PROJECT REPORT

Income Tax Law

Definition:
Income Tax is all income other than agricultural income levied and collected by the central
government and shared with the states.

Why People dont pay taxes in Pakistan??

Following are the points with explanations that why people dont pay taxes:

Ruling class dont pay taxes:

The reason people quote is that the people sitting at the top don't pay taxes themselves
which is true. Other than that people don't trust the government, they believe taxes will
go in pockets of the politicians in power. Instead people (some people I know) choose to
pay the same amount extra in charity. Barely 1% of Pakistan's population pays taxes (2%
is registered to pay).

Corruption:
According to a 2010 study, 99% of 256 respondents reported facing corruption with
regard to taxation. Furthermore, 32% of respondents reported paying bribes to have their
tax assessment lowered, and nearly 14% reported receiving fictitious tax assessments
until a bribe was paid.

Press Report by Finance Ministry:

ISLAMABAD, June 4 2011: Minister for Finance Dr. Hafeez Shaikh on Saturday said
that there were around 2.3 million tax-evaders out of which 0.7 million had been properly
identified with the help of latest technology. The identified non-taxpayers are residing
in high-class areas of the country, but not paying a single penny as tax he said at a postbudget news conference here. He said the non-taxpayers had at least two foreign
currency accounts in the country.
They often travel abroad and every year spends two months out of the country for
business or visiting purposes. But they dont have even Tax ID numbers, he added.
He said around 70,000 such people had been issued notices, while the others would be
issued by June end. He informed that at present only 1.5 million people are paying taxes.
Reference: Associate Press of Pakistan (Pakistans Premier). www.app.com.pk

Tax Evasion by the Countrys Elite:

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Sri Lankans pay 15 per cent of their GDP in taxes, Indians pay 17 per cent, Turks pay 24
per cent, Americans pay 28 per cent and Swedes pay a fat 50 per cent.The main reason
behind Pakistans low tax-to-GDP ratio is tax evasion by the countrys elite. Federal
officials, including ministers (even PM Gilani), only pay taxes on their government
salaries and not on their personal assets. Although the government promises to take steps
toward tax reform, it continues to dodge the issue every chance it gets.

Taking from the poor, giving to the rich:

It is an embarrassment that we continue to beg others to come to our help when the
solution is available within our own borders. As a solution to this economic crisis,
President Zardari has proposed a one-time tax. Naturally, his proposal sparked an outcry
all over Pakistan as it was perceived to be another opportunity to rob the middle and
lower classes, while handing the ruling elite a free pass. Zardari chooses to ignore the fact
that unless the entire tax structure is reformed, Pakistan will continue raking in debt and
will be unable to meet the demands of its citizens. While Zardari and the PPP are not
finding any success, a more promising effort toward reform has been undertaken by
another element of the Pakistani government.

Back Breaking Government fake Expenditures:

The expenses of the President House have been increased by 12.88 per cent for the
upcoming fiscal year. The expenses of the staff household and the allowances of the
president exceeded the allocation by 8.31 per cent in the outgoing fiscal year. As a result,
the expenses of the President House have been increased by 12.88 per cent for the
upcoming fiscal year.
The budget of the Presidents House was set at Rs427.25 million at the time budget 201011 was approved but the actual expenditures of the President house ended up at Rs462.81
million. So for the upcoming fiscal year the expenditures have been earmarked at
Rs482.63 million. It is noteworthy that the major chunk of the increase will go to pay for
the increase in the salaries of the staff.

Expanding the tax base:

The current tax structure in Pakistan has tremendous room for improvement. While the
new bill specifically addresses land redistribution and agricultural development, it will
indirectly play a great role in the expansion of the Pakistani tax base. Right now there is a
critical need for discourse on this issue between all parties because Pakistan needs a
strong combination of land and tax reform in order for any chance at economic recovery.

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Some societal beliefs:
There is a strong, and quite well-founded belief, that a large part of the tax collected will
not be spent on the welfare of the public at large, but rather on the politicians personal
needs/wants, or the needs/wants of these politicians favorites. Second, due to the above
problem, people simply do not expect that paying taxes will lead to any increase in the
quantity and quality of public goods and services provided by the state. Hence, they have
nothing to gain from paying taxes.

Lack of Balance:
The lack of judicious balance between direct and indirect taxes has pushed an
overwhelming majority of Pakistanis towards the poverty line. A report recently
submitted to the Economic Coordination Committee admits that owing to heavy taxation
of consumer items, the share of indirect taxes have registered a growth of 26.8 percent.
General sales tax registered a growth of 28.3 percent, customs duty collection witnessed
surge of 18 percent and federal excise duty went up to 33.9 percent.
The central goal of Tax Administration Reforms Project (TARP), funded by World Bank
and Department for International Development (DFID), was to improve the direct
taxation collection and minimize the indirect taxes to make the taxation system just and
fair. However, at the far end of completion of TARP, the result is just the opposite. This is
how we implement our programs and then blame IMF, the World Bank and other donors
for our own wrongdoings.

Burden only upon poor:

Due to wrong policies of the successive governments civil and military alike the
poor have been burdened with more and more taxes. What makes the situation more
painful is the fact that taxes collected are wasted by the rulers on their personal comforts
and luxuries and the masses get nothing back out of what they pay to the State.
The State has miserably failed to discharge its basic obligation of protecting life and
property of its people, what to talk of extending social services free of cost. Taxes
collected are largely being used to provide for debt serving for the security and foreign
tours of the rulers, besides regressive taxation the government is resorting to borrowing
money from wherever available to run the day to day affairs.

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Our Opinion

Inflation:
In recent years, the record inflation has reduced the purchasing power of the
consumers and the government instead of giving any relief to the poor has been
resorting to heavy indirect taxes to add further to their miseries

Wasteful Expenses:
The worsening plight of the poor is largely due to wasteful expenses on the part of
rulers and is hand-picked bureaucracy who is not answerable to courts or masses.

Failures of FBR:
The real potential of tax collection for FY 2007-08 was not less than Rs.2.5
trillion. The FBR failed to reach even the Rs.1.5 trillion mark by granting
generous exemptions and concessions to the wealthy segments of society
(exemption under one head alone i.e. capital gains on stock markets was Rs.
112.45 billion according to governments own admission at page 262 of
Economic Survey 2006-07).
It proves beyond any doubt that the tax system is directly contributing to growing
poverty as people who possess enormous income and wealth are not being
subjected to income taxation in Pakistan and poor people are subjected to heavy
taxation e.g. 16 percent sales tax. Thus, the very purpose of redistribution of
wealth as the main object of taxation is being defeated.

Burden of Indirect Taxes:

The burden of indirect taxes is always passed on the end consumers. These kinds
of taxes take a very small portion of a rich mans enormous income and a very
large slice of poor mans meager earning. The rulers controlling the state and its
resources are not ready to pay income tax on their colossal incomes from
agriculture, which they earn as absentee landlords. They are not willing to cut
non-development expenditure at least by 50 percent. They are not inclined to live
like a common man and surrender all the perks and privileges they are enjoying at

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the cost of taxpayers money. On the contrary, they are burdening the masses with
more and more indirect taxes.

Unfair Tax System:

The existing ill-directed, illogical, regressive and unfair tax system is widening
the existing divide between the rich and the poor. The sole stress on indirect
taxation (even under the garb of income taxation through presumptive tax regime
on goods and services) without evaluating its impact on the economy and the life
of poor masses is a lamentable policy. In the name of higher growth in tax
collection, the economic and social fabric of society is being destroyed.

Politicians among top Tax Dodgers:

Prime Minister Yousaf Raza Gilanis nomination papers show that while his assets
are worth millions of rupees, he did not pay any income tax from 2004 to 2007.
The reason for this given by his spokesperson is that he spent most of the period
in jail and thus did not pay income tax. Since becoming the prime minister,
though, he has paid Rs82, 000 annually, which is deducted from his salary.

Sharif, too, with declared assets in and outside Pakistan worth billions of rupees,
did not pay anything to the national exchequer during the same period.His partys
excuse is that he was in exile during that time. However, it did not share how
much income tax he is paying as chief minister Punjab.

Asfandyar Wali and Fazlur Rehman also did not pay any tax during the period
between 2004 and 2007. Sindh Chief Minister Qaim Ali Shah, who also has
declared assets amounting to billions of rupees, paid Rs8,000 in income tax in the
three-year period and Rs10,000 as land revenue for the same period.

Balochistan Chief Minister Nawab Aslam Raisani paid Rs16,000 as income tax
and Rs0.6 million as land revenue during the period in question. Leader of the
opposition in the National Assembly, Chaudhry Nisar Ali, and former Punjab
chief minister Pervaiz Elahi, who both have assets worth billions of rupees, paid
only Rs0.2 million in income tax between 2004 and 2007. And Rehman Malik,

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while he did not pay any income tax, paid a measly Rs194 as land revenue in the
three years.

Day by day increasing Poverty:

Poverty in Pakistan is a continued source of concern. Although the middle-class
has grown in Pakistan to 40 million nearly one-quarter of the population is
classified poor. 17.2% of the total population lived below the poverty line, which
is the lowest figure in the history of Pakistan.

Unpaid Taxes:
The sovereignty of Pakistan rests on the unpaid taxes of these 2.3 million affluent
citizens. Consider the following numbers: if the very rich tax evaders are charged
a nominal annual tax of $2,500, and the remaining 1.6 million not-so-wealthy
evaders are charged $1,500 annually, this would generate an additional $4.2
billion in tax revenue.
Remember that the US is offering Pakistan annually $1.5 billion (in aid) through
the Kerry Lugar Bill, in exchange for drone attacks on its own people. The $4.2
billion from the wealthiest tax-evaders could buy Pakistan its freedom from the
United States.

Thinking of a true Pakistani:

All Pakistanis, irrespective of their political or religious persuasions, hate their
countrys dependence on handouts from the United States, the IMF, the World
Bank and other similar institutions. The easiest and surest way to break free of
this economic dependency is for Pakistanis to pay their taxes.

American Insurgency:
In Pakistan, the lack of a workable tax system feeds something more menacing: a
festering inequality in Pakistani society, where the wealth of its most powerful
members is never redistributed or put to use for public good. That is creating
conditions that have helped spread an insurgency that is tormenting the country
and complicating American policy in the region.

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This is a system of the elite, by the elite and for the elite, said Riyaz
Hussain Naqvi, a retired government official who worked in tax collection for
38 years. It is a skewed system in which the poor man subsidizes the rich
man.
The problem starts at the top. The average worth of Pakistani members of
Parliament is $900,000, with its richest member topping $37 million, according
to a December study by the Pakistan Institute of Legislative Development and
Transparency in Islamabad.

Relationship between the State and the Citizen

The relationship between the State and the citizen is defined by the citizens willingness
to pay taxes. Withholding taxes weakens the State. A weakened State has no alternative
but to compromise. In Pakistans case, it is not the politicians alone who have pushed the
State to beg from the IMF or the United States. Instead, it is the citizens of Pakistan who
refuse to buy a stake in the countrys future by paying taxes, have forced the State to
borrow from IMF and other lenders.
Due to such poor unstable planning and policies the Tax Revenue percentage of GDP in
Pakistan is the least as compared to other countries. Following is the very clear but sad
percentage chart that shows how it is damaging our countrys economy.

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This poor GDP progress has come to an alarming stage and is affecting immensely on the
economy and increasing poverty day by day. Another graph represents the poverty level
in our country.

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Recommendations
What must a government do to achieve this goal?
I.

II.

III.

IV.

V.

VI.

First, make clear, credible promises for improvements and increases in public
goods and services: infrastructure, public transportation, education, health,
social security. If people see improvements in their standard of living by
paying taxes, theyll be more inclined to pay. Governments should show
people that if they pay more through taxation, then their expenses will be
reduced by the state.
Second, governments should be more transparent about how much tax is
collected, from whom it is collected (geography, profession-wise), and where
it is eventually spent. This will instill greater confidence among the public in
the governments initiatives, such as the ones listed above. It can also be
useful in ensuring greater equality in terms of the tax burden, so that one
powerful group does not evade taxation easily.
Third, ensure that filing in taxes is easy, and that help is available for those
finding it difficult. Make tax evasion hard in the first place. This can be done
by ensuring cross-checks between various data between agencies, and
different levels of administrative (local, provincial, federal, etc). Penalties for
tax evasion must be swiftly implemented without fear or favor. An honest,
competent bureaucracy, including the police service, would be a great help
here.
Fourth, reduce the tax burden on the lower and middle classes. This can
obviously be done by lowering the income tax rate, but also by shifting the
focus of taxation from indirect, consumption taxes to wealth taxes. Such a
reduction, from a pure tax collection perspective, can be beneficial by giving
people a much greater incentive to pay tax, instead of trying to evade it. Its
very much possible that the government may collect more tax revenue at
lower rates but higher compliance, as compared to higher tax rates, but higher
evasion as well.
Fifth, increase the tax net to include untaxed and low taxed activity, such as
agriculture. Apart from the above measures, the government can sell these
reforms by explaining to the people that the high rate of inflation is due to
some fundamental issues in the agriculture market, some malfunction in
markets and the state bank printing too much money.
Sixth, the last problem can be dealt with by reducing money printing through
higher tax revenue and a reduction in borrowing needs. A major problem of the

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government and the public will be solved this way. This will provide yet another
boost to the purses of ordinary Pakistanis.

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