TAXATION SYSTEM OF PAKISTAN.

INSTITUTE OF ADMINISTRATIVE SCIENCES

UNIVERSITY OF THE PUNJAB, LAHORE

Submitted to:-

Ma’am Ayesha Hanif

Submitted by:-

Faryal Shahzad 155

Tuba Makhdoom 152

Rafia Zaheer 146

Rimsha Tahir 133

Muhammad Adeel 128

Sajid Ali 158

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CONTENTS

1. Introduction
1.1 Tax
1.2 Types of tax
1.3 Types of direct and indirect tax
1.4 Objectives
2. Taxation in Pakistan
2.1 History of taxation
2.2 Principles of taxation
3. Structure of taxes
3.1 Proportional tax
3.2 Progressive tax
3.3 Regressive tax
4. Tax laws in Pakistan:
Legislature of Tax Laws
Income Tax Ordinance,2001.
Distribution of Revenues (Presidential Order 2010)
Income Tax Rules, 2002
Tax Rates, 2019
Sales Tax Laws of Pakistan
Provincial Tax in Punjab
5. Tax system of Pakistan
5.1 CBR
5.2 FBR
6. Challenges faced by the government in collection of tax
6.1 Problems
6.2 Solutions
7. Conclusion
7.1 Tax problems in Pakistan
7.2 Tax corruption in Pakistan
7.3 Suggestions

Abstract
This paper undertakes a critical evaluation of the strengths and weaknesses of all of Pakistan’s
major sources of tax revenue: the individual income tax, the corporate income tax, the sales tax,
excise taxes and trade taxes on imports. Taxation has always been proved as a backbone of
government machinery. This study provides a brief introduction of different types of taxes such
as direct and indirect taxes. The role judiciary, executive and legislation are also discussed. The
laws inactive in Pakistan, current policy and provincial order are also named in this study. The
role of Central Board of Revenue (CBR) and Federal Board of Revenue (FBR) are also
elaborated under the IT rules, 2002. After that exercise the paper identifies the concluding
section of this paper sets forth for consideration an array of tax reform proposals that attempt to
address he most important flaws and problems that have been detected in Pakistan’s tax system.

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TAXATION

Mark Twain once said that there were only two things in life that were as certain as the dawn,
death and taxes. It is true, we as a society have come to accept the inevitability of taxes. Everyone
hates them, but we recognize their need.

Taxes are any payment on behalf of the individual to the government. Taxes are used to pay for
all government services. Without taxes the government would have no money to operate.

Just about every taxpayer complains about the high rate of taxes, yet if one were asked if they
would trade the tax for the removal of service, they would rather pay the tax. In order for taxes to
be acceptable, however, they must meet certain criteria. In order for a tax to be successful, it must
be equitable, simple, and efficient.

According to Hugh Dalton

“a tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount
of service rendered to the taxpayer in return, and not imposed as penalty for any legal offense”.

TYPES OF TAX
There are two types of taxes which includes

 Direct tax
 Indirect tax

Direct taxes:
A tax is said to be direct tax when impact and Incidence of a tax are on one and same person, i.e.,
when a person on whom tax is levied is the same who finally bears the burden of tax.

For Instance, income tax is a direct tax because impact and incidence falls on the same person.

If impact of tax falls on one persons and incidence on another, the tax is called indirect.

For example, tax on saleable articles is usually an indirect tax because it can be shifted on to the
consumers.

Merits of Direct Tax:

(i) Direct taxes afford a greater degree of progression. They are, therefore, more equitable.

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(ii) They entail fewer expenses on collection and as such are economical.

(iii) They satisfy canons of certainty, elasticity, productivity and simplicity.

(iv) Another advantage of direct taxes is that they create civic consciousness in people. When a
person has to bear burden of tax, he takes active interest in affairs of state.

Demerits of Direct Tax:

(i) It is easy to evade a direct tax than an indirect tax. Taxpayer is seldom happy when he pays tax.
It pinches him that his hard-earned money is being taken by government. So he often submits false
statements of his income and thus tries to evade tax. Direct tax is in fact a tax of honesty.

(ii) Direct tax is very inconvenience because taxpayer has to prepare lengthy statements of his
income and expenditure. He has to keep a record of his income up-to-date throughout the year. It
is very laborious for taxpayer to prepare and keep these records.

(iii) Direct tax is to be paid in lump some every year while income which a person earns is received
in small amounts. It often becomes difficult by taxpayers to pay large amounts in one instalment.

Indirect Taxes:

Indirect taxes are those taxes which are paid in the first instance by one person and then are shifted
on to some other persons. The impact is one person but the incidence is on the other.

Merits of Indirect Tax:

(i) It is not possible to evade indirect tax. The only way to avoid this tax is not to buy taxed
commodities.

(ii) They are more convenient because they are wrapped in prices. Consumer often does not know
that he is paying tax.

(iii) Another advantage of tax is that every member of society contributes something towards
revenue of state.

(iv) Indirect tax is also elastic to a certain extent. State can increase its revenue within limits by
increasing rates of taxes.

(v) If state wishes to discourage consumption of intoxicants and harmful drugs, it can raise their
prices by taxing them. This is a great social advantage which a community can achieve from tax.

Demerits of Indirect Tax:

(i) A very serious objection levelled against indirect taxation is that it is regressive in character. It
is inequitable. Burden of tax falls more on poor people than on rich.

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(ii) Indirect tax is also uneconomical. State has to spend large amounts of money on collection of
taxes.

(iii) Revenue from indirect tax is uncertain. State cannot correctly estimate as to how much money
it will receive from this tax.

(iv) As lax is wrapped up in prices; therefore, it does not create civic consciousness.

(v) If goods produced by manufacturers are taxed at higher rates, it hampers trade and industry and
causes widespread unemployment in the country.

After discussing merits and demerits of two types of taxes, we come to conclusion that for
reducing inequality of income and raising sufficient funds for state, both these taxes are essential,
A country should not place exclusive reliance on any one type, but should employ both these forms
of taxation.

We agree here with Gladstone when he says:

"Direct and Indirect taxes are like two equally fair sisters to whom as Chancellor of Exchequer,
he had to pay equal addresses".

In recent times, however, there has been a slight change in utilization of both these types of taxes.
Every state, in order to reduce inequality of income, is trying to raise major portion of its income
from direct taxes.

Direct and indirect taxes are further classified in the following categories which includes the
following:
Types of direct tax:

It includes the following

 Income tax
 Corporate tax
 Securities transaction tax
 Wealth tax
 Capital gains tax
Income tax

An income tax is a tax that governments impose on income generated by businesses and
individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to
determine their tax obligations. Income taxes are a source of revenue for governments. They are
used to fund public services, pay government obligations, and provide goods for citizens.

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Most countries employ a progressive income tax system in which higher-income earners pay a
higher tax rate compared to their lower-income counterparts. The United States imposed the first
income tax during the War of 1812. Its original purpose was to fund the repayment of a $100
million debt incurred from war-related expenses. After the war, the tax was repealed and then
reinstated during the early 20th century.

Corporate tax

A corporate tax is a levy placed on the profit of a firm to raise taxes. After operating
earnings are calculated by deducting expenses, including the cost of goods sold (COGS) and
depreciation from revenues, enacted tax rates are applied to generate a legal obligation the business
owes the government. Rules surrounding corporate taxation vary greatly around the world and
must be voted upon and approved by the government to be enacted.

Securities transaction tax

(STT) is a tax levied at the time of purchase and sale of securities listed on stock exchanges in
India.

Securities are tradable investment instruments such as shares, bonds, debentures, equity-oriented
mutual funds (MFs) and so on and are issued either by companies or by the Indian government

This tax was introduced in the 2004 Union Budget and came into effect from 1 October 2004.

The rate of STT differs based on the type of security traded and whether the transaction is a
purchase or a sale.
For instance, while buying or selling an equity share (delivery-based), purchaser and seller both
need to pay 0.1% of share value as STT.

Wealth tax

Wealth tax is a tax based on the market value of assets that are owned. Although many developed
countries choose to tax wealth, the United States has generally favored taxing income.

Wealth tax is also called capital tax or equity tax.

Wealth taxes are used by governments principally as a means of promoting social equity by
reducing disparities in wealth holdings. While proponents believe this tax promotes equality,
critics state that it discourages accumulation of wealth, which is thought to drive economic growth.

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The problem with the wealth tax is that it also applies to people who earn low income but have a
high-value asset, such as a home. For example, a farmer who earns little but whose land is highly
valued may have trouble coming up with money to pay the taxes.

Capital gains tax

Capital gains tax is a tax levied on capital gains, which are profits from the sale of specific types
of assets, including stocks, bonds, precious metals and real estate. This tax is calculated on the
profit – or positive difference – between the sale price and the original purchase price of the asset.

Most countries' tax laws, though not all provide for some form of capital gains taxes on investors'
gains, although laws vary from country to country. In Canada, for example, residents pay half of
their marginal tax rate on capital gains. In the United States, individuals and corporations are
subject to capital gains taxes each year on their annual net capital gains. Capital gains taxes apply
to anyone who sells an asset for profit – unless that person sells and buys assets for a living, as
a day trader does. In that case, profits are taxed as business income, not as capital gains.

Types of indirect tax:

It includes the following types

 Excise tax
 Custom duty
 Value added tax
 Service tax
Excise tax

An excise tax is an indirect tax on the sale of a particular good or service such as fuel, tobacco and
alcohol. Indirect means the tax is not directly paid by an individual consumer — instead,
the Internal Revenue Service (IRS) levies the tax on the producer or merchant, who passes it onto
the consumer by including it in the product's price.

In some cases, governments levy excise taxes on goods that have a high social cost, such as
cigarettes and alcohol, and for this reason, these taxes are sometimes called sin taxes.

Custom duty

Import duty is a tax collected on imports and some exports by a country's customs authorities. A
good's value will usually dictate the import duty. Depending on the context, import duty may also
be known as a customs duty, tariff, and import tax or import tariff.

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Import duties have two distinct purposes: raise income for the local government and to give a
market advantage to locally grown or produced goods that are not subject to import duties. A third
related goal is sometimes to penalize a particular nation by charging high import duties on its
products.

Value added tax

A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at
each stage of the supply chain, from production to the point of sale. The amount of VAT that the
user pays is on the cost of the product, less any of the costs of materials used in the product that
have already been taxed.

More than 160 countries around the world use value-added taxation, and it is most commonly
found in the European Union. But it is not without controversy. Advocates say it raises government
revenues without punishing success or wealth, as income taxes do, and it is simpler and more
standardized than a traditional sales tax, with fewer compliance issues. Critics charge that a VAT
is essentially a regressive tax that places an increased economic strain on lower-income taxpayers,
and also adds bureaucratic burdens for businesses.

Goods and service tax

The goods and services tax (GST) is a value-added tax levied on most goods and services sold for
domestic consumption. The GST is paid by consumers, but it is remitted to the government by the
businesses selling the goods and services. In effect, GST provides revenue for the government.

The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of certain
goods and services. The business adds the GST to the price of the product, and a customer who
buys the product pays the sales price plus GST. The GST portion is collected by the business or
seller and forwarded to the government. It is also referred to as Value-Added Tax (VAT) in some
countries.

France was the first country to implement the GST in 1954, and since then an estimated 160
countries have adopted this tax system in some form or another. Some of the countries with a GST
include Canada, Vietnam, Australia, Singapore, United Kingdom, Monaco, Spain, Italy, Nigeria,
Brazil, South Korea, and India.

Objectives of Taxation:
The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation. But it is not the only goal. In other words,
taxation policy has some non-revenue objectives.

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Truly speaking, in the modern world, taxation is used as an instrument of economic policy. It
affects the total volume of production, consumption, investment, choice of industrial location and
techniques, balance of payments, distribution of income, etc.

Here we will discuss the objectives of taxation in modern public finance

1. Economic Development

2. Full Employment

3. Price Stability

4. Control of Cyclical Fluctuations

5. Reduction of BOP Difficulties

6. Non-Revenue Objective

Objective # 1.Economic Development:

One of the important objectives of taxation is economic development. Economic development of
any country is largely conditioned by the growth of capital formation. It is said that capital
formation is the kingpin of economic development. But LDCs usually suffer from the shortage of
capital.

To overcome the scarcity of capital, governments of these countries mobilize resources so that a
rapid capital accumulation takes place. To step up both public and private investment, government
taps tax revenues. Through proper tax planning, the ratio of savings to national income can be
raised.

By raising the existing rate of taxes or by imposing new taxes, the process of capital formation can
be made smooth. One of the important elements of economic development is the raising of savings-
income ratio which can be effectively raised through taxation policy.

However, proper care has to be taken, regarding investment. If financial resources or investments
are channelized in the unproductive sectors of the economy the economic development may be
jeopardized, even if savings and investment rates are increased. Thus, the tax policy has to be
employed in such a way that investment occurs in the productive sectors of the economy, including
the infrastructural sectors.

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Objective # 2. Full Employment:
Second objective is the full employment. Since the level of employment depends on effective
demand, a country desirous of achieving the goal of full employment must cut down the rate of
taxes. Consequently, disposable income will rise and, hence, demand for goods and services will
rise. Increased demand will stimulate investment leading to a rise in income and employment
through the multiplier mechanism.

Objective # 3. Price Stability:

Thirdly, taxation can be used to ensure price stability—a short run objective of taxation. Taxes are
regarded as an effective means of controlling inflation. By raising the rate of direct taxes, private
spending can be controlled. Naturally, the pressure on the commodity market is reduced.

But indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices,
on the one hand, discourage consumption and, on the other hand, encourage saving. Opposite
effect will occur when taxes are lowered down during deflation.

Objective # 4. Control of Cyclical Fluctuations:

Fourthly, control of cyclical fluctuations—periods of boom and depression—is considered to be
another objective of taxation. During depression, taxes are lowered down while during boom taxes
are increased so that cyclical fluctuations are tamed.

Objective # 5. Reduction of BOP Difficulties:

Fifthly, taxes like custom duties are also used to control imports of certain goods with the objective
of reducing the intensity of balance of payments difficulties and encouraging domestic production
of import substitutes.

Objective # 6. Non-Revenue Objective:

Finally, another extra-revenue or non-revenue objective of taxation is the reduction of inequalities
in income and wealth. This can be done by taxing the rich at higher rate than the poor or by
introducing a system of progressive taxation.

Taxation in Pakistan
Taxation in Pakistan is a tax take. Only 0.57% of Pakistanis or 768,000 people out of a population
of 190 million pay income tax.
Pakistan's Current Taxation system is defined by Income Tax Ordinance 2001, promulgated on 13
September 2001, which became effective from 1 July 2002.

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Complex system of more than 70 unique taxes administered by at least 37 agencies of
the Government of Pakistan.
According to the International Development committee in 2013 Pakistan had a lower-than-average
History of taxation in the United States
The history of taxation in the United States begins with the colonial protest against British taxation
policy in the 1760s, leading to the American Revolution. The independent nation collected taxes
on imports ("tariffs"), whiskey, and (for a while) on glass windows. States and localities
collected poll taxes on voters and property taxes on land and commercial buildings. In addition,
there were state and federal excise taxes. State and federal inheritance taxes began after 1900,
while the states (but not the federal government) began collecting sales taxes in the 1930s. The
United States imposed income taxes briefly during the Civil War and the 1890s. In 1913, the 16th
Amendment was ratified, permanently legalizing an income tax.
Principles of Taxation
Taxation principles are the guidelines that a governing entity should use when devising a system
of taxation. These principles include the following: Broad application. The system
of taxation should be spread across a broadest possible population, so that no one person or entity
is unduly taxed. Broad tax usage.
It then sets out four principles of taxation (simplicity, neutrality, stability and flexibility), and
three broad methods of taxation (income, wealth and consumption).
The 18th-century economist and philosopher Adam Smith attempted to systematize the rules that
should govern a rational system of taxation. In the Wealth of Nations (Book V, chapter 2) he set
down four general canons.

I. The subjects of every state ought to contribute towards the support of the government, as nearly
as possible, in proportion to their respective abilities; that is, in proportion to the revenue which
they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time
of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the
contributor, and to every other person.
III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be
convenient for the contributor to pay it.

IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people
as little as possible over and above what it brings into the public treasury of the state

Distribution of tax burdens

Various principles, political pressures, and goals can direct a government’s tax policy. What
follows is a discussion of some of the leading principles that can shape decisions about taxation.

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Horizontal equity

The principle of horizontal equity assumes that persons in the same or similar positions (so far as
tax purposes are concerned) will be subject to the same tax liability. In practice this equality
principle is often disregarded, both intentionally and unintentionally. Intentional violations are
usually motivated more by politics than by sound economic policy (e.g., the tax advantages
granted to farmers, home owners, or members of the middle class in general; the exclusion of
interest on government securities). Debate over tax reform has often centred on whether deviations
from “equal treatment of equals” are justified.
The ability-to-pay principle
The ability-to-pay principle requires that the total tax burden will be distributed among individuals
according to their capacity to bear it, taking into account all of the relevant personal characteristics.
The most suitable taxes from this standpoint are personal levies (income, net worth, consumption,
and inheritance taxes). Historically there was common agreement that income is the best indicator
of ability to pay. There have, however, been important dissenters from this view, including the
17th-century English philosophers John Locke and Thomas Hobbes and a number of present-day
tax specialists. The early dissenters believed that equity should be measured by what is spent (i.e.,
consumption) rather than by what is earned (i.e., income); modern advocates of consumption-
based taxation emphasize the neutrality of consumption-based taxes toward saving (income taxes
discriminate against saving), the simplicity of consumption-based taxes, and the superiority of
consumption as a measure of an individual’s ability to pay over a lifetime. Some theorists believe
that wealth provides a good measure of ability to pay because assets imply some degree of
satisfaction (power) and tax capacity, even if (as in the case of an art collection) they generate
no tangible income.
The ability-to-pay principle also is commonly interpreted as requiring that direct personal taxes
have a progressive rate structure, although there is no way of demonstrating that any particular
degree of progressivity is the right one. Because a considerable part of the population does not pay
certain direct taxes—such as income or inheritance taxes—some tax theorists believe that a
satisfactory redistribution can only be achieved when such taxes are supplemented by direct
income transfers or negative income taxes (or refundable credits). Others argue that income
transfers and negative income tax create negative incentives; instead, they favour public
expenditures (for example, on health or education) targeted toward low-income families as a better
means of reaching distributional objectives.
Indirect taxes such as VAT, excise, sales, or turnover taxes can be adapted to the ability-to-
pay criterion, but only to a limited extent—for example, by exempting necessities such as food or
by differentiating tax rates according to “urgency of need.” Such policies are generally not very
effective; moreover, they distort consumer purchasing patterns, and their complexity often makes
them difficult to institute.
Throughout much of the 20th century, prevailing opinion held that the distribution of the tax
burden among individuals should reduce the income disparities that naturally result from the
market economy; this view was the complete contrary of the 19th-century liberal view that the
distribution of income ought to be left alone. By the end of the 20th century, however, many
governments recognized that attempts to use tax policy to reduce inequity can create costly
distortions, prompting a partial return to the view that taxes should not be used for redistributive
purposes.

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Structure of taxes
There are three general ways that a government can apply tax rates.
• Proportional tax
• Progressive tax
• Regressive tax
Proportional tax
If the rate of tax remains the same irrespective of the level of the income earned this kind of tax is
called the proportional tax.
FOR EXAMPLE;
Government announces the 5% tax on every person income earned.
Progressive Tax
If the rate of taxes increases with the increases in the level of income this type of tax will be known
as progressive tax.
FOR EXAMPLE;
5% tax from the income below 200000. 7% tax from the income between 200000 to 300000. 9%
from the income more than 300000.
Regressive tax
• A regressive tax is a tax applied uniformly, taking a larger percentage of income from low-
income earners than from high-income earners. It is in opposition to a progressive tax ,
which takes a larger percentage from high-income earners.
FOR EXAMPLE;
Imagine two individuals each purchase $100 of clothing per week, and they each pay $7 in tax on their
retail purchases. The first individual earns $2,000 per week, making the sales tax rate on her purchase
0.35 percent of income. In contrast, the other individual earns $320 per week, making her clothing sales
tax 2.2 percent of income. In this case, although the tax is the same rate in both cases, the person with
the lower income pays a higher percentage.

Compendium Of Tax Laws In Pakistan (containing bare-acts only) :

Legislation of Tax Laws:

Parliament makes substantive legislation to impose different taxes in the light of cannons of
taxation.

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Many tax laws and rules are presently imposed in Pakistan, a few laws relating it are being
discussed below:

Income Tax Ordinance 2001

Income Tax Rule 2002
Sales Tax Act 1990
Federal Excise Act 2005
Punjab Revenue Authority Act 2012
Punjab Sales Tax on Services Act 2012

Income Tax Ordinance,2001 :

The Ordinance is a Central statute and is, therefore, applicable to the whole of Pakistan.
It’s a consolidation and amending Law consists of 13 chapters, 241 sections and 9 schedules. It
was promulgated on Sep 13th 2001 and became inactive on 1st of July 2002.The Ordinance is a
Central statute and is, therefore, applicable to the whole of Pakistan. In this Ordinance there is

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 Heavy Reliance (53%) on Withholding Tax
 Progressive Personal Income Tax (max rate: 20-25%)
 Corporate Income Tax (35% rate)
 Universal Self-Assessment Scheme

Distribution of Revenues :
According to “Acts Ordinances President's Orders and
Regulations May 10, 2010”:

Short title and commencement;

This order may be called “Distribution of Revenues and Grant –In-Aid-
Order,2010”.

Distribution of revenue:
According to distribution of revenue the divisible pool taxes
are collected by Federal Government in that year, namely,
1) Taxes on income.

— 2) Wealth tax.
3) Capital tax value.
4) taxes on sales and purchase goods imported, exported;
produced, manufactured or consumed.
5) Export duties on cotton.
6) Customs duty.
7) Federal exercise duties excluding the exercise duty on gas
charged at Well head. and
8) Any other tax which may be levied by the federal government.

Allocation of shares to Provincial Government:

1, The indicators and their respective weights as agreed
upon are;
(a) Population 82.0%
(b) Poverty of Backwardness 10.3%
(c) Revenue collection of generation 5.0%
(d) Inverse population density 2.7%

2, The sum of assigned to the Provincial Government under

Article 3 shall be distribute amongst the province on the
basis of percentage specified against each;

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 Balochistan 9.09%
KPK 14.62%
Punjab 51.47%
Sindh 24.55%
_______
Total 100.00%

Income Tax Rules, 2002:

The rules About IT framed under viz. Income Tax Rules, 2002 (the Rules).
FBR compiled these rules in exercise of her power according to Income Tax Ordinance,
2001.It consists of 29 chapters, 232 sections and 1 schedule with 14 parts. It became
active on 1st of July 2002.

Tax Rates:
Under section 4 of the Ordinance, income tax is imposed for each tax year at specified rates
on every person who has taxable income for the year. Tax rates for the salaried class in
Pakistan are 0.5% to 20%, and for other taxpayers, 0.5% to 25%. Basis – Income tax is
payable by salaried individuals if taxable income exceeds 4,00,000 Rupees. The limit of not
chargeable to tax for Tax Year 2019 is: Rs. 4,00,000.

Income Tax Slab:

As per income tax exemption bill passed by Government of Pakistan, following slabs and
income tax rates will be applicable for salaried persons for the year 2018-2019 :

TAX RATES FOR SALARIED INDIVIDUALS & ASSOCIATION OF PERSONS (AOPS)

Income Tax Slabs Financial Year 2018-2019

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 Fixed Amount
No. Lower Limit Upper Limit Income Tax R
Addition

1 0 400,000 0 0.00

2 400,001 800,000 1,000 0.00

3 800,001 1,200,000 2,000 0.00

4 1,200,001 2,400,000 0 5.00

5 2,400,001 4,800,000 60,000 10.00

6 4,800,001 10,000,000,000 300,000 15.00

Penalties:
• The penalty for failure to file a tax return is 0.1% of the amount of the tax payable
for each day of default. The minimum penalty is Rs. 500 and the maximum is 25%
of the amount of tax payable.

Recovery of IT (Chapter 16 OF ITR,2002):

If an AOP does not pay income tax even with penalty under certain time frame or earns
“Black Money”, it becomes “defaulter” of FBR. Following procedure is to follow to recover
IT.

Notice forming
Time Limit
Execution (Arresting the defaulter)
Investigation by the Commissioner
Warrant issue
Detention sentenced by the Commissioner

SALES TAX LAWS IN PAKISTAN:

General Sales Tax - Sales Tax Act, 1990:

It consists of 10 chapters, 75 chapters and 9 schedules. Consumption tax is charged at the

point of purchase for certain goods and services. The tax amount is usually calculated by

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 applying a percentage rate to the taxable price of a sale. The Standard Rate of Income tax is
17%. Sales Tax is Collected from the buyer by the seller. Sales Tax Rules, 2006 and Sales
Tax Special Procedure Rules, 2007 are also being carried out in Pakistan.

Provincial Taxes:
Punjab Sales Tax On Services Act, 2012, Punjab Sales Tax On Services Rules, 2012 and
Punjab Sales Tax On Services Rules, 2014 are imposed on Punjab.

Central Board of Revenue.

INTRODUCTION TO CBR:-

The Central Board of Revenue (CBR) was created on April 01, 1924 through enactment of the
Central Board of Revenue Act, 1924. In 1944, a full-fledged Revenue Division was created under
the Ministry of Finance. After independence, this arrangement continued up to 31st August 1960
when on the recommendations of the Administrative Re-organization Committee, FBR was made
an attached department of the Ministry of Finance. In 1974, further changes were made to
streamline the organization and its functions. Consequently, the post of Chairman FBR was created
with the status of ex-officio Additional Secretary and Secretary Finance was relieved of his duties
as ex-officio Chairman of the FBR.

In order to remove impediments in the exercise of administrative powers of a Secretary to the

Government and effective formulation and implementation of fiscal policy measures, the status of
FBR as a Revenue Division was restored under the Ministry of Finance on October 22, 1991.
However, the Revenue Division was abolished in January 1995, and FBR reverted back to the pre-
1991 position. The Revenue Division continues to exist since from December 01, 1998.
Federal Board of Revenue
It is a top federal government body that investigates crimes related to taxation and money-
laundering. FBR also operates special Broadening of Tax Base Zones that keep tax evaders under
surveillance and compulsorily bring them into the tax net through its inspectors. These zones have
exclusive powers to scrutinize tax evaders. BTB-Karachi nets potentially big tax evaders with the
deployment of Inspectors Inland Revenue for field operations, and thus, contributes comparably
greater than other BTB Zones in the country. FBR collects intelligence on tax evasion and
administers tax laws for the Government of Pakistan and acts as the central revenue collection
agency of Pakistan.

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History

The Federal Board of Revenue is the successor of the Central Board of Revenue created on 1 April
1924 through enactment of the "Central Board of Revenue Act, 1924". In 1944, the CBR was put
under the Revenue Division with the Ministry of Finance until 1960, when on the
recommendations of the "Administrative Reorganization Committee", the CBR was made into
a division of the Ministry of Finance. In 1974, further changes were made to streamline the
organization and its functions. In 1991, the CBR was once again reverted to its original status
under the Revenue Division, however in January 1995, the Revenue Division was abolished and
the CBR was once again reverted to a division of the Ministry of Finance. In 2007, the "FBR Act"
was passed in July 2007, whereby the Central Board of Revenue was renamed to the present-day
Federal Board of Revenue and for a third time placed again under the Revenue Division of the
Ministry of Finance.

Functions
FBR is a semi-autonomous federal agency of Pakistan that is responsible for enforcing fiscal laws
and collecting revenue for the government of Pakistan. FBR has the responsibility for (i)
formulation and administration of fiscal policies, (ii) levy and collection of federal duties, taxes
and other levies, and (iii) quasi-judicial function of deciding taxation cases and appeals. FBR is
perhaps the largest federal department in Pakistan. FBR primarily operates through its main
collection arms comprising Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs)
across the country. FBR has two major wings: the Inland Revenue & Customs. The Inland Revenue
Service (formerly known as Income Tax Department) administers domestic taxation including
Sales Tax, Income Tax and Federal Excise Duties and is the main component of FBR. The Pakistan
Customs Service administers import duties and other taxes collected at import stage, as well
regulates international trade with regard to prohibitions & restrictions imposed by the government.
For the purpose of collection of revenue and pursuing tax evaders, FBR's powers & functions also
include but are not limited to: carrying out inquiries and audits/investigations into the tax affairs,
commanding arrests, attachment as well as public auction of movable and immovable assets of a
non-compliant.

In the existing setup, the Chairman, FBR, being the executive head of the Board as well as Secretary
of the Revenue Division has the responsibility for

(i) Formulation and administration of fiscal policies,

(ii) Levy and collection of federal taxes and

(iii) Quasi-judicial function of hearing of appeals.

19
 His responsibilities also involve interaction with the offices of the President, the Prime Minister, all
economic Ministries as well as trade and industry.
FBR MISSION VISION VALUES:-

In a progressive, effective, autonomous and credible organization for optimizing revenue by providing
quality service and promoting compliance with tax and related laws

OUR MISSION:-

Enhance the capability of the tax system to collect due taxes through application of modern techniques,
providing taxpayer assistance and by creating a motivated, satisfied, dedicated and professional workforce

OUR VALUES:-

 Integrity
 Professionalism
 Teamwork
 Courtesy
 Fairness
 Transparency
 Responsiveness

Working of FBR:-
FBR is a semi-autonomous federal agency of Pakistan that is responsible for enforcing fiscal laws
and collecting revenue for the government of Pakistan.
FBR has two major wings:

Inland Revenue

Custom Revenue.

Chairman of FBR Pakistan:-

Dr Jahanzeb Khan appointed Chairman FBR. Pakistan. FBR established in July 1, Rukhsana
Yasmeen becomes new Chairman FBR. KARACHI: The caretaker Prime Minister has approved
transfer of Chairman Federal Board of Revenue (FBR) Tariq Mahmood Pasha and approved
posting of Rukhsana Yasmeen (BS-22) as the new chairman of the revenue body. Pasha is posted
as Secretary Statistics1920.

Board of Revenue:-
Federal agency responsible for handling revenue generated from the taxation of citizens and
businesses. This agency is also responsible for the collection of a wide variety of taxes. Each state
has its own department of revenue that collects local and state taxes.

20
Structure
Wings
[2]

Customs
Inland Revenue
Admin
Taxpayers Audit
Legal
Fate
SPR&S
HRM
Information Technology
Accounting
RA&R

Directorates
[3] [4]

Directorate General of Transit Trade - Pakistan Customs

Directorate of Broadening of Tax Base (Special Directorate)
Directorate General of Intelligence & Investigation - Pakistan Customs

21
 Directorate General of Internal Audit - Pakistan Customs
Directorate General of Input Output Coefficient Organization - Pakistan Customs
Directorate General of Reform & Automation - Pakistan Customs
Directorate of Post Clearance Audit - Pakistan Customs
Directorate General of Valuation - Pakistan Customs
Directorate General of Training & Research - Pakistan Customs
Directorate General of Intelligence & Investigation - Inland Revenue
Directorate general of Training and Research - Inland Revenue
Directorate of Withholding Tax - Inland Revenue
Directorate General of Internal Audit - Inland Revenue

List of Regional Tax Offices Across Pakistan

Current Chief
Sr.No Designation
Commissioner

1. Chief Commissioner Large Taxpayer Unit Islamabad Muhammad Naseer Butt

2. Chief Commissioner Large Taxpayer Unit Lahore Asim Ahmad

3. Chief Commissioner Large Taxpayer Unit Karachi Ms. Seema Shakil

Chief Commissioner Corporate Regional Tax Office Dr. Fazal Muhammad

4.
Karachi Abrejo

5. Chief Commissioner Regional Tax Office Islamabad Raza Munawar

6. Chief Commissioner Regional Tax Office Rawalpindi Dr. Hamid Ateeq Sarwar

7 Chief Commissioner Regional Tax Office-II, Karachi Dr. Faiz Illahi Memon

22
 Chief Commissioner Corporate Regional Tax Office,
8 Nadeem Hussain Rizvi
Lahore[6]

9. Chief Commissioner Regional Tax Office-II, Lahore Mr. Asim Majid Khan

10. Chief Commissioner Regional Tax Office Multan Dr. Khalil Ahmad Zahid

11. Chief Commissioner Regional Tax Office Gujranwala Ghazanfar Hussain

12. Chief Commissioner Regional Tax Office Sukkur Dr. Muhammad Ali Khan

13. Chief Commissioner Regional Tax Office Faisalabad Ch. Muhammad Tarique

14. Chief Commissioner Regional Tax Office Peshawar Mir Badshah Khan Wazir

15. Chief Commissioner Regional Tax Office Abbotabad Mr. Amir Ali Khan Talpur

16. Chief Commissioner Regional Tax Office Quetta Dr. Ashfaq Ahmad Tunio

17. Chief Commissioner Regional Tax Office Sialkot Nadeem Arif

18. Chief Commissioner Regional Tax Office Hyderabad Ms. Naheed Azhar

19. Chief Commissioner Regional Tax Office Bahawalpur Shaban Bhatti

20. Chief Commissioner Regional Tax Office Sargodha Dr. Bashirullah Khan

23
 21. Chief Commissioner Regional Tax Office Sahiwal Dr. Khalil Ahmad Zahid

Challenges faced by the government in collection of tax:-

A well‐functioning revenue system is a necessary condition for strong, sustained and inclusive
economic development. However, the revenue systems in some developing countries have
fundamental shortcomings. Using Public Expenditure and Financial Accountability assessment
data, this article provides a summary of the revenue raising capabilities across 58 developing
countries. Tax reforms or tax system changes need to be made mindful of that current capacity.
The optimal choice of tax regime may be different when administrative capacity is low. The
increasing globalisation of economic activity adds a further layer of complexity that developing
countries need to manage in building and maintaining their revenue systems. Finally, any proposals
to change the revenue system in a developing country need to recognise that, like developed
countries, tax reforms are highly political endeavours.

The tax system undergone a fundamental reform aimed at improving revenue generation and
maximizing the efficiency of collection. However, low capacity of the revenue administration,
inability to implement the tax system effectively, lack of collection skilled knowledge of the tax
collectors contribute to the challenge of revenue maximization and generation of new revenue
sources. Tax payer’s attitude and knowledge towards tax also another challenge to maximize
revenue. Most of tax payers know why they pay taxes, but they complain that the tax system is not
fair and transparent. They deliberately understate their actual income to reduce their tax liability.
There is a substantial gap between the planned to be collected and actually being collected amount
of revenue in the past years, even though the amount of the gap is decreasing from time to time.
The study is aimed at identifying the challenges for revenue collection and maximizing
revenue generation and proposing possible
measures for improving revenue generation. In the study the data obtained from tax payers andth
e revenue administration office is included in the analysis. Based on the findings ofthis study, the
researcher concludes that there are many problems facing the revenue administration while
collecting revenue and indicate in the recommendation the possible that must be taken to enhance
revenue collection.

The Tax Problem of Pakistan

Tax is the most important source of government revenue. Revenues earned by the federal
government are then reallocated for federal government’s and provincial government’s
expenditures. One of the complexities of our economic system is the ‘tax problem’ that everyone

24
keeps pointing out time and time again. Revenue generation has always been a hard-core problem
for Pakistan’s economy which is why our government turned towards Structural Adjustment
Programmers in the first place. The problem lies with the tax base, that is considerably very narrow
as compared to other countries. The reasons behind the low tax base are large number of
exemptions given in sales taxes, excise duty, income tax and custom duties and huge number of
incidences of tax evasion. This leads to eventual pitching of tax rates resulting in more
opportunities and incidences of tax erosion and even higher tax rates; making it a never ending
vicious cycle. The overall level of fiscal effort is low and tax-to-GDP ratio has always been nearly
stagnant which is why budget deficit has been high.
Repeated and frequent changes in tax legislation have also contributed towards distorted tax
system. Changes are done to provide protection or incentives to certain groups and mafias. These
policies have contributed towards narrowing the tax base and lowering an overall tax effort. This
makes one question the general fairness and transparency of the system. Reports suggest that the
main problem with the tax system is the sustained inability to raise adequate revenue to finance
the public-sector budget. There is a structural fiscal gap equal to 5% of GDP. The reason of a low
tax base is preferential and discriminatory behavior towards different sectors of economy that
create many distortions within the economy. Tax laws are such that the individuals with same
income, businesses and profits are treated very unequally. For instance, 1/5th of the GDP comes
from agriculture and a handsome amount of revenue could be generated by taxing the income from
this particular sector but, legally the tax base is not extended to tax the income from agriculture.
The shortfall in agriculture and services puts a burden on industrial sector.
Extensive use of withholding taxes as opposed to being adjustable against full liabilities has added
to the arbitrariness of tax system. There is an evident overdependence on indirect taxes which until
recently accounted for a share in revenues of over 80%. This has increased regressively of the tax
system. And imposed an excess burden of taxation. The nature of taxation is regressive in general,
meaning a tax is imposed uniformly to everyone regardless of individual income. Moreover, within
indirect taxes, there is a domination of taxes on international trade which leads to an overall
inefficiency and has distorted resource allocation and encouraged illicit trade another problem is
the poor tax administration of tax system. Reports suggest that people while filling their returns,
provide incomplete information and data and since our tax system uses orthodox and primitive
procedures to analyze the data, it makes it very complex to highlight the offenders (tax evaders)
The alleged reasons behind the lag are corruption and institutional inefficiencies.
We have ruled out some of the problems with the tax system, narrow tax base and tax evasion
being the most serious concerns. Now, the question arises, why do people evade tax? What could
be the possible reasons apart from the fact that people lack the sense of responsibility? Do we
actually not pay taxes? According to the stats, only 1.21 million citizens pay income tax making it
less than 1% of the total population. But according to state bank of Pakistan’s annual report, 57.5
million people are employed and obviously are earning some income and thus 57.5 million people
should be paying income tax one way or the other. So, that rules out the figure of tax payers that
keeps on floating here and there. Moreover, Pakistan’s total population is around 200 million.
According to the common notion, 29% of the population is paying the taxes. people end up paying
them. These are the kind of taxes that no one can evade. These taxes are most definitely paid out
of personal incomes. Do you still think we do not pay taxes? Do you still think we are not an
overtaxed nation?

25
Now we think that maybe, the problem lies with the imbalance between government expenditure
and government revenue. But that’s But according to Economic survey of Pakistan . 61.4%
population is of working age making 122 million people fall into the working population. The 57.5
million tax payers constitute of 48% these working people. Approximately 140 million mobile
users pay more than 20% taxes on their consumption. People use automobiles which use fossil
fuels that are subject to different taxes and consequently not something only Pakistan is facing.
We are perhaps just poor at managing our resources.
Another question arises in our minds, what if we make the tax system progressive instead of just
leaving it regressive? Will that be of any help? I’m afraid, that might not be the case. Progressive
taxation is the imposition of higher taxes for the people with higher levels of incomes and vice
versa. But did you know, South Africa does have a progressive tax system yet it is revealed that
south Africa has the highest income inequality. It is not guaranteed that if today we equalize
expenditures and revenues, our budget deficit would not go high tomorrow. If the revenues go up,
what if expenditures go up too? In order to correct the situation, progressive taxation is not the
only thing we need. We must make sure the inclusiveness of institutions like education, research
and development. These institutions are directly correlated with economic growth.

It should not be concluded that Pakistani do not evade tax. The reason why people evade taxes
primarily is absence of trust towards the administration. People do not see their efforts being paid
back. So, they don’t find a point of making efforts at all. There is a lack of transparency and
accountability within the system that makes public question themselves whether their money is
actually being used for their benefit or is gone into satisfying someone else’s vested interests.

Therefore, the inclusiveness of institutions, reforms in system, use of modernized ways to analyse
data, ensured trust, accountability and transparency would be a good heads up towards the solution
of the tax problem of Pakistan.

TAX CORRUPTION IN PAKISTAN

In the case of Pakistan, we would have to disagree. It is one of the more corrupt countries in the
world today, not because of the corruption index in place but because of the chronic diseased mind-
set of the people who thrive through pain, hunger, lack of shelter, lack of governance and lack of
the will to take action against corruption.

Where the world is making headlines in new technology, we are facing the dysfunctional mindset
towards space and science. Where people make and sell cars, here we end up importing and selling
dangerous drugs. Where the world is discussing rights of the child, we let our children suffer from
abuse and isolation and lack of proper basic education and healthcare. Where people discover new
ways to control infant mortality rates, we do not have safe and clean water for our children and we
don’t care.

26
Yet the biggest truth about life in Pakistan is the mindset towards being an honest citizen. While
governance is in the hands of the rich and affluent, they are the exact same people responsible for
the financial chaos and corruption. The poorest of the poor pay 80% of taxes collected in Pakistan
while the rich contribute to only 5%, while enjoying special rights, privileges and a concessionary
lifestyle under the country’s unethical tax structure and policy, that the rich control and exploit
very openly.

The country’s indirect taxes constitute 80% of the tax-revenue collection that are recovered from
the poor middle class segment of society through petrol, utilities and mobile communication. For
example, over 36 million mobile phone users paid over USD 4.6 million for the year 2015-16 tax
collections while the majority of them were not even in the taxable bracket. Sadly, the same
indirect taxes apply to both the privileged class and the rest, leading to major income disparity. No
wonder Pakistan has had the record breaking trophy of being the country with the lowest tax to
income ratio in Asia.

Real numbers indicate a horrific picture where only 12% is recovered through direct taxes while
88% is collected indirectly by virtue of unethical tax policies of successive governments including
the one today, facing major corruption and fraud charges and being one of the longest running
governments in the country and an elitist government, making the poor people cough up more and
more revenue despite having little or no capacity to pay. Indirect taxes hurt low income groups,
which are 80% of the population, while the rich segments remain undocumented, hence untaxed.

The FBR-Federal Board of Revenue is unreliable and malfunctioned to do its own job and has
failed to ensure transparency as it is controlled by the Ministry of Finance who is directly related
to the Prime Minister of the country and whose personal assets have increased 91 times since he
joined government.

How can accountability flourish under such bad governance?

According to figures, the FBR regional tax office collect $68 million out of the total of $31 million
billion in collections, whereas the cost incurred by the FBR to maintain their offices cost $78
million. This is clear corruption in the pockets of the officials that is being promoted by the
government despite the fact the government cannot even justify the existence of FBR and may be
in a better shape without having these huge administrative costs under corrupt leadership.

27
In a country where a mere 500,000 people pay taxes out of 4 million people, indicators reveal a
huge problem of bad governance and zero accountability. The elite contribute to less than 5% to
tax revenue when they control over 55% of the wealth. The system has been completely toned
down by the policy makers, while businesses skip taxes legally and the poor people end up holding
the tax burden on their heads.

The elite, who constitute a powerful land mafia and belong to the agricultural lobby, are part of
the decision tree that is sitting in parliament, hence none of the laws adopted or made support tax
collection from the high and mighty. These people are the rulers of the country whereas someone
who is not a tax payer should not be eligible to contest elections as it constitutes tax evasion, a
crime punishable by law. Less fortunate countries are lucky, as they can learn from the cost others
had to pay to attain the supreme country status. Such a country cannot aim for global dominance
but should concentrate on being adaptive and having a sound financial health.Illicit trade,
organized crime and corruption are major challenges for Pakistan today. Instances of state failure,
terrorism and geo-political conflict are directly proportionate to rising instability, nepotism,
chronic negative business trends and systemic economic breakdowns. Financial mismanagement,
money laundering, racketeering and tax evasion have severely undermined the efficiency of good
governance, increased global risk and adversely affected global stability. Meanwhile, incentives
to operate in such parallel economies continue to increase both dangerously and globally.

Internally, Pakistan society experiences moral decay, massive brain drain and diminishing
intellectual capability, as the motivation to stay positive declines rapidly due to the continuous
moral and ethical brainwashing of society. Externally, such countries are isolated, tourism
diminishes and the entire society is marginalized. Greed has no limits and greedy businesses don’t
last long –there is always a catch somewhere and always a loss. We need to look on the inside,
clarify business rules, imbibe good business ethics, and find solutions to administrative failures by
seeking answers from the ones who stand above the law today while being lawmakers. Where
corruption is a social norm, we need to ensure that we reject bribery and corruption and make very
stringent laws and punishments to cut down this cancer of the mindset. Unawareness of the pitfalls
of corrupt practices puts a business’ reputation at serious risk. Any kind of illegal offer or payment
to the government, third party vendors, regulators, existing or potential customers – or acceptance
of the same from them – must be subject to prosecution. Dictatorship is Fascism. No difference.
Fascism is a radical authoritarian political ideology governed by a leader who exercises

28
dictatorship over the government and all state institutions. Pakistan is currently being ruled by
dictators and this has to stop in order for the people of the country to be able to work, live and
survive as a nation of honest and dedicated people who stay and work for its betterment rather than
travel and leave the country to work outside and never return back home. They will never be home
hence will never contribute to taxes in the country knowing that the rulers of this country eat up
their hard earned income and use the tax to elevate their own corruption through corrupt assets
held offshore and having larger than life lifestyles, buying out whatever they wish and whenever.
This is a deadly trap that has to be destroyed through efficient tax collection and strict legal and
compliance through accountability and justice.

SUGGESTIONS

Pakistan is developing country .where the corruption is a main hurdle.

 Focus resources on improved auditing, process, and tools

Fast-moving growth creates opportunities for tax evasion and may encourage a culture of
noncompliance. Auditing can not only detect and penalize evasion attempts but also signal
a tax administration’s intention to prioritize more aggressive enforcement. One such
administration, for example, installed a group of some 50 auditors while at the same time
training about 100 tax examiners.

 Use simple segmentation to identify large collection opportunity

Most rapidly developing economies lack the advanced analytic tools and databases
necessary to flag and follow up on suspicious taxpayer behaviour automatically.
Nonetheless, simply segmenting taxpayers according to attributes such as size, sector, and
past behaviour can help tax authorities quickly perform a risk analysis identifying
discrepancies between an individual taxpayer’s behaviour or payments and that of his or
her cohort.

 Target collection in the tax offices with the largest outstanding debts.

In many emerging markets, tax collection is neither automated nor centralized. Collection
rates are often low, and there is little awareness of how much is truly owed. In response to
this challenge, one customs authority identified the importing businesses that owed the

29
 most in back taxes and put in place a technical team to negotiate payment terms directly
with debtors

 Ensure regular updates to the taxpayer registry.

In many rapidly growing markets, it can be difficult to maintain an accurate central

taxpayer registry, as much of the economy is made up of “informal” and small-scale
businesses, and tax authorities lack the external controls necessary to ensure that such
entities stay within the system.

 Introduce account managers to oversee large taxpayers

In most countries, a very small number of taxpayers account for the majority of tax revenue.
Although tax administrations usually have large-taxpayer units, these LTUs often use the
same processes, rules, and resources as general tax offices. LTU “account managers,”
supported by a back office devoted to their needs, can provide large taxpayers with
differentiated and improved services that will ensure increased revenues.

 Use electronic channels for simple transactions

In many rapidly developing economies, mobile and Internet penetration are comparatively
high. Tax administrations can therefore introduce electronic channels such as Internet
portals, mobile-payment options, and ATMs. By using these channels for simple taxpayer
transactions (such as declarations and payments), a tax administration can increase the level
of voluntary payments while conveying a strong sense of its public purpose. Such
approaches reduce the length of queues at tax offices while also removing a barrier to
compliance.

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http://www.socialstudieshelp.com/eco_taxation.htm
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of-taxation-discussed/17450
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