ISSUES OF TAXATION IN PAKISTAN AND ITS SOLUTIONS

7/28/2019 ISSUES OF TAXATION IN PAKISTAN AND ITS SOLUTIONS

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PAKISTAN:REVENUEMOBILIZATIONMEASURES&CURRENTTAXISSUESBy

ShahidHussain

Asad

Member(InlandRevenue)

FederalBoard

of

Revenue,

Islamabad

Pakistan

IMF JAPAN HIGH LEVEL TAX CONFERENCE FOR ASIAN

AND PACIFIC COUNTRIES


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SchemeofPresentation

A. OverArchingStructureofTaxAdministration

B. RecentReformsIntroduced

C. MajorTaxIssues

D. WayForward/ProposedReforms


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A.

Over

Arching

Structure

of

TaxAdministration


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Pakistan:FederalTaxes

IncomeTaxexceptAgriculturalIncomeTax

SalesTax(VAT)

FederalExcise

Duty

CustomsDuty

Petroleumlevy


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Pakistan:ProvincialTaxes Agricultural Income Tax

CapitalValueTax

Motor Vehicle Tax

Land Tax

PropertyTax

Cesses like Cotton cess, Sugar Cane cess Excises on Hotels, Cinemas, Etc.


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FederalBoardofRevenue

Apex Body for collection of Federal Taxes

Collects 90% of Federal Revenue

Formulation and administration of fiscal policies,

levy and collection of taxes


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FederalBoardofRevenue Continued

Resolving tax related disputesADRC

Conclude Double Taxation and Customsrelated Agreements with other Countries

Interaction with different Ministries and

executive authorities of the State.


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Chairman/SecretaryRevenueDivision

Member

Inland

Revenue

MemberAdminist

ration

MemberLegal

MemberFATE

Member

Customs

MemberSP&S

MemberTaxpayer

Audit

MemberE&C


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FederalTaxes AdministeredbyFBR

InlandTaxes IncomeTax

SalesTax

FederalExciseDuty

CrossBorderTaxes Customs

Duty


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FBRMission

Enhancethecapability of the taxsystem

tocollectduetaxesthroughapplication

ofmoderntechniques,providing

taxpayerassistanceandbycreatinga

motivated,dedicated,professional

workforce


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FBRValues

Integrity

Teamwork

Fairness

Professionalism

Courtesy

Transparency


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B.

Recent

Tax

Reforms

Introduced


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NeedForReforms

Low Tax : GDP Ratio

Narrow Tax base

Outdated Processes

Corruption & Administrative excesses

Complexity of tax laws and arbitrariness in theirapplication

Relationship between taxpayer and tax collectorlargely adversarial


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FBRTaxReformProgram

To increase revenue

To widen taxpayers base

To simplify tax laws

Taxpayer friendly environment

To develop an honest and efficient taxadministration

Objectives:


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Strategy

PolicyReformsSimplificationofLawsReducingrelianceonwithholdingtaxesElimination

of

Exemptions

EffectiveDisputeResolutionMechanism

ProceduralReformsUniversal

Self

Assessment

ReengineeringofProcessesAutomation

AdministrativeReformsOrganisationofFBRonFunctionalLinesEstablishmentofLTUs/RTOs

ReformedHRM

Process


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SimpleLaws&Procedures(i)

New

simplified

Income

Tax

Law

(ii) NewIncomeTaxRules

(iii)Record

Keeping

Requirements

(iv)RevisedSalesTaxRefundRules

(v)

TaxRates

and

Tariff

reduction

and

rationalization.

(vi)EffectiveDisputeResolutionMechanism

PolicyReform


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UniversalSelfAssessment All income tax returns filed are treated as

assessment orders

No Returns are audited unless selected by the

System or on the basis of specific information

Contact between tax officials and Taxpayersminimized substantially.

ProceduralReforms


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ProceduralReformsContinued

Recordkeeping/maintenance upgraded

through massive IT injection

Electronic Filing rendered mandatory forall corporate taxpayers, AOPs, refundclaimants, salaried individuals with

income exceeding Rs. 500,000, IncomeTax withholding statements and sales taxreturns


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NewOrganizationalStructure

Creation ofInland Revenue Service to handleall inland taxes i.e. Income Tax, General SalesTax, & Federal Excise Duty

Restructuring the top hierarchical structure of

FBR

Induction of support & functional members

AdministrativeReforms


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AdministrativeReformsContinued

Reorganization of the entire tax

administration on functional lines, consistingof 3 Large Taxpayers Units, and 18 Regional

Tax Offices across the country

Taxpayer friendly environment

Minimizing contact between taxpayer and

tax collector


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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 annuallyOpen floor layout & and one-desk operation for

the taxpayer in respect of all inland taxes

KeyElementsofLTUs


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TheCollectionEffort:TAXTOGDPRATIOOFPAKISTAN(200001To201011)

(%ofGDP)

YearDirect

Taxes

Indirect

Taxes

Surcharge

/Levy*

Total

Taxes

FBR

Revenue

Shareof

DirectTaxes

200001 2.99 6.89 0.73 10.61 9.42 28.18

200102 3.20 6.41 1.23 10.83 9.11 29.54

200203 3.17 6.94 1.41 11.53 9.57 27.49

2003

04 2.92 6.84 1.09 10.84 9.25 26.94200405 2.72 7.01 0.41 10.14 9.05 26.82

200506 2.82 7.06 0.67 10.54 9.36 26.75

200607 3.85 6.41 0.74 11.00 9.76 35.00

200708 3.79 6.47 0.34 10.60 9.83 35.75

200809 3.46 6.00 0.99 10.44 9.08 33.14

200910 3.66 5.83 0.90 10.39 9.05 35.23

201011 3.33 5.28 0.24 8.85 8.6 38.7

*Onpetroleumproductsandnaturalgas


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MajorTaxIssues

Low

Tax/GDP

RatioRoleofLobbies

SectoralImbalances

UndocumentedEconomy

NarrowTaxbase

TAX TO GDP RATIO!WHY LOW?


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TAXTOGDPRATIO!WHYLOW?

Taxto

GDP

ratio

alarmingly

low

at

9%

of

GDP

DuetoLargeTaxExemptions

~ onCapitalGainson Properties

~ immunityonforeignremittances

~

Withdrawalof

Wealth

Tax

~ WithdrawalofExciseDutiesonConsumer Durables

Dueto

Reduction

in

Tax

Rates

~ MaximumTariffsonImportsdownfrom35%to25%

~ CorporateandPersonalIncomeTaxratesbroughtdown


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TAXTOGDPRATIO!WHYLOW?

DuetoSlackeningofFiscalEffort

~ SelfAssessmentSchemewithoutAuditsin

IncomeTax

and

Sales

Tax

~ NumberofIncomeTaxreturnsfiledatonly2.2million(oneper75persons)

~

Provincialgovernments

continue

to

slacken

fiscaleffortduetohighdependenceontransfers

Dueto

high

variability

in

revenue

from

Surcharges


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ThereareanumberofformalandinformallobbiesinPakistan,whichinfluencepolicyformulationincludingtaxreforms.

Some

of

the

most

influential

lobbies

include: Agriculturists(largelandholders,strongpresencein

parliament)

BusinessLobby(ChambersofCommerceandIndustries,AllPakistan

Textile

Mills

Association,

Overseas

Chamber

of

Commerce,Associationsofwholesaleandretailtraders)

Bankingsector

Stock

Markets

Someexamplesoftheinfluenceontaxpolicyaregivenonnextslide:

RoleofLobbies


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R l f L bbi (C ti d )


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The

Stock

Exchange

lobby

resisted

successfully

to

avoid

taxation

oncapitalgainsuntil201011.CapitalGainsTaxcouldnotbeleviedatthetimewhenstockmarketswereflourishing.

CapitalGains

Tax

on

real

estate

could

not

be

levied

due

to

strongresistancefromtheconcernedinterestgroups

VATcould

not

be

implemented.

Introduction

of

VAT

was

delayedduetostrongoppositionfrombusinesscommunityaswellasfrompoliticalparties

GSTcouldnotbeextendedtowholesaletradeandservicesduetostrongresistancefromtradingcommunity.

RoleofLobbies:(Continued.)


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IMBALANCEDSECTORALDISTRIBUTION

OFTHE

TAX

BURDEN

2009

10

(%)

ShareinGDP

ShareinTaxRevenue

Ratio

Agriculture 22.5 1.2 0.053

Industry 23.5 70.4 2.995

Services(and

others) 54.0 28.4 0.526

Total 100.0 100.0 1.000

Source:

Ministry

of

Finance,

Fiscal

Policy

Statement.


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OutcomeofReforms

Automatedprocesses

(ERS,

STARR,

SMART,VERITAX,RECAPetc.)

Reduceddependence

on

WHT

IncreasingRevenues

Electronic

Filing Infrastructureimprovement

GainingStakeholdersrespect

Transparencyandreductionincorruption


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WayForward

/Proposed

Reforms


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RECENTREFORMS(200809Onwards)

PetroleumLevy

IntroductionofFixedLevyonPetroleumProductswith

largerevenue

yield

of

upto

1%

of

GDP

SalesTax

Phasingoutofexemptionsandzeroratingofdomesticsales

Rationalizationofrateofsalestax

ExciseDuty

AbolitionofAcrosstheBoardSpecialExciseDutyat1%throughFinanceAct2011


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RECENTREFORMS(200809

ONWARDS)

(Continued)DirectTaxes

Taxationof

(Short

Term)

Capital

Gains

on

Shares

ExtensionoftheWithholdingTaxNet(BankCash

Withdrawals,

Air

Travel)

IntroductionofMinimumTaxonTurnover(@1%)

RandomBallotforAuditwithOutsourcingtoprivateAccountingFirms

DetectionofNewTaxPayersthroughthirdparty data


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PROPOSEDREFORMSContinued

Introductiondelayeddueto

~

issueof

collection

by

provinces

of

the

salestaxonservices

~

lobbies(especially

the

trading

community)


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39

CURRENTSTATUS


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Thanks

Documents

ISSUES OF TAXATION IN PAKISTAN AND ITS SOLUTIONS