PAKISTAN:REVENUE MOBILIZATIONMEASURES& CURRENTTAXISSUES

By ShahidHussainAsad Member(InlandRevenue) FederalBoardofRevenue,Islamabad Pakistan

IMF JAPAN HIGH LEVEL TAX CONFERENCE FOR ASIAN AND PACIFIC COUNTRIES

SchemeofPresentation
A. OverArchingStructureofTaxAdministration B. RecentReformsIntroduced C. MajorTaxIssues D. WayForward/ProposedReforms

A.OverArchingStructureof TaxAdministration

Pakistan:FederalTaxes
IncomeTaxexceptAgriculturalIncomeTax SalesTax(VAT) FederalExciseDuty CustomsDuty Petroleumlevy

Pakistan:ProvincialTaxes
Agricultural Income Tax Capital Value Tax Motor Vehicle Tax Land Tax Property Tax Cesses like Cotton cess, Sugar Cane cess Excises on Hotels, Cinemas, Etc.

FederalBoardofRevenue
Apex Body for collection of Federal Taxes Collects 90% of Federal Revenue Formulation and administration of fiscal policies,

levy and collection of taxes

FederalBoardofRevenue Continued
Resolving tax related disputesADRC Conclude Double Taxation and Customs

related Agreements with other Countries executive authorities of the State.

Interaction with different Ministries and

Chairman/SecretaryRevenue Division
Member Inland Revenue
Member Administ ration Member Legal Member FATE

Member Customs
Member Member Taxpayer E&C Audit

Member SP&S

FederalTaxes AdministeredbyFBR
InlandTaxes IncomeTax SalesTax FederalExciseDuty CrossBorderTaxes CustomsDuty
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FBRVision
Tobeamodern,progressive,effectiveand credibleorganizationforoptimizing revenuebyprovidingqualityserviceand promotingcompliancewithtaxlaws.

FBRMission
Enhancethecapabilityofthetaxsystem tocollectduetaxesthroughapplication ofmoderntechniques,providing taxpayerassistanceandbycreatinga motivated,dedicated,professional workforce

FBRValues
Integrity Teamwork Fairness Professionalism Courtesy Transparency

B.RecentTaxReforms Introduced

NeedForReforms
Low Tax : GDP Ratio Narrow Tax base Outdated Processes Corruption & Administrative excesses Complexity of tax laws and arbitrariness in their

application

Relationship between taxpayer and tax collector

largely adversarial

NeedforReformsContinued
Lack of transparency Inadequate HR Skills and Capabilities Management of human resources severely

deficient

Undocumented economy Lack of automation

FBRTaxReformProgram

Objectives:
To increase revenue To widen taxpayers base To simplify tax laws Taxpayer friendly environment
To develop an honest and efficient tax administration

Strategy
PolicyReforms
SimplificationofLaws Reducingrelianceonwithholdingtaxes EliminationofExemptions EffectiveDisputeResolutionMechanism

ProceduralReforms
UniversalSelfAssessment ReengineeringofProcesses Automation

AdministrativeReforms
OrganisationofFBRonFunctionalLines EstablishmentofLTUs/RTOs ReformedHRMProcess

PolicyReform
SimpleLaws&Procedures
(i)NewsimplifiedIncomeTaxLaw (ii)NewIncomeTaxRules (iii)RecordKeepingRequirements (iv)RevisedSalesTaxRefundRules (v)TaxRatesandTariffreductionandrationalization. (vi)EffectiveDisputeResolutionMechanism

ProceduralReforms
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 Taxpayers

minimized substantially.

ProceduralReformsContinued
Recordkeeping/maintenance

upgraded

through massive IT injection

Electronic Filing rendered mandatory for

all corporate taxpayers, AOPs, refund claimants, salaried individuals with income exceeding Rs. 500,000, Income Tax withholding statements and sales tax returns

AdministrativeReforms
NewOrganizationalStructure
Creation of Inland Revenue Service to handle

all inland taxes i.e. Income Tax, General Sales Tax, & Federal Excise Duty
Restructuring the top hierarchical structure of

FBR
Induction of support & functional members

AdministrativeReformsContinued
Reorganization

of the entire tax administration on functional lines, consisting of 3 Large Taxpayers Units, and 18 Regional Tax Offices across the country

Taxpayer friendly environment Minimizing contact between taxpayer and

tax collector

ReformedFunctionalStructure Field Formations

1 Taxpayer Facilitation 5 2 Information Processing 3 4

Audit

Enforcement Collection

7
Information Technology

Legal

HRM

Internal Control

KeyElementsofLTUs
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 annually Open floor layout & and one-desk operation for the taxpayer in respect of all inland taxes

TheCollectionEffort:TAXTOGDPRATIOOFPAKISTAN(2000
01To201011)
(%ofGDP)
Year 200001 200102 200203 200304 200405 200506 200607 200708 200809 200910 201011 Direct Taxes 2.99 3.20 3.17 2.92 2.72 2.82 3.85 3.79 3.46 3.66 3.33 Indirect Taxes 6.89 6.41 6.94 6.84 7.01 7.06 6.41 6.47 6.00 5.83 5.28 Surcharge /Levy* 0.73 1.23 1.41 1.09 0.41 0.67 0.74 0.34 0.99 0.90 0.24 Total Taxes 10.61 10.83 11.53 10.84 10.14 10.54 11.00 10.60 10.44 10.39 8.85 FBR Revenue 9.42 9.11 9.57 9.25 9.05 9.36 9.76 9.83 9.08 9.05 8.6 Shareof DirectTaxes 28.18 29.54 27.49 26.94 26.82 26.75 35.00 35.75 33.14 35.23 38.7

*Onpetroleumproductsandnaturalgas

MajorTaxIssues
LowTax/GDPRatio RoleofLobbies SectoralImbalances UndocumentedEconomy NarrowTaxbase

TAXTOGDPRATIO!WHYLOW?
TaxtoGDPratioalarminglylowat9%ofGDP DuetoLargeTaxExemptions

~onCapitalGainsonProperties ~immunityonforeignremittances ~WithdrawalofWealthTax ~WithdrawalofExciseDutiesonConsumerDurables

DuetoReductioninTaxRates

~MaximumTariffsonImportsdownfrom35%to25% ~CorporateandPersonalIncomeTaxratesbroughtdown

TAXTOGDPRATIO!WHYLOW?
DuetoSlackeningofFiscalEffort

~SelfAssessmentSchemewithoutAuditsin IncomeTaxandSalesTax ~NumberofIncomeTaxreturnsfiledatonly2.2 million(oneper75persons) ~Provincialgovernmentscontinuetoslacken fiscaleffortduetohighdependenceontransfers

Duetohighvariabilityinrevenuefrom

Surcharges

RoleofLobbies
ThereareanumberofformalandinformallobbiesinPakistan,

whichinfluencepolicyformulationincludingtaxreforms. Someofthemostinfluentiallobbiesinclude: Agriculturists(largelandholders,strongpresencein parliament) BusinessLobby(ChambersofCommerceandIndustries,All PakistanTextileMillsAssociation,OverseasChamberof Commerce,Associationsofwholesaleandretailtraders) Bankingsector StockMarkets Someexamplesoftheinfluenceontaxpolicyaregivenonnext slide:

RoleofLobbies:(Continued.)
Agriculturalincomecontinuestoremainexemptedfromtax
thoughprovinceshaveleviedagriculturalincometaxbut

thecollectionisnegligibleandthetaxismainlybasedon landholdingandnotonagriculturalincome

Severaleffortsfromgovernmentforgreaterdocumentationof

economyhavefailedduetostrongresistancefrombusiness lobby.Forexample,surveyforthedocumentationofeconomy launchedbythegovernmentin2000wasstronglyopposedand resistedbythebusinesssector rateforbankingcompanieswerebroughtdownfrom50%in 2002to35%in2007

Bankingsectormadehugeprofitsduringlastdecadewhiletax

RoleofLobbies:(Continued.)
TheStockExchangelobbyresistedsuccessfullytoavoidtaxation

oncapitalgainsuntil201011.CapitalGainsTaxcouldnotbe leviedatthetimewhenstockmarketswereflourishing.
CapitalGainsTaxonrealestatecouldnotbelevieddueto

strongresistancefromtheconcernedinterestgroups
VATcouldnotbeimplemented.IntroductionofVATwas

delayedduetostrongoppositionfrombusinesscommunityas wellasfrompoliticalparties
GSTcouldnotbeextendedtowholesaletradeandservices

duetostrongresistancefromtradingcommunity.

IMBALANCEDSECTORALDISTRIBUTION OFTHETAXBURDEN200910
(%) Sharein GDP Agriculture Industry Services(andothers) Total 22.5 23.5 54.0 100.0 ShareinTax Revenue 1.2 70.4 28.4 100.0 Ratio 0.053 2.995 0.526 1.000

Source:MinistryofFinance,FiscalPolicyStatement.

OutcomeofReforms
Automatedprocesses(ERS,STARR,

SMART,VERITAX,RECAPetc.) ReduceddependenceonWHT IncreasingRevenues ElectronicFiling Infrastructureimprovement GainingStakeholdersrespect Transparencyandreductionincorruption

WayForward/Proposed Reforms

RECENTREFORMS(200809Onwards)
PetroleumLevy IntroductionofFixedLevyonPetroleumProductswith largerevenueyieldofupto1%ofGDP SalesTax Phasingoutofexemptionsandzeroratingof domesticsales Rationalizationofrateofsalestax ExciseDuty AbolitionofAcrosstheBoardSpecialExciseDutyat 1%throughFinanceAct2011

RECENTREFORMS(200809 ONWARDS) (Continued)

DirectTaxes Taxationof(ShortTerm)CapitalGainsonShares
ExtensionoftheWithholdingTaxNet(BankCash

Withdrawals,AirTravel)
IntroductionofMinimumTaxonTurnover(@1%) RandomBallotforAuditwithOutsourcingtoprivate

AccountingFirms
DetectionofNewTaxPayersthroughthirdpartydata

PROPOSEDREFORMS
IntroductionofComprehensiveVAT(orRGST)withthe
followingobjectives
1. Tobroadentaxbaseandreducetaxrateto15% 2. Eliminationofexemptionsongoods,exceptbasicfoodstuffs

andlifesavingdrugs,couldgenerateo.25%ofGDP
3. Enhancedcoverageofservices(excludingeducationand

health)couldincreasetaxrevenuesinthemediumtermby1.5 %ofGDP 4. Reductionintaxburdenonindustry

PROPOSEDREFORMSContinued
Introductiondelayeddueto

~issueofcollectionbyprovincesofthe salestaxonservices ~lobbies(especiallythetrading community)

CURRENTSTATUS

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Thanks