The level of Literacy rate and tax education both are different 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
FBR, however, in major cities FBR 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 FBR to taxpayer –
Compliance expected by FBR, Avoid paying additional taxes, Be Safe and Secure in terms of
Inadmissible taxes, The Direct/Indirect Tax Regime etc.

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. Pakistan’s 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.