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Seminar in Economics Policy

TOPIC: Potential for increase indirect taxation in Pakistan for next decade.

Submitted to: Dr.Rafique

Submitted by:

In the colloquial sense. In a recent survey. Thus. and cigarette taxes. hence. Tax authorities worldwide are gradually migrating the overall tax burden from direct tax to the less visible indirect taxes and are the sole big reason of increasing inflation. Pakistan is moving ahead in the right direction recommended by the World Bank which covers four broad measures to progressively reform taxation in general. whereas an indirect tax can be. As the honorable chairman of proposed FBR has excise and customs are dying levies. consumption taxes constituted approximately 30 percent of total taxation in OECD countries while in some countries these constituted more than 50 percent of the total tax revenue.Potential for increase indirect taxation in Pakistan for next decade The term indirect tax has more than one meaning. currently our government is also more focused on deriving maximum benefit from these taxes like consumption tax policies. Examples would be fuel. an indirect tax is such which can be shifted or passed on. the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed. or goods and services tax (GST)) 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). Currently. The intermediary later files a tax return and forwards the tax proceeds to government with the return. Indirect tax policy consideration Consumption taxes have grown to be a major source of tax revenue for governments around the globe. 1. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars. As now that consumption taxes are taking more prominent role. Consolidation of the number of taxes . In this sense. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. 1990 which is about to be replaced with value added tax in near future and a committee is working in CBR over this law. legislation and auditing are all under increased scrutiny by government and tax officials. value added tax (VAT). an indirect tax (such as sales tax. liquor. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else.

Government must prepare such treaties with an aim to avoid double taxation. This will have a deep impact over the mind set of tax machinery. 9 of OECD – double taxation treaties of indirect taxes. . senior manager like tax facilitation manager. need for imposing tax.– CBR must work with ministry of education to include the concept of tax. There is a dire need to increase the literacy rate not only to increase the tax to GDP ratio but also the civic sense. Other institutions are also responsible for this reduced tax to GDP ration owing to the low literacy rate. CBR is not the only institution which is responsible for reduced tax to GDP ratio. From the administrative front. basic tax calculation of direct and indirect taxes etc in the appropriate portion of syllabus at various classes or stages at school and college level and do not limit it like a 30 marks portion in B. Efforts must not only be concentrated towards illiterates. simplification of administration and above all certainty for business. commissioner. Cutting back on special exemptions and privileges 3. The training at DOT must not concentrate only on law but the difference between wrong decisions. tax audit manager and taxpayer care manager. Inspectors. an order of an economic manager and finance manager also need to be crystal clear in their mindset by experience sharing. The three dimensional strategy of Excise Tax and five dimensional strategy of Sales tax needs to be principally based instead rule based facilitation to bring certainty in Business Planning and removal of unnecessary doubts about the discrimination and transparency issues. Com. there must be a process of consultation within tax machinery for complex issues and not just throwing the ball for appeal forums. Simplifying filing requirement 4. recommend replacing the use of designation of collectors. manager. assistant collectors. types of taxes in Pakistan.2. CONSUMPTION TAX POLICIES At the moment a consistent indirect policy keeping an eye over literacy rate and geographical segregation of urban and rural population is not reflective from any document. promote harmonization of rules. taxation officers with assistant manager. mutual co-operation. Such conflicting rule based facilitation with dimensional tax legislation makes the excise and sales tax law the most difficult piece of legislation to comprehend. Broadening the tax base by keeping rates moderate in the developing countries However. that is. Moreover. the recommendation of something more in the light of directions given by working party No.

excise tax needs to be inclusive for the purpose of determination of value for the purpose of duty under section 12. TAX ON TAX and RATES OF TAX Tax on tax issue is not limited to section 148 of Income Tax Ordinance. banks are at safer side owing to precedence available in this regard. 2001 but has its roots in Sales Tax and Excise tax also. things need to be cleared with efficient advice mechanism for machinery by the CBR as it deteriorates the image. however. However.The fact that strategies are hard to apply and hard to manage. It is worthwhile here to note that rates of tax coupled with tax on tax varies the prices considerably when the items covered in sensitive price index are now manufactured and becomes the indispensable part of life of urban population. clause (a) and (d) clearly enunciates the fact that sales tax needs to be levied on value inclusive of all taxes specially federal excise. Provided free of charge 2. excise tax machinery now days taking a view that according to section 12(4). 2005 are highly debated in the professional circles of banking industry. Although various precedence in field at the moment. EXCISE TAX Rule 40A (4) of Federal Excise Rules. A levy needs to be independent in order to calculate its impact tax on tax is clearly an impediment for the tax administration owing to the variability in tax rates. however. 2005 creates two fictions while others believe in three in respect of chargeability of excise duty on normal rates irrespective of following. 2005 read with section 12(2) of the FEA. principle based strategy is much easier to apply then a rule based strategy. Some professionals believe rule 40A (4) of FER. 2005] and section 12(2) of FEA. 1. These will also bringing certainty. especially 15% rate of sales tax will greatly relieve the SPI which is continuously moving upward. 2005 [FER. A clarification needs to be issued to avoid plethora of cases in this regards. On the excise front. Such tax on tax needs to be removed and have a considerable effect over consumer price and sensitive price index issued by state bank of Pakistan. . At discounted rate or 3. Section 2 (46) – value of supply. Normal rate. Removal of tax on tax and reduction in tax rates of indirect taxes.

This list needs to include other manufacturers also to move in the direction of burying this law and increased consolidation towards sales tax and administration. 1984 has not been brought to the lime light as there is not notification available under section 22 of Sales Tax Act. In a principle based methodology. Currently. However. Let’s hope for a good review petition taking appropriate direction from the courts as it can not provide for the deficiency in law in view of Article 4 of the constitution. 1990 on payment of excise tax. I would like to quote the recent judgment of Honorable Supreme Court whereby fixed asset and scrap are liable for output sales tax at the point of sales. strongly request CBR to resolve this matter amicably and neither revenue should discuss the fact that liability arise because of taxpayers’ incorrect interpretation nor taxpayer will argue that their understanding is based on varying notifications in the field . while exercising powers under Article 199 of the constitution. the Companies Ordinance. there are only some manufacturers which are authorized to claim input under Sales Tax Act. 1990 like section 17 of Federal Excise Act. in some cases much more than ten years have elapsed and in the absence of any prescribed time limit in fiscal laws. there is no time limit needs to be prescribed in section 22 of Sales Tax Act. this may not a long term solution. Moreover. none of the appellant tried to took the direction from Honorable Supreme Court for CBR in respect of inconsistent treatment of input and output of fixed asset. Unfortunately. from the face of the judgment. the taxpayers can effectively be categorized as large. CBR should prescribe the postulates of their documents instead of the document itself. 1984 becomes the base law for such companies. however. In this regard. medium and small. 1990 which clearly specifies the holding period of records. Medium taxpayers are requested to closely align their documentation according to law while the prescription of document method needs to be left for small taxpayers. 2005. 2005. RECORD KEEPING The strategy for prescribing the necessary records should be principle based instead of existing rule based methodology. the constraint of minimum ten years record keeping requirement under section 230(6) of Companies’ Ordinance. As we know that the sales tax on services is moving in the right direction and constitutional impediment was overcome through effective arrangement. Large taxpayers normally maintain detailed records not only for tax purposes but for effective data mining to ascertain their business share in the market and effective marketing plan for future potential.According to section 7 of Federal Excise Act.

. RCPS and now CREST. CBR may stick to its current practice of refund claim during current year but must allow adjustment of refund against various different taxes during same fiscal year – income. 1990 which needs to be suitably amended in order to avoid the timing difference and problems currently being faced by the taxpayers. hence. Section 96. the existing audit section needs to be rephrased under one chapter which may include audit management. sale. suggest that CBR must consider accepting the refund related reports in MS Excel format apart from any new software. TAX REFUND INFORMATION SYSTEM It is really applaud able that CBR is making experience adjustment starting from STARR. SHARIAH COMPLIANT FINANCIAL PRODUCT Shariah Compliant Financial Product instead of Islamic Banks deliberately as Securities and Exchange Commission of Pakistan is currently working over a framework whereby NBFC will also be able to undertake and offer Shariah compliant financial product resembling to their current financial product. the most distinguishing feature of any new software is its capability of importing such MS Excel report. however. These anomalies can put the providers of Shariah compliant financial products at a commercial disadvantage. taxpayers’ obligation. The sales tax treatment of Shariah compliant financial products is somewhat uncertain and produces anomalous results. From the corporatization front. modus operandi of audit decision. excise and custom. GROUP RELIEF would like to suggest that Group relief needs to be incorporated into the Sales and Excise Tax Acts whereby intermediate supply related transactions falling within the ambit of Sales Tax needs to be zero rated while intermediate goods used by another group needs to be exempted from excise tax. 97 and 98 of Income Tax Ordinance. postulates of an audit order and time frame to conduct & complete the audit. Moreover. taxpayers are still suffering. modus operandi of audit. 2001 relating to promotion of corporatization is neither harmonized with sales tax nor with excise tax specifically stress over sub-section (2) of section 49 of Sales Tax Act. authorized representative obligation. A detailed modus operandi may be formulated which may include notifying different departments etc. This will have a considerable impact not only over the working capital cycle of business in avoiding liquidity crunch and taking unnecessary high cost loans but also help CBR in showing true revenue collection less tax refundable. By this way the taxpayers will be relieved from current practice of hectic data entry into STARR then RCPS now CREST.AUDIT Moreover. This is just because of lack of efficient IT policy which do not use appropriate system analysis methodology.

On productivity front of masses. 2001. revision of return. RECTIFICATION OF ERROR OR MISTAKE BROUGHT TO THE NOTICE Currently. This will bring the Shariah compliant financial product providers at par with conventional financial products providers and remove uncertainty. if the government takes help from chastisement and conquest then boldness. 1990.Conventional financial institutions are at ease to structure the transaction. However. CUSTOM TARRIF Rationalization of tariff after the WTO regime and continual Free Trade Agreements make this an unobservable secondary issue and this is also realized by CBR. facilitation of transfer of modern technology including research not just technological equipment. 1990 do not contain any specific provision parallel to section 221 of the Income Tax Ordinance. and hire purchase etc in such a manner that it does not fall within the ambit of Sales Tax Act. It is suggested that Shariah compliant financial products need to be brought out specifically from the preview not by implication which is the current state. Must appreciate the efforts of CBR who is trying to provide developed countries facilities in a developing country but it must adopt the practice and thoughts as tactical cum strategic economic managers not finance managers. for instance. Sales Tax Act. I would like to end up on the borrowed phrases from the preamble of History of Ibn e Khaldoon. sense of honor and self respect remains the personality trait of the masses. there are many new investments are in the offing and waiting for clarity. this procedure conquers their personality traits and sooner or later they become lazy and good for nothing – that is non-productive . hence. appeal stages also feel handicapped when any mistake was brought to their notice. CBR may not be able to reap any benefit from IT related efforts in customs unless and until there databases are attached through a key field to fetch the data and are connected through a secure intranet with the use WAN. Moreover. Although the concept is present in various section but in the absence of such specific provision claim of refund under complex situations remain unresolved for instance correction of errors. In other words. issuance of debit and credit note etc. It is suggested that tariffs needs to be suitably amended which promote investment in manufacturing and IT sector not only to become the regional hub. Apart from refund claim. not only relying over textile export but a diversified product base exporter resulting in increased GDP. “if the government gives top priority or keeps an eye over facilitation and judicial system then the boldness. honorable chairman of CBR has stated that it is a dying levy. consumer finance. sense of honor and self respect gradually extinct from the personality masses and the ability of guardianship and striving to repel an assailant would become almost absent.

5 billion in economic aid over the next five years. although Pakistan has long been one of the largest recipients of US aid. We [the United States] tax everything that moves and doesn't move.Tax offers Pakistan escape from poverty Pakistanis were thrilled to hear United States Secretary of State Hillary Clinton during her recent visit chiding the Asian country's business elite for their tax-shy habits. Your population is projected to be about 300 million. which stood at close to $1 billion in 2001.. Pakistan received $15 billion in US economic and military assistance in the 1947-2004 period. it does little to help the government escape from the trap of an enduring fiscal deficit .. This is the single-largest aid package the US has offered to any ally. Irfan Siddiqi. The US regards Pakistan's national security as inextricably linked to its economic security. The EPPA (otherwise known as the Kerry-Lugar Bill) will provide Pakistan with US$7. unless you start planning right now. attests to this new US vision of Pakistan. for plain talk.. however. and that's not what we see in Pakistan . What makes this vertical accumulation even worse is its immunity to taxation.a gap between the government's annual revenue and its expenditure . a conservative journalist who opposes the EPPA. Islamabad. According to the US Congressional Research Service (CRS). where captains of industry were assembled. has garnered far more indirect benefits from its relationship with the United States. which puts it next only to Egypt and Israel (listed alphabetically). The US Congress's Enhanced Partnership with Pakistan Act (EPPA) of 2009. You do have 180 million people. Addressing a conference in the Governor's House. And I don't know what you're gonna do with that kind of challenge. During her October 28-30 visit. Pakistan's most populous and most prosperous province. which hardly trickle down to the average Pakistani. Yet these benefits are vertical in growth. A major illustration of these benefits is remittances by Pakistani expatriates. capital of the Punjab. As a result.and . reported that $85 billion had flowed into Pakistan since 9/11.... which President Barack Obama signed into law on October 16. she met business leaders in Lahore. she stunned her audience by setting aside diplomatic niceties to hammer home a straight and searing message: At the risk of sounding undiplomatic. Middle Pakistan cheered her candor and echoed her concerns. especially since the 9/11 terror attacks there. and have now risen to $12 billion a year. The percentage of taxes on GDP [gross domestic product] is among the lowest in the world . Pakistan has to have internal investment in your public services and your business opportunities . A Pakistani lawmaker valued the indirect benefits at a remarkable $50 billion.

The financing of this gap drains the government of every ounce of its fiscal energy. Yet Pakistan has . it claimed the rate was down to 23%. believe that 50% of the national population (that is. Some independent observers. economic development. the entirety of the FATAs are food-insecure. she/he is "unpoor. Many blame the regime of former president Pervez Musharraf for reducing the definition of poverty to make it appear there were fewer people than there actually were. 40% of the national population lives below the poverty line. 97% of which are rural. Prior to October 2006.3 million residents of the tribal areas is as high as 90%. Public healthcare claimed a laughable allocation of $79 million for a nation of 180 million people. which in Pakistan is liberally defined as a food intake that is equivalent of the daily need of an adult's caloric consumption. needs $50 billion nationwide .5 billion rupees). The Mahbubul Haq Development Center counts 73% of the population living below the poverty line. Poverty among 3. such as banker and economist Shahid Hasan Siddiqi.6% of the population as poor. the government budgeted 646 billion rupees (US$8 billion) for public sector development (PSD). Poverty varies across Pakistan. The Awami National Party. the country has to mobilize its own resources by having taxable income-earners (individuals and companies) pay their fair share. In 2008. which will cost $12 make a meaningful dent in the existing level of poverty. 87 million Pakistanis) is at risk of slipping below the poverty threshold. which came to 5% of Pakistan's gross domestic product (GDP) of $160 billion. Pakistan has been financing the fiscal deficit with external and internal borrowings. if a person secures the daily diet of required calories. as of that month. and reduced public expenditures are what fuels poverty in Pakistan. according to the Pakistan Planning Commission. the Musharraf government reported 33. education.$5 billion a year for 10 years .increase what little it has to invest in what Clinton calls "public services". which border Afghanistan. followed by Balochistan and the Pakhtunkhwa. they are "poor". In 2008. In other words. The most deprived parts include rural areas. and healthcare. which includes spending on defense. are little better off. As of 2009. According to the World Food Program. The result is extensive cuts in its public expenditure. that is 43 cents per person per year. at a time when governments around the world are stoking public spending to keep afloat. a severe fiscal deficit. To raise this kind of money. has worked out a long-term economic construction plan for the seven tribal agencies. Rural Pakhtunkhwa is the worst hit by privation. however. the fiscal deficit climbed to almost $9 billion (722. 72 million Pakistanis. The untaxed vertical growth. Pakistan. which leads the coalition government in the Pakhtunkhwa. The Federally Administered Tribal Areas (FATAs). still live below the poverty line. Even by this liberal definition." if they fall short.

were thus cut down by their own power after for long taking tax-exemption as their entitlement. which Clinton lamented. which has spawned its own vicious knock-offs.85% of whom were large landholders. the government took on the landowning classes and had legislation passed to tax their income.been grossly undertaxed.of Ayub Khan. If left alone. to convince naysayers among textile barons to contribute to the national till. the first time the taboo on taxing farm income was broken. Ziauddin concluded that the landowning classes had been evading taxes of 100 billion rupees a year. whose estates extend from the Punjab to the Pakhtunkhwa. he reported "zero income" while he was still the sitting president of Pakistan. they traded in their geopolitical utility to keep them in cash. however. Imran Khan. leader of the Pakistan Tehrik-e-Insaf (Pakistan's Justice Movement) shamed the entire landed class by revealing that a practicing lawyer. Although the legislation was toothless. This shaming. the tax-GDP ratio under these governments. Khalid Ishaq. when democratically elected governments of the Pakistan People's Party (PPP) and Pakistan Muslim League (PML) were at the helm. The landowning classes. In the 1990s. In general. according to Mirza Ikhtiar Baig. paid more in taxes in 1992-93 than all 273 members of the National Assembly combined . He found that all landlords in the country pitched in just chump change of 2 million rupees in taxes in 1996 against their annual income of 600 billion rupees. A case in point is Sardar Farooq Legari. who ride on their landownership into the legislative chambers. These regimes did not rely on tax revenue to stay afloat. On this scale. to persuade them to open their checkbooks to the treasury. Large landholders are especially notorious in evading the taxman. Many believe that textile tycoons constituted some of the power behind Bhutto's ouster in 1996. Zia ul-Haq and Musharraf. Instead. The ratio increased to 14% in the 1990s. celebrated journalist-writer M Ziauddin conducted a thorough investigation into the taxable farm income and tax-paying behavior of wealthy farmers. it was symbolically potent. She would use chalk and board. This is a blatant case of tax theft. therefore. As a result. In 1994-95. those who form the top of the economic pyramid in Pakistan are resistant to paying their fair share in taxes. went easy on the urbanindustrial elite and large landholders in exchange for their support in grabbing power. In 1996. In 1994-95. did not work on lawmakers who kept evading taxes. Benazir Bhutto. hovered around 10%. an aide to Bhutto. tax . largely thanks to military regimes . has almost been tax-exempt. totally untaxed wealth). Yet the textile sector. took the national housekeeping far more seriously. She went after the "untouchables". such as the All Pakistan Textile Mills Association (APTMA). one of which is "black money" (that is. They each. during her second term in office (1993-1996). which had a projected income of $11 billion in 2007-08. The late prime minister. an economist estimated that black money in Pakistan grew as large as to form 40% of GDP.

costs the government 112 billion rupees a year. At the current exchange rate.400 rupees a month in taxable income. Siddiqi also lists the most profitable industries such as textile. Similarly.6 trillion rupees as against the projected 1.2% in 1995. the government needs to widen its tax net to black money. At least an additional 100 billion rupees can be raised by bringing farm income to tax.193 big companies reported 33. The government can close this gap by eliminating tax exemptions.yet have had their tax rate reduced to 35% from 38%. Another 1.evasion in the above-ground economy or underground economy increases the budget deficit and forces governments to shift the tax burden to consumers or to increase money supply. Its tax revenue should be 1. it is a whammy for the poor. but its share in tax revenue is just 1%. Yet the stock market capitalization has more than doubled from 2. In either case. according to Siddiqi.250 billion rupees to 1. who have now grown to more than 2 million.341 corporations claimed to be in the red.100 billion rupees to 4. The country's 768 top corporations posted taxable income as low as 8. It is unfair for a country like Pakistan to give a two-year tax holiday on capital gains. cement and sugar.000 tax payers. This means that the government's tax holiday is encouraging surplus wealth away from productive enterprises to unproductive ventures such as the stock market. Economist Mahnaz Fatima decries the government for slashing the tax-GDP ratio to 13. In 1994. it consisted of an overwhelming majority of the working middle class of 800. To have a stolen pile in untaxed wealth laundered white for 2% of giveaways in . the banking industry that has been swimming in profits .5% in 2006 from 17. Siddiqi argues that a tax-GDP ratio of 15% can raise the projected tax revenue of 1. can over the next 10 years raise $50 billion .650 billion rupees.$5 billion a year . The government. They can be readily targeted for at least another 100 billion rupees.300 rupees ($100 at the current rate) a month. Pakistan has set itself on the course of widening the tax net. while 2.6 billion rupees in 2006 alone . The tax base also is on the rise. In the 2008-09 budget. In terms of the tax-GDP ratio. Last but not least.with takings of 123. In parallel. which. that is not nearly enough.600 billion rupees within the past three years. the corporate sector is ridiculously undertaxed. thus. agriculture's contribution to GDP (of $160 billion) is 21%. the current budget features a relatively high ratio at rein in poverty. Economist Shahid Hasan Siddiqi believes that Pakistan is undertaxed by 400 billion rupees a year. $5 billion comes to 345 billion rupees.25 trillion rupees for 2008-09. Although it has attempted to net the untaxed and black money in its 2008-09 budget. yielding additional 400 billion rupees. which are near tax-exempt or pay very little in taxes. Similarly.

There is no dispute over the fact that the government needs more financial resources to steer the country out of poverty and bring economic stability in the country.taxes will only invite public wrath. closures of more and more units. while this sector has the potential to generate sufficient chunk of tax-revenue. agriculture accounts for 22 percent of the GDP. such wealth ideally should be confiscated or mercilessly taxed up to 85%. But it does not imply that the government should spend all its energies on exploiting the existing tax bases. will be the final deathblow for the entire economy. especially the business community. The result is overall industrial recession. Clinton's call for an increase in tax-GDP ratio to help Pakistan meet its challenges ahead couldn't be more appropriate. The government. The nation has already received the Eid gift in the shape of substantial hike in POL prices. All these jolted the entire nation. instead of reducing wasteful expenses is increasing the prices of inputs utilized by the business houses. . Businessmen can no longer recover the cost of various inputs from the end users the purchasing power of the masses is fast-diminishing. For example. without realizing its impact on the common man’s life. can help the government raise $50 billion over the next 10 years to combat the severity of poverty in the country. It is the most ignored sector. but contributes just 1 percent to the tax revenue. Given the dire straits in which Pakistan finds itself. These measures have been announced when the industry is on the verge of a collapse. the government would be forced to levy new taxes or enhance the rate of some prevalent ones. after these steps. Rather it should take measures to expand the tax-base as there exist enormous opportunities to broaden the tax-net by eliminating tax-exemptions. The businessmen have rightly stressed upon the government to explore avenues for broadening the tax-base. jointly or severally. The expected increase in the cost of doing business. The untapped avenues of resource mobilization the introduction of progressive taxes and the increase in production are totally being ignored by the government. instead of putting more pressure on the existing taxpayers. Indirect Taxation playing havoc rolls in Pakistan The Federal Board of Revenue (FBR) says if the half-yearly target (about 45% of the revenue target of Rs 1380 billion) is not met. rising unemployment and poverty. coupled with an 18 percent power and a 26 percent gas tariff increase. Any of the preceding measures.

The right strategy would be more and more growth in agricultural sector. On the one hand we are not exploring the actual potential of taxes of Rs 4000 billion and on the other. The government. 26 percent gas tariffs and 2 percent FED. including agrobased industries. It is a fact that our economic managers and tax collectors have utterly failed to remove the fiscal imbalances. instead of giving those bail-outs. Their tax policies are based on collecting taxes at the source and without bringing the mighty sections of society within the tax ambit or to collect what is actually due from them – absentee landlords are not paying a single penny as income tax.5 trillion. the persistence of large fiscal deficits. The FBR relies heavily on import-based taxation that results not only in huge current account deficits. Expecting. among other reasons. 1. we must concentrate on producing value-added textile products. . In reality. Instead of exporting yarn.8% of the GDP. Resultantly tax from this sector alone could have been between Rs. Had the State invested substantially in agriculture. The IMF and the World Bank then impose their conditions.5 to 2. The business houses are already facing multiple problems. Due to the huge fiscal deficit. or forcing.Total investment in this sector–60% of total population depends on it–is 1% of GDP. We should tax the import of such luxury goods heavily and give relief to the local industry. It is now reported in the Press that the government may suffer fiscal deficit of 6% of GDP during the current fiscal year. extraordinary growth in tax collection in an ailing economy can only be counter productive. but also an unprecedented surge in imports of luxury goods. Foreign direct investment (FDI) has already posted a decline of 53 percent and exports have fallen by 9 percent in the first four months of the current financial year. the government borrows more and more money. is increasing 18 percent power tariffs. yet it was just 8. The FBR collected tax revenues to the tune of Rs 1130 billion in the fiscal year 2008-09. whatever is collected is wasted by the ruling elite. we could have increased our GDP growth rate to 7% to 9%. Tax will be a natural outcome of accelerated growth in economy. remains one of the primary causes for the rise in public debt and a major source of macro-economic imbalances. The lack of a judicious balance between direct and indirect taxes and the levy of regressive taxes in the garb of income tax and petroleum development surcharge has pushed an overwhelming majority of Pakistanis towards the poverty line.

000 billion and there will be no need to burden the masses with VAT and other regressive taxes at the exorbitant rate of 16%. estate duty.4% in 2007-08. If these taxes are imposed and collected. Undoubtedly. are not being subjected to income taxation (wealth tax and other progressive taxes like capital gain tax. It is tragic that in a country where billions of rupees are earned by the rich absentee landlords. it is merely 2. 2. where it can neither afford to give any meaningful tax relief package to the common people. The sole reliance on indirect taxes that constitute over 80% of the total collection proves beyond any doubt that the tax system is directly contributing to the rising cost of doing business and abject poverty.01% in 2005-2006. They are not ready to pay income tax.2% in 2008-09. knowing very well that VAT will not hit them. There should be no exemptions. the tax-to-GDP ratio is pathetically low at 8. Thus. These figures establish. wealth tax. capital gain progressive taxes on their colossal incomes and wealth. 2. our economy is faced with a dilemma. The burden of such taxes is to be borne by the end users. who possess enormous income and wealth.The government must collect taxes of Rs 4000 billion by bringing all persons. gift tax and estate duty were abolished to favor the rich). The contribution of income tax [although a major portion of it is now composed of indirect levies or expenditure taxes]. as a percentage of GDP. Serious efforts should be made to use taxation as a catalyst for economic development and industrial growth. We need progressive taxes incidence of which is on the rich segments rather than regressive taxes like Value Added Tax (VAT). enormous money is made in speculative transactions. VAT – being a regressive tax – takes a larger portion of the meager income of a poor man but a thin slice of the rich man’s cake. are keen to levy more regressive taxes.15% [FBR YEAR BOOKS 2004-05 to 2006-07 and Economic Surveys of Pakistan 2007-08 and 2008-09]. beyond any doubt. The priority of the government should be improving productivity and economic growth that will ultimately result in more revenue generation. is continuously declining. This tax is passed on to the consumers. within the tax net. the prevalent economic and tax policies are detrimental for business and industry. 3. whereas in 2004-2005 it was 3. trade and industry [due to the huge . At present. as rent of land and orchards. we can easily collect Rs 4. having a taxable income.8% in 2006-07. People.8%. Those who possess more economic power (income and wealth) should contribute more to the public exchequer and vice versa. that rich segments of society are paying negligible tax. Indirect taxation is playing havoc with society. Our rulers. the very purpose of the redistribution of wealth as the main object of taxation is being defeated. at the behest of IMF and World Bank.

viz. are liable to tax. Income from other sources. 3.. all income is classified under the following heads: 1. Tax on Companies All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. This is a vicious circle that the government needs to break. 10. It must come out of this tangle to make Pakistan a competitive economy where investors. Inter-Corporate Dividend Tax Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. at the rates rending from 10 to 35 per cent. However. A broad description regarding the nature of administration of these taxes is explained below: Direct Taxes Direct taxes primarily comprise income tax. provided it does not exceed Rs. the effective rate is likely to differ on account of allowances and exemptions related to industry. Capital gains. Salaries 2. along with supplementary role of wealth tax. both domestic and foreign. etc. Interest on securities. Treatment of Dividend Income Dividend income received as below enjoys tax exemption. . location. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income. find satisfactory conditions to live and invest.5%.. Income from property. Inert-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i. For the purpose of the charge of tax and the computation of total income. unregistered firms. and 6.e. Income from business or professions 5. Taxation System Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories. exports. 7. associations of persons. etc. 4.fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to the retrogressive tax measures].000/-. Personal Tax All individuals. Other companies are taxed at the rate of 20%.. direct and indirect taxes.

· all supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him. and services provided or rendered in Pakistan. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. All exports are exempted from Central Excise Duty. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding system which is being used all over the world. These agreements lay down the ceilings on tax rates applicable to different types of income arising in Pakistan. the general scheme envisages higher rates on luxury items as well as on less essential goods. Dividend received by non-resident from the state enterprises Mutual Fund set by the Investment Corporation of Pakistan. Central Excise Central Excise duties are livable on a limited number of goods produced or manufactured. Agreement for avoidance of double taxation The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countries including almost all the developed countries of the world. · there are an in-built system of input tax adjustment and a registered person can make . Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad. however. if such income has already been subjected to tax outside Pakistan. 2. Customs Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. payable by the importers. They also lay down some basic principles of taxation which cannot be modified unilaterally. Unilateral Relief A person resident in Pakistan is entitled to a relief in tax on any income earned abroad. The rate structure of customs duty is determined by a large number of socio-economic factors. On most of the items Central Excise duty is charged on the basis of value or retail price. Sales Tax · Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on: · all goods imported into Pakistan. chargeable to duty on the basis of weight or quantity.1. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lower than those on consumer goods. Some items are. whichever is lower. However.

As a result of talks with IMF for next tranche. Measuring the im plementation of IMF conditions is not straightforward. It is apprehended that if the target of fiscal deficit which is core area of IMF’s medicine to poor state is not materialised by the government. Keeping in view the shortfall of the projected revenue for current financial year. the government’s central challenge in this first budget would be putting downwards pressure on inflation. it is unlikely that such reduction in deficit can be achieved. Presently. other targets such as expenditure of Rs3. Critics are fast to note that this budget is no exception. development expenditure Rs616 billion and . Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies. The budget for the fiscal 2009-10 is due to be announced in June this year. There should be priority on the national issues and allocation of funds for various key sectors and the role and extent of IFIs.064 trillion.adjustment of tax paid at earlier stages against the tax payable by him on his supplies. Pakistan Budget 2009-2010 and IMF consolidations.6 billion may be delayed. reducing fiscal deficit and increase tax to GDP ratio. 2009 under 23 months Standby Arrangement loan of $7.6 billion loan of IMF. defence expenditure Rs380 billion. at present. just after the approval of second tranche of $800 million of $7. Budget document presents the government action plan of priority and allocation of funds and the question that confronts us is ‘how to strength the policy that should not undermine the sovereignty on decision making functions of the country. debt servicing Rs751 billion. It remained a question whether the resolution of annual budget is to gain political mileage or to reveal an economic action plans for next year? This question becomes much relevant in upcoming budget in view the garb of economic restructuring plan of IMF for Pakistan. then the future trenches after June 30.

Pakistan will . which naturally gives leverages to influence the monetary policies and budgets. how much exploitation of present sectors of tax-base can be made. is not a difficult riddle. As per agreement with the IMF we are under obligation for a new value-added tax laws for full implementation. though there is stronger view that existing bases should be exploited.879 trillion is already fixed for next financial year. Pakistan had a long and difficult relationship with the IMF and it remained concerned with macro economic issues of Pakistan. may not work with other states keeping in view the week tax structure. If we look at Pakistan’s present tax structure in international perspective. What we need is to link our tax base with our per capita income which is also lowest in the revenue of Rs1. If this tax is not charged at the borders. It caused lower tax to GDP ratio which is now declined to 9. There is a potential chance that under VAT sales is underreported. The policy makers seeking to reform tax structure must comprehend that a misguided tax reform would do more harm than good to the general public. then there is a brighter chance form accumulation of profits by importers without any tax. Keeping this fact in view. So fixing up these macro targets already tuned the budget of 2009-2010. From a macroeconomic perspective. Now the authorities in Pakistan targeted its raise to 15-18 per cent through tax reforms in coming 5 years. it will improve the horizontal equity of the sales tax and replacing a corporate profits tax with a VAT will make revenues more stable but with the caution that what works with Europe. we would know that already it has narrow tax base while having tax evasions too. replacing a corporate profits-tax with a VAT. It will also increase administrative cost of the tax collection. barring a miracle any way. It is also said that if potential in the existing tax base gets exploited. This new VAT system will replace the existing general sales tax (GST) regime. but this takes a whole restructuring of the tax system. now with great emphasis on the value added tax (VAT). leaving a smaller room for consumers to know that they are paying VAT. Since 1998. A revised target of 1 trillion is already set for the next financial year by Federal Board of Revenue.5 per cent which in 1980s and 1990s remained at 12 and 13 per cent respectively. In EU it is ranging between 24 to 44 per cent. Unlike sales tax VAT often may not be itemised on retail receipts. will make already-unfair tax systems even more regressive to consumers. IMF’s favorite policy advice area is tax reforms. Under the given tax structure it is believed that it will be regressive and put more burden on poorer than rich classes of any country. which will easily generate 400 to 500 billion rupees. Rationale of VAT must have some merit for replacing a sales tax or excise duty. Though it is also be considered as most efficient way of raising revenue but we should be mindful that it would be also at risk of evasion and tricks may be lesser but still. For the past three decades. a particular area of interest for policy makers is whether the existing overall tax to GDP ratio is appropriate. and VAT with a relatively high registration threshold will exclude smaller businesses for which this is likely to be more of a risk. and whether the existing composition of tax revenue is viable. Naturally we need to enhance the tax net base. ghost traders can evade VAT as other taxes. Since it is passed through to consumers like a sales tax. It is lower even in the region where average is about 15 per cent to GDP. unregistered groups will be beneficiary.

and it is not their issue. for already exploited areas. if it is done by increasing tax more on indirect source on already well exploited sectors or to take some superficial measures on administration level for reducing the tax evaders. Just focusing on indirect taxes will not give revenue recovery in the long run. In the past the promises of brining Agriculture sector in to tax net have been made but did not work. if Pakistan wants to continue with IMF program.easily be able to generate Rs300 to Rs400 billion and can generate revenues of over Rs100 -150 billion if tax exemption is revisited but it would need an investment in restructuring of the tax system to work. In given structure it is the biggest sector of tax evasion. it has to go for agriculture tax. Now it has been warned by IMF that there is no escape. as often the income of non-agriculture can be exposed as agriculture income which substantially increases nonformal sectors of economy. The IFIs surely wants us to improve tax revenue. Agriculture sector accounts for 22 per cent to GDP but contributing in tax revenue only 1 per cent. . Agriculture tax will give a financial cushion immediately to tax gap in present circumstances. The tax area would enhance capacity through investment in traditional tax sectors.