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Merits and Demerits of Self Assessment Scheme

Taxation Report
Tooba Iqbal 10478 Syed Zain Junaid 11934

........................ 6 Macroeconomic Disadvantages ...................................................................................................................................................................... 6 Disadvantages of Doing taxes .............................................................Self Assessment Scheme ................ 6 Business Community Perspective .......................................................................................................................Table of Contents Introduction................................................... 8 2 ........... 7 The Government Perspective ........................................................................ 3 Self Assessment Scheme: Advantages ...............................................................................................................................................................

The objective of USAS was to facilitate the taxpayers. But. the government constituted a Task Force on Reform of Tax Administration. delayed refund payments and a non-friendly environment in tax offices. The direct taxes also play a key role in ensuring a sustainable level of economic growth and development. These factors not only reduced the tax collection but also resulted in the loss of credibility of the tax machinery in public. 2001. the introduction of USAS had also put great responsibility on the shoulders of the 3 . Historically.Self Assessment Scheme The major issues of the taxation system and revenue organisation during pre-reform period in Pakistan were. In this backdrop there was a need to address these issues in a manner that the taxation system becomes less complicated and cumbersome. to minimise the contact between taxpayers and tax collectors and to enhance income tax revenue through increased confidence of tax payers in the system. On the other hand. narrow tax base. 44 per cent and 55 per cent. respectively. discretionary powers with tax officials. public and other companies were taxed at the rate of 66 per cent. SRO culture. high tax rates. low buoyancy. the rates for the corporate sector were exceptionally high which not only discouraged tax compliance but also encouraged tax avoidance and evasion. Similarly. income tax returns submitted by the taxpayers were subjected to full assessment resulting into un-manageable litigation process and un-necessary wastage of precious time of taxpayers. During the year 1992-93 banking. heavy reliance on withholding taxes. low share of direct taxes. It may be realised that the direct taxes are generally progressive in nature. In year 2000. help in maintaining the overall proportionality of the taxation system and equitable distribution of income. the share of direct taxes in total tax collection in most of the advanced countries has been higher than indirect taxes. The old Income Tax Ordinance. The focus of the reform report was to raise tax revenues through simplified tax laws and procedures and a congenial business environment and to regain the taxpayers’ confidence in revenue organisation. The fundamental change introduced from July 2002 was the introduction of a regime of Universal Self-Assessment Scheme (USAS) in income tax. in Pakistan. Within income tax. the share of direct taxes in total federal taxes has been historically low. which presented its report in April 2001. corruption.Introduction. 1979 has been replaced with the Income Tax Ordinance.

bank interest. The new law is in accordance with the international practices in all developed countries around the world and a first such experience in this part of the world. The introduction of USAS in 2002 has proved to be a success in the income tax regime. (3)All income tax returns are accepted without any conditions of compulsory enhancement of tax liability over previous year to qualify for acceptance. contributing nearly 70 per cent of the total income tax collection. there was heavy reliance on withholding taxes and collection on demand. Whereas. Positive Impact on income tax revenue and compliance: There are three major components of income tax in Pakistan. Until the recent past. voluntary payments include. as it has shifted the focus from enforced collection to voluntary compliance with the result that the voluntary payments (VP) have emerged as a major source of income tax revenue. payments with returns and advance payments. due on them. withholding taxes are collected from more than 20 sources . (5) Rates of tax for the banking and private companies to be gradually brought down to 35 per cent by the year 2007. honestly. which has curtailed the most abused discretionary powers of the taxation officers.the major sources are salaries. (4) A certain percentage of returns filed are selected for tax audit on the basis of risk assessment to verify the accuracy and correctness of income tax returns. imports. voluntary payments.taxpayers to respond positively by assessing their own income and to pay tax. electricity and telephone bills. Some of the salient features of the Income Tax Ordinance. namely: the collection on demand. contracts. and withholding taxes. 2001 are: (1) The taxpayers themselves assess their income and determine their tax liability. (2) The powers of the taxation officer to make the assessment and impose tax have been reduced to a large extent. The collection on demand includes arrear demand and current demand. (see graph) In 4 . exports.

The new system has been helpful. during the year 2006-07. (see table)It is evident that the income tax filers have increased remarkably. after the introduction of USAS. the revenue collection has recorded a notable growth of 78 per cent. More than 50 per cent growth in the number of returns filed has been recorded in the categories of corporate and AOP during the last four years. the overall contribution of WHT in income tax fell quite rapidly. and a dawn of new economic era in the country. In other words. Moreover. poverty reduction. an unprecedented growth of 48 per cent has been recorded in the net income tax collection. Particularly. economic growth. This remarkable performance of the direct taxes enabled the CBR to achieve the rather ambitious target of Rs835 billion.1 billion in 2002-03 which has increased to Rs165. The taxpayers are now visiting CBR field formations without any hesitation and fear. the response from the corporate sector and AOP has been very encouraging.6 billion in 2006-07. During the same period. 5 . the collection on account of VP was Rs50. There is an unflinching resolve to pursue the reform process relentlessly with the hope that the new approach of the revenue organisation will pave the way for further revenue generation. not only in improving taxpayers’ confidence in the system. even though withholding taxes grew by 98 per cent. a growth of 207 per cent has been recorded during this period. investment. The USAS has been welcomed by the taxpayers by responding positively up to a large extent. The acceptance of USAS and new system can be further validated through the analysis of income tax returns during the last few years.absolute terms.

so they find the convenience of a software application very appealing. and affordability. one of the biggest "pros" of doing your own taxes is ease. or doing other self-assessments of your own taxes. people may cease to fill out tax forms "the old-fashioned way".these include software packages that guide you through the process. or to claim tax allowances or reliefs against your tax bill. to using software. In time. there are drawbacks.Self Assessment Scheme: Advantages Self Assessment involves completing an online or paper tax return in order totell the government about your income and capital gains (profits on the sale of certain assets). and then calculate what you owe. Macroeconomic Disadvantages     Higher tax evasion Lower tax revenue Lower economic growth Higher corruption and frauds 6 . or what refund you are due. Many people are tired of filling out forms when they do their own taxes. step by step. there are many ways to do your own taxes . Self-assessment of one's own taxes has advantages and disadvantages. Disadvantages of Doing taxes • You will not understand the tax system the way an accountant or tax specialist would • You may not know how to claim the full amount of deductions you are eligible for • You may make mistakes that lead to an audit or other problems with the tax department. However. or disadvantages. convenience. Today.

SAS mainly aims at inviting applications for the tax returns without having troublesome routine process of normal tax assessment. if your income is not very high. However. SAS scheme announced by the government seems contradictory to their claims to benefit the traders and business community. hiring an accountant may not be cost-effective. Bashir Miandad also criticized the 9 page form with high degree of complexity will raise fears among tax payers. he added. and your tax returns are usually very simple and straightforward. Computerised solutions to help execute this problem are also not available in Pakistan making it a system. Bashir Miandad. The cases which had been filed for preceding two immediate assessment years will not be eligible for SAS is an irrational step and conspiracy to exclude the majority to come to avail SAS. Central Chairman Pakistan Small Chamber of Commerce and Cottage Industry said. hiring a financial specialist to help you file your taxes can be very wise. On the other hand. SAS announced when only two weeks remaining to file tax returns. But experts and traders are of the view that due to its complications and harsh terms SAS will not be able to produce any fruitful results. if your taxes are complicated. it may be worth your while to pay for the professional services of a tax specialist. With the present conditions only few per cent of tax payer would get benefit out of the scheme and majority will not be benefited. with low check and balance and a tedious process. Policy also provided that persons who have whitened their money through (Tax Amnesty Scheme)TAS will only required to declare those assets and sources of payment which remain 7 .Since accountants and tax specialists are there to help clients pay the least amount of taxes they can (within the boundaries of federal law). Business Community Perspective Self-Assessment Scheme (SAS) 2000 has started new debate among the business community and traders with its unprecedented tough conditions and limitations. He said that these provisions would shrink the scope of the policy and would be resulted in a drastic decline in revenues. He further said that majority of tax payer would be excluded to avail the SAS due to provisions and limitations.

This will not only create problems for under net traders but it too discourage the new tax payers. restriction to get registered with GST has also made this scheme controversial. A chain of harsh conditions show that scheme is not focused to make all new tax payer to avail the scheme. The Government Perspective Income Tax Universal Self-Assessment Scheme (USAS) would not be eliminated. Another question mark arises regarding the detailed audit of the 10 per cent filed returns but Central Board of Revenue have not capacity to do so. He said that government should take steps to encourage tax evaders to come under the tax net but these conditions would further alienate government and detriment to increase the tax base in the country. income tax authorities opened past five-year cases that amounted to harassment. he added. This condition once again has opened the door for new controversies as tax survey dispute has not been completely settled so far. only salaried class and house property owner are mainly focused. companies filing returns as new tax payer will not be eligible for the scheme.undeclared through TAS. Addressing a post-budget briefing at Federal Board of Revenue (FBR) house Chairman FBR Sohail Ahmed said USAS was announced to facilitate the taxpayers. he added. He also called the decision unjust in which tax payers are bound to get registered with the Sales Tax Act1990. However. modarbas and banking. instead of past five-year. Regarding tax collection issue. its audit functions under USAS would be streamlined and audit would cover past one-year accounts only. FBR has 8 . Scheme also demands 20 per cent more taxes as compared to last year's 10 per cent is also a big question mark. he added. So government must realize that SAS should be subject to facilitate the tax payers rather than create further problems and controversies. Audit was not carried out from last many years and it was started in currant fiscal year 2008-09. All cases of public limited companies engaged in a leasing. however. He further said that policy has excluded the large number of tax payers from the scheme.

286 trillion would be achieved through normal growth in economy. Third party system would be adopted and in this regard private chartered accountants would be involved. He said that those that would be achieving tax collection targets and would be instrumental in increase in revenues would be getting rewards in 2009-10 and remaining would not get anything. The chairman said that it has been fixed by keeping in view the inflation and GDP. he said that FBR has provided possible protection to the local industries through import tariffs. broadening the tax base and improving tax collection through improvement in system and laws. Rs 70 billion new taxation measures announced in the budget would take it ahead and FBR authorities would endeavour to add Rs 25 billion to Rs 30 billion in total through revenue efforts in 200910. He termed the tax collection target of Rs 1. 9 . valuation system at import stage to be improved and would effectively check the mis-declaration and underinvoicing. he added. tax burden has been shifted where it was non-existent in the past. he explained.decided to conduct income tax audit based on accounts of past one-year only under USAS in 2009-10. Some 40 percent revenue would come from direct taxes side and 60 percent would come by indirect taxes during 2009-10. He said some 5 percent income tax returns from potential sectors would be selected through computer based Pera-metric selection for audit in 2009-10.178 trillion revised tax collection target for outgoing fiscal year as the collection in the first 10 days is projecting 25 percent to 30 percent increase in the last month of June. An amount of Rs 1.377 trillion for 2009-10 as challenging but getable fixed on sound analysis of economic activity in the country. he added that it would be done without harassment. He hoped that FBR would be able to achieve Rs 1. Explaining broadening the tax base. restraining un-necessary imports. Explaining the tax revenue budget methodology for 2009-10. In this raged. the chairman explained that this was based on four guiding principles supporting the manufacturing sector especially export oriented industries.

committees would be required to submit their recommendations within the next 60 days and decisions would be announced within the next 30 days. he clarified. Importers. the FBR chairman explained that 16 percent general sales tax would be applicable on commission earned by advertising agencies that book advertisements for television channels and newspapers. exporters and service providers are required to file normal return of income instead of simple statement. he said.5 percent of the tax payable if they are able to make at least 90 percent of their sales to sales tax registered persons. 2001. He explained that Alternate Dispute Resolution (ADR) system is being revamped to resolve tax disputes within minimum time frame. In this regard. The committees that would not be able to forward their recommendations within stipulated time would be dissolved. NTN has been made mandatory for purchase of property. In order to ensure filing of income tax returns by all persons having reasonable resources and income. This levy would not be applicable on advertisement charges received by the television channels and newspapers. obtaining commercial and industrial gas/electricity connection and opening of a bank account. To accelerate the pace of documentation of the economy and broadening of tax base the manufacturer is being given incentives by allowing tax credit at 2. Taxation officers are being empowered to pass best judgment assessment orders in the cases of the taxpayers who failed to furnish statutory statement as required under section 115 of the Income Tax Ordinance. He also outlined measures to broaden the tax base and promote documentation of economy. committees would be formed within 30 days. Further tax deducted/collected from such taxpayers would be treated as minimum instead of final tax. All NTN holders are also proposed to file returns necessarily. 10 . flat having covered area 2000 sq ft or owns a motor vehicle having engine capacity of 1000CC or more shall file return of income.During the question answer session. it has been proposed that any person owning immovable property with a land area having 500 sq yards.