Income Tax except Agricultural Income Tax ƒ
• Sales Tax (VAT)
• ƒ Federal Excise Duty ƒ
• Customs Duty
• Petroleum levy

Pakistan: Provincial Taxes ƒ

• Agricultural Income Tax
• ƒ Capital Value Tax
• ƒ Motor Vehicle Tax ƒ
• Land Tax ƒ
• Property Tax
• ƒ Cesses like Cotton cess, Sugar Cane cess ƒ
• Excises on Hotels, Cinemas, Etc.

Federal Taxes ‐ Administered by FBR ƒ

Inland Taxes

• ƒ Income Tax ƒ
• Sales Tax ƒ
• Federal Excise Duty ƒ

Cross Border Taxes ƒ

• Customs Duty

Need For Reforms ƒ

• Low Tax : GDP Ratio
• ƒNarrow Tax base ƒ
• Outdated Processes
• ƒCorruption & Administrative excesses ƒ
• Complexity of tax laws and arbitrariness in their application ƒ
• Relationship between taxpayer and tax collector largely adversarial
• Lack of transparency
• Inadequate HR Skills and Capabilities
• ƒManagement of human resources severely deficient
• Un‐documented economy ƒ Lack of automation

Objectives of FBR Tax Reform Program

• To increase revenue
•  To widen taxpayers base
•  To simplify tax laws
•  Taxpayer friendly environment
•  To develop an honest and efficient tax administration

Strategy ƒ

Policy Reforms

• Simplification of Laws
• Reducing reliance on withholding taxes
• Elimination of Exemptions
• Effective Dispute Resolution Mechanism

ƒ Procedural Reforms

• Universal Self Assessment
• Reengineering of Processes
• Automation ƒ

Administrative Reforms

• Organisation of FBR on Functional Lines
• Establishment of LTUs/RTOs
• Reformed HRM Process

Reforms in Detail

• New Income Tax Rules
• Record Keeping Requirements
• Revised Sales Tax Refund Rules
• Tax Rates and Tariff reduction and rationalization.
• Effective Dispute Resolution Mechanism
• All income tax returns filed are treated as “assessment orders”
• ƒ No Returns are audited unless selected by the System or on the basis of specific information ƒ
• Contact between tax officials and Taxpayers minimized substantially
• Record‐keeping/maintenance upgraded through massive IT injection
• ƒ Electronic Filing rendered mandatory for all corporate taxpayers, AOPs, refund claimants, salaried individuals with income exceeding Rs. 500,000, Income Tax withholding statements and sales tax returns
• Creation of Inland Revenue Service to handle all inland taxes i.e. Income Tax, General Sales Tax, & Federal Excise Duty
• Re‐structuring the top hierarchical structure of FBR
• ‰Induction of support & functional members
• Re ‐organization of the entire tax administration on functional lines, consisting of 3 Large Taxpayers Units, and 18 Regional Tax Offices across the country
• Taxpayer friendly environment ‰
• Minimizing contact between taxpayer and tax collector
• Integration of all Federal inland taxes i.e. Income Tax, Sales Tax & Federal Excise Duty
• LTUs at Karachi, Lahore, & Islamabad deal with around 1500 cases of designated large Corporate Taxpayers
• LTUs contribute an estimated revenue of around 70% of total inland revenue annually Open floor layout & and one-desk operation for the taxpayer in respect of all inland taxes

Why Tax‐to‐GDP ratio alarmingly low?

Due to Large Tax Exemptions

• on Capital Gains on Properties
• immunity on foreign remittances
• Withdrawal of Wealth Tax
• Withdrawal of Excise Duties on Consumer Durables

Due to Reduction in Tax Rates

• Maximum Tariffs on Imports down from 35% to 25%
• Corporate and Personal Income Tax rates brought down

Role of Lobbies

There are a number of formal and informal lobbies in Pakistan, which influence policy formulation including tax reforms. ƒ

Some of the most influential lobbies include: ‐

• Agriculturists (large land holders, strong presence in parliament)
• Business Lobby (Chambers of Commerce and Industries, All Pakistan Textile Mills Association, Overseas Chamber of Commerce, Associations of wholesale and retail traders)
• Banking sector
• Stock Markets

Examples
Agricultural income continues to remain exempted from tax ƒ though provinces have levied agricultural income tax but the collection is negligible and the tax is mainly based on land holding and not on agricultural income.

Banking sector made huge profits during last decade while tax rate for banking companies were brought down from 50% in 2002 to 35% in 2007

The Stock Exchange lobby resisted successfully to avoid taxation on capital gains until 2010‐11.

Capital Gains Tax could not be levied at the time when stock markets were flourishing. ƒ Capital Gains Tax on real estate could not be levied due to strong resistance from the concerned interest groups .

VAT could not be implemented. Introduction of VAT was delayed due to strong opposition from business community as well as from political parties

Others

• Due to Slackening of Fiscal Effort
• Self‐Assessment Scheme without Audits in Income Tax and Sales Tax
• Number of Income Tax returns filed at only 2.2 million (one per 75 persons)
• Provincial governments continue to slacken fiscal effort due to high dependence on transfers
• Due to high variability in revenue from Surcharges

Outcome of Reforms

• Automated processes (ERS, STARR, SMART,VERITAX,RECAP etc.) ƒ
• Reduced dependence on WHT
• ƒ Increasing Revenues ƒ
• Electronic Filing ƒ
• Infrastructure improvement ƒ
• Gaining Stakeholder’s respect
• ƒ Transparency and reduction in corruption

RECENT REFORMS (2008‐09 Onwards)

Petroleum Levy

• Introduction of Fixed Levy on Petroleum Products with large revenue yield of upto 1% of GDP

Sales Taxƒ

• Phasing out of exemptions and zero‐rating of domestic sales
  Rationalization of rate of sales tax

Excise Duty

• Abolition of Across‐the‐Board Special Excise Duty at 1% through Finance Act 2011

Direct Taxes ƒ

• Taxation of (Short Term) Capital Gains on Shares
• Extension of the Withholding Tax Net (Bank Cash Withdrawals, Air Travel)
• Introduction of Minimum Tax on Turnover (@ 1%)
• Random Ballot for Audit with Outsourcing to private Accounting Firms
• ƒDetection of New Tax Payers through third party data

PROPOSED REFORMS

Introduction of Comprehensive VAT (or RGST) with the following objectives
1. To broaden tax base and reduce tax rate to 15%
2. Elimination of exemptions on goods, except basic foodstuffs and life‐saving drugs, could generate o.25% of GDP
3. Enhanced coverage of services (excluding education and health) could increase tax revenues in the medium term by 1.5 % of GDP
4. Reduction in tax burden on industry

Introduction delayed due to

• Issue of collection by provinces of the sales tax on services
• Lobbies (especially the trading community)