Direct &

Taxes
Indire
ct
Presented By:
Karim Ismail Dinani
2008-1-40-9185
 Startin
g
Brief
With

discussion
Taxation system of
Pakistan:
Pakistan
Structure
an
d
trends
Economic
Objectives Assigned to Taxation
While resource mobilization remains as the primary


objective of taxation system in Pakistan, through the

medium of various exemptions and incentives, the tax
system embodies a wide range of secondary objective as
well. These include:
•Encouragement of savings
•Stimulation of certain industries
•Development of backward areas
•Encouragement of fixed investment
•Promotion of exports
•Promotion of capital markets
•Support for charity
•Support for welfare activities
•Promotion of house building
Tax Structure
• Fiscal structure in Pakistan is divided
between the Federal and the
Provincial Governments.
• This structure was derived from the
revenue-sharing provisions of the
Government of India Act 1935 and
has been incorporated into
successive constitutional provisions
outlining the respective revenue
powers of the Federal and
Provincial Governments.
Taxation Structure
Federal Government
 Federal Government
Taxes: Taxes
Taxes::
Capital Value Tax
• Income Tax Super Tax Export development
• Wealth Tax Surcharge
Development Surcharge on
• Gift tax Petroleum
• Turnover Tax Gas Development Surcharge
General Sales Tax
• Corporate Asset Tax Federal Education Cess
• Corporate Income Tax Workers Participation Fund
(A) Workers Welfare Fund
Estate Duty
• Import Duties Zakat
Ushr
• Import Surcharge Oilseeds Development Cess
• Export Duties on Companies
Tobacco Cess
• Iqra Surcharge Cotton Cess
• Income Tax on imports Development Surcharge on
Electricity
• Import Licence Fee Textile Technology Cess
• Import Registration Fee Airport Tax
• Export Registration Fee
• Central Excise Duty
• Sales Tax on
Manufactured goods
Provincial Government
Taxes
Taxes::
Professional Tax Property
Tax
Vehicle Tax Stamp Duty
Entertainment Tax
Betterment Tax Social
Security
Contribution Explosive
Licence Fee Provincial
Education Cess Capital
Gain
Tax Punjab Airport Tax
Provincial Excise Duty
Karachi
Dock Labor Board Cess Cess
on Hotels Cotton Fees
Paddy
Development Cess
Provincial
Excise Duty Land Revenue
Tax
Employee Old Age Benefit
Contribution Trade Tax on
Jewelers, Garment shops
Taxation Structure
• Under the present 1973 constitution,
constitution
Federal and Provincial Governments
are assigned separate revenue
jurisdictions.
• Federal taxes in Pakistan like most
of the taxation systems in the world
are classified into two broad
categories:
1.Direct taxes
2.Indirect taxes
Taxation Structure
Direct Taxes:
The term direct tax generally means a

tax paid directly to the government by

the persons on whom it is imposed.
Indirect Taxes:

Indirect tax is a tax collected by an

intermediary (such as a retail store) from

the person who bears the ultimate
economic burden of the tax (such as the
customer). The intermediary later files a
tax return and forwards the tax proceeds
to government with the return.

Division of Direct & Indirect
Taxes
The Federal Government has the
constitutional right to levy a wide range of
Direct Taxes including:
• Personal and corporate tax (excluding tax
on agricultural income)
• Workers Welfare Tax
• Capital Value Tax
• Worker profits participation tax
Indirect Taxes Include:

• Custom Duties
• Federal Excise
• Sales Tax
• Others
  (PKR in million) 2010-11 Budgeted 2010-11 % Change

Total Tax 1,778,715 1,679,363 -5.6%

Federal
Direct Tax 657,700 626,900 -4.7%

  Income Tax 633,000 602,500 -4.8%

Taxes
  Workers' Welfare Tax 20,000 20,000 0.0%

  Capital Value Tax 4,700 4,400 -6.4%

Indirect Taxes 1,121,051 1,052,463 -6.1%

(FY10)
Components of

  Custom 180,800 173,300 -4.1%

  Sales 674,900 654,600 -3.0%

  Federal Excise 153,600 132,900 -13.5%

  Petroleum Levy 110,000 90,000 -18.2%

  Other Tax 1,715 1,663 -3.0%

 of Direct
Description

Taxes
Income Tax (Personal & Corporate)


• Income tax is levied on the total income of a

person from all sources including salaries,
interest on securities, income from house
property, income from business,
professional or vocation, capital gains,
and 'other sources of income'.
• Income Tax Ordinance, 1979 and the rules
made thereunder provide the mechanism
for computation of income and tax.
• The structure of income tax is based on
withholding taxes (WHT), voluntary
payments (VP) and collection on demand
(COD).
 of Direct
Description

Taxes
• For salaried person, minimum threshold of
Rs.35,000 is allowed for all other income
sources.
• Corporate taxpayers do not enjoy any
minimum threshold.
 of Direct
Description

Taxes
•W ith h o ld in g ta xe s ( W H T ), W ith h o ld in g is a n
a• ct o f d e d u ctio n o r co lle ctio n o f ta x a t
so u rce . W ith h o ld in g ta xe s a re co lle cte d fro m
m o re th a n 2 0 so u rce s - th e m a jo r so u rce s
a re sa la rie s, b a n k in te re st, co n tra cts,
im p o rts, exp o rts, e le ctricity a n d te le p h o n e
b ills.
T h e co lle ctio n o n d e m a n d ( C O D ) in clu d e s
a rre a r d e m a n d a n d cu rre n t d e m a n d .
V o lu n ta ry p a ym e n ts in clu d e ; p a ym e n ts w ith
re tu rn s a n d a d va n ce p a ym e n ts.
 of Direct
Description

Taxes
• In respect of business income, losses are
allowed to be off-set against current income
from all sources and where these are not
completely absorbed, these can be carried
forward for six years to be set-off against future
profits from the same business, profession or
vocation.
• The six years time limit, however, does not apply
to un-absorbed depreciation allowance which
can be carried forward indefinitely.
• Industries set-up in Export Processing Zone enjoy
concessional tax treatment in respect of profits
and gains. Salary income of expatriate workers
and technicians is tax exempt. Similarly,
foreign investment enjoy extensive tax
 of Direct
Description

Workers Welfare Tax :

Taxes
It is charged at 2% on the manufacturers having income of Rs 100,000
and above. Employees Old Age Benefit Scheme is financed through this
fund.
Capital Value Tax :
Capital Value Tax is payable by every individual, association of
persons, firm and company, not born on the National Tax Register.
Currently CVT is payable with different rates on immovable commercial
and non commercial property, residential flats, and purchase of shares
of stock exchange.
Workers Profits Participation Fund :
This tax is paid by the industrial undertaking having more than 10
workers at 5% of their profits for distribution amongst workers. Any
leftover amount after distribution amongst the workers is deposited
with the government to become part of the WWF.
 of Indirect
Description

Taxes
 Custom Duties:
Customs duties are levied through Customs Act,


1969 on goods imported into Pakistan. It contributes

18.8% in the indirect taxes and 12% in total taxes
collected by FBR. Only 20 major commodity groups
contributed 78% of the total customs duties during
2010-11. Auto sector is the top contributor of the
customs duty. The composition of gross customs
duty collection is provided as following:
• Import Duties
• Warehouse Surcharge
• Export Development Surcharge
• Misc (auctions, recovery of arrears, defense etc)

 of Indirect
D e scrip tio n

 Federal Excise:
Taxes
Federal Excise Duties are levied on domestic production, imports and
services rendered in the country. The major excisable commodities
include cigarettes, cement, beverages, natural gas and POL products
whereas excisable services are; Air Travel, Insurance, Non-Fund Services
provided by banking or non-bank financial companies and Franchise
services. As part of budgetary measures for the year 2010-11, Special
FED at 1% has been levied on goods which are manufactured or are
imported in Pakistan.


 Sales Tax:

This tax is being implemented in our country in the mode of Value



Added Tax (VAT). At each stage a manufacturer, a wholesaler and a

retailer is required to pay tax only on the value its business activity
 T a xa tio n S tru ctu re


The Provincial Government is empowered to
legislate in respect of direct and Indirect taxes
that are not reserved to the Federal Government.
The provinces levy the following Direct Taxes:
Taxes
• Property Tax
• Agriculture Income Tax
• Land Revenue Tax
Indirect Taxes:

• Provincial Excise Duties

• Stamp Duties
• Motor Vehicle Taxes
• Others

 of Provincial
Description

Direct Taxes Taxes

 Property Tax:
• Property tax or 'house tax' is a local tax on buildings, along with
appurtenant land, and imposed on owners.

• The tax base is the annual rateable value (ARV) or area-based rating.
Owner-occupied and other properties not producing rent are assessed
on cost and then converted into ARV by applying a percentage of cost,
usually six percent.

• Vacant land is generally exempt. Central government properties are

exempt.

 Agriculture Income Tax:

An agricultural income is the income which can be generated through rent or


revenue from the land used for agricultural purposes. Income from sales of
 of Provincial
Description

Direct Taxes Taxes

 Land Revenue Tax:
Land tax is a tax levied on the owners of land, In general, your
principal place of residence (your home) or land used for primary
production (a farm) is exempt from land tax. You may be liable for
land tax if you own or part-own:
• vacant land, including vacant rural land
• land where a house, residential unit or flat has been built
• a holiday home
• investment properties
• company title units
• residential, commercial or industrial units, including car spaces
• commercial properties, including factories, shops and warehouses
• land leased from state or local government.
 of Provincial
D e scrip tio n

Indirect Taxes
Taxes
Stamp Duties:
Stamp duty is a tax that is levied on

documents. This Includes the majority

of legal documents such as cheques,
receipts, etc. A physical stamp (a
revenue stamp) has to be attached to
the document to denote that stamp
duty has been paid before the
document was legally effective.

 of Provincial
Description

Indirect Taxes
Taxes
Provincial Excise Duties:
An excise or excise tax (sometimes called a special

tax) is commonly refers to as a tax on a goods produced

for sale, or sold, within the country. An excise is
considered an indirect tax, meaning that the producer
or seller who pays the tax to the government is expected
to try to recover the tax by raising the price paid by the
buyer


Motor Vehicle Duties:

A need to pay duty on an application to register a motor

vehicle when:
• It is new and is being registered for the first time
• Registration is being transferred to another person
• An imported second hand vehicle is first registered in
Taxation system of Pakistan

.:. t r e n d s . : .
 Taxation Trends : Direct vs
Indirect Tax
Period Tax Collection (PKR Million) Growth (%)
Direct Tax Indirect Tax Total Direct Tax Indirect Tax Total

2001-02 142,505 261,565 404 , 070

2002-03 151,898 308,729 460 , 627 6.6% 18.0% 14.0%
2003-04 165,079 355,764 520 , 843 8.7% 15.2% 13.1%
2004-05 183,372 407,015 590 , 387 11.1% 14.4% 13.4%
2005-06 224,988 488,454 713 , 442 22.7% 20.0% 20.8%
2006-07 333,737 513,499 847 , 236 48.3% 5.1% 18.8%
2007-08 383,276 617,923 1 , 001 , 199 14.8% 20.3% 18.2%
2008-09 440,271 716,731 1 , 157 , 002 14.9% 16.0% 15.6%
2009-2010 528477 799,973 1 , 405 , 598 20.0% 11.6% 21.5%
2010-2011 626,900 1,052,463 1 , 679 , 363 18.6% 31.6% 19.5%
2011-2012 B 743,600 1,330,582 2 , 074 , 182 18.6% 26.4% 23.5%

Source: State Bank of Pakistan, Federal Budget 2011-12

 Tax Collection – PKR Million
Period Direct Indirect Taxes Total Taxes
Taxes
Sales Excise Customs Total
2001-02 142,505 166,561 47,186 47,818 261,565 404,070

2002-03 151,898 195,139 44,754 68,836 308,729 460,627

2003-04 165,079 219,167 45,552 91,045 355,764 520,843

2004-05 183,372 238,537 53,104 115,374 407,015 590,387

2005-06 224,988 294,798 55,272 138,384 488,454 713,442

2006-07 333,737 309,396 71,804 132,299 513,499 847,236

2007-08 383,276 375,754 91,423 150,746 617,923 1,001,199

2008-09 440,271 452,294 116,055 148,382 716,731 1,157,002

2009-2010 528477 517302 121182 161489 799973 1,405,598

2010-2011 626,900 654,600 132,900 173,300 1,052,463 1,679,363

2011-2012 B 743,600 836,700 165,600 206,400 1,330,582 2,074,182

Source: State Bank of Pakistan, Federal Budget 2011-12
 Break up wise
Period Direct Taxes Indirect Taxes Total Taxes
Sales Excise Customs Total
2001-02 35% 41.2% 12% 12% 64.7% 100%
2002-03 33% 42.4% 10% 15% 67.0% 100%
2003-04 32% 42.1% 9% 17% 68.3% 100%
2004-05 31% 40.4% 9% 20% 68.9% 100%
2005-06 32% 41.3% 8% 19% 68.5% 100%
2006-07 39% 36.5% 8% 16% 60.6% 100%
2007-08 38% 37.5% 9% 15% 61.7% 100%
2008-09 38% 39.1% 10% 13% 61.9% 100%
2009-2010 38% 36.8% 9% 11% 56.9% 100%
2010-2011 37% 39.0% 8% 10% 62.7% 100%
2011-2011 B 36% 40.3% 8% 10% 64.1% 100%

Source: State Bank of Pakistan, Federal Budget 2011-12

 Growth Rate
Period Direct Taxes Indirect Taxes Total Taxes

Sales Excise Customs Total

2002-03 6.6% 17.2% -5.2% 44.0% 18.0% 14.0%

2003-04 8.7% 12.3% 1.8% 32.3% 15.2% 13.1%

2004-05 11.1% 8.8% 16.6% 26.7% 14.4% 13.4%

2005-06 22.7% 23.6% 4.1% 19.9% 20.0% 20.8%

2006-07 48.3% 5.0% 29.9% -4.4% 5.1% 18.8%

2007-08 14.8% 21.4% 27.3% 13.9% 20.3% 18.2%

2008-09 14.9% 20.4% 26.9% -1.6% 16.0% 15.6%

2009-2010 20.0% 14.4% 4.4% 8.8% 11.6% 21.5%

2010-2011 18.6% 26.5% 9.7% 7.3% 31.6% 19.5%

2011-2012 B 18.6% 27.8% 24.6% 19.1% 26.4% 23.5%

Source: State Bank of Pakistan, Federal Budget 2011-12

Break-up of
Taxes
Indire

(FY09 -
10)
ct
 Total
Taxes
Break-up

(FY09 -
10)
of
 Taxation system of Pakistan

Reasons for
.:.
Distortion.:.
 Reasons
For Distortions
Income From Agriculture Untaxed :
The most glaring abnormality in the fiscal policy adopted by every
government in Pakistan is to leave the income from agriculture
untaxed.

Tax - Payer evading Sales Tax :

The sales tax is being implemented in our country in the mode of Value
Added Tax (VAT).
Fortunes are being built on evasion of sales tax.
It is a difficult tax to administer in a poorly documented economy
like ours.
There are innumerable cases of tax evasions through what are called
“fake and flying vouchers” in the parlance of the Sales Tax department.
 For Distortions
Reasons
A
Lack of Political Will :
All governments in Pakistan, whether military dictatorships or
democratic governments, have lacked the will to implement an equitable
tax system.

Corruption :
Dramatic Increase in corruption since the last 10 years

Tax Exemptions :
Businesses granted exemptions of income tax, sales tax and excise duty
have led people on a number of instances to misuse these policies and
almost never yielded the desired results. We have already considered
the most abused exemption, that of agricultural income.
 ..
U
Thank O
Y