Civil Services Preparatory

School: CSPs

Civil Services Preparatory School: CSPs

0316-5701593
Civil Services Preparatory School: CSPs
0316-5701593
Tax System of Pakistan

By: Junaid Murtaza Janjua

Civil Services Preparatory School: CSPs

0316-5701593
 SEQUENCE OF PRESENTATION
1. Introduction of Taxes

2. Historical Background
3. Organogram

4. Statement of Problem – tax-to-GDP ratio

5. Issues in Tax system of Pakistan
6. Recommendations.

Civil Services Preparatory School: CSPs

0316-5701593
 Introduction

• Why Governments levy taxes?

Civil Services Preparatory School: CSPs

0316-5701593
 Introduction
• Why Governments levy taxes?
– Right of State to levy taxes
– State needs to run its affairs
• Provincial Share of Revenue
• Current Expenditure
• Public Sector Development projects
– Redistribution of wealth in the society

Civil Services Preparatory School: CSPs

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 Introduction

Governments
Revenues

Capital Revenue
Receipts Receipts

Public Debt- Loans &

Tax Non-Tax
sukuk, Advances
Revenue Revenue
bonds etc Recovered

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 Introduction
Sr Description FY 2018-19 Percentage of
Rs in Billion Gross Revenue

1 Tax Revenue 4,393 87.3%

2 Non-Tax Revenue 637 12.7%

3 Gross Revenue Receipts 5,031

4 Less Provincial Share of 2,462 48.9%

Revenue through NFC
5 Net Revenue Receipts 2,568 51.1%
Civil Services Preparatory School: CSPs
0316-5701593
 Introduction Income Tax
(40% of FBR
Taxes)
Direct Taxes
Workers Welfare
(Around 38% of
Fund
TTR)
Capital
Value Tax
FBR Taxes
(Around 94% of Custom Duty
TTR) (17.7% of FBR
Taxes)
Total Tax Revenues

Indirect Taxes
Sales Tax (35.9%
(Around 56.7 % of FBR Taxes)
of TTR)
Federal
Other Taxes ICT Excise Duty
(6.4% of FBR
Other Taxes Taxes)
(Around 6% of Petroleum Levy
TTR)
Civil Services Preparatory School: CSPs
Natural Gas
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Surcharge
TAX WISE ANALYSIS 2018-19

Tax Break up

Income Tax
18% Sales Tax
6% 40% Federal Excise
Duty
Custom Duty
36%

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 Introduction
• Federation is left with Revenues of Rs 2.5
trillion to manage current expenditure and
public sector development expenditure
(PSDP)
• The budgetary expense for 2017-18 was
Rs 6.4 Trillion
• Hence, 60% of Expenses is made through
Loans and other financing mechanism.
Civil Services Preparatory School: CSPs
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Civil Services Preparatory School: CSPs
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 Introduction
• Hence, Pakistan can only get Fiscal
Space, if tax to GDP ratio of 21% is
achieved.
• IMF for the first time set tax targets (Rs
5,555/- Billion) in current structural
adjustment program.

Civil Services Preparatory School: CSPs

0316-5701593
Civil Services Preparatory School: CSPs
0316-5701593
Historical Background

Civil Services Preparatory School: CSPs

0316-5701593
 Historical Background
• Established as the Central Board of Revenue 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.
• In 1991, the CBR was once again reverted to its original status
under the Revenue Division,
• 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
Civil Services Preparatory School: CSPs
under the Revenue Division0316-5701593of the Ministry of Finance.
 Historical Background

Income Tax Group (ITG) came into existence as a result of Administrative

Reforms 1973

Sales Tax Act 1990 was being administered by Customs & Excise Group till
2009

Inland Revenue Service, created as part of Tax Administration Reforms

Program (TARP) from 1st July, 2009 has been mandated to collect three
taxes i.e. Income Tax, Sales Tax and Federal Excise Duty

Civil Services Preparatory School: CSPs

0316-5701593
 INLAND REVENUE TAX LAWS

Income Tax Sales Tax Federal Excise Duty

 Income Tax  Sales Tax Act  Federal Excise

Ordinance 2001 1990 Act 2005

Civil Services Preparatory School: CSPs

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Historical Background- Income
Tax
Imposition in 1860

Income Tax Act, 1922

Income Tax Ordinance, 1979

Income Tax Ordinance, 2001

Civil Services Preparatory School: CSPs

0316-5701593
Historical Background- Sales Tax
Sales Tax was a provincial subject
at the time of partition
Federal subject in 1948

Enactment of Sales Tax Act, 1951

Assigned to Central Excise

Department, 1981
Enactment of New Sales Tax Act,
1990
Inland Revenue Service, 2009
Civil Services Preparatory School: CSPs
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Historical Background- Federal
Excise Duty
Central Excises Act, 1944

Abolishment of Supervised
Clearance, 1990

New Federal Excise Act, 2005

Inland Revenue Service, 2009

Civil Services Preparatory School: CSPs
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Organogram

Civil Services Preparatory School: CSPs

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 Organogram

Chairman
Operational Support Functional
Members Members Members

Member Strategic Member

Member IR Policy
Planning Enforcement
Member Taxpayer
Member Customs Member Legal
Audit
Member IR Member HRM Member FATE
Operations
Member
Member Admin
Accounting

Member Training
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 27,492
Employ
50,840 2,206
Registered ees
Companies
Employe
/ 22,068 es BPS
Filers 17-22

150,281
25,286
Register
Employe
ed AOP /
es BPS
38,312 FBR 1-16
Filers

21
2.7 M Custo
Filers m Field
Offices
25
Two Inland
data- Revenu
centres e Field
Offices
Civil Services Preparatory School: CSPs
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 INLAND REVENUE ORGANOGRAM
Chairman
Member
(Inland DG
DG I & I
Revenue Member (IR)
Internal DG DOT
Audit
Policy) (Inland Revenue
Operations)
Chief Commissioner Chief Commissioner
LTU’s RTO’s

CRTO CRTO
Lahore Karachi
Karachi Karachi-II Lahore Islamabad
Karachi
Abbotabad
II & III

Islamabad Rawalpind
i

Peshawar Sukkur

Faisalabad Lahore-II

Multan Hyderabad

Gujranwal
Quetta a

Sahiwal Sialkot
Bahawalp
ur
Civil Services Preparatory School: CSPs
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Statement of Problem

Civil Services Preparatory School: CSPs

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 STATEMENT OF PROBLEM
Pakistan has been unable to generate sufficient taxes
for meeting its expenditure requirements. It continues to
experience chronic fiscal deficit. The culture of paying
taxes has not flourished. Successive governments,
despite promising to introduce equity in taxation and
improve the fiscal situation, have failed to enhance the
Tax-to-GDP ratio.

Civil Services Preparatory School: CSPs

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Issues in Tax Collection

Civil Services Preparatory School: CSPs

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 Issues in Tax Collection
• Narrow Tax Base
– Number of Filers are less than 1% of
population since last 2 decade except for year
2018
– Business prefer to operate in undocumented
sectors in Pakistan. Why?

Civil Services Preparatory School: CSPs

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 Issues in Tax Collection
– Business prefer to operate in undocumented
sectors if:
• People are dissatisfied with their government
• The probability of being caught is less
• The penalty of tax evasion is less
• Higher tax rates
• High Unemployment rate

Civil Services Preparatory School: CSPs

0316-5701593
 Issues in Tax Collection
• Tax Policy
– Skewed in favor of few sectors like exemptions/ tax
credits for privileged class- the burden is borne by other
sectors
– High reliance on withholding taxes making domestic
industry non-competitive.
– Tax Evasion is not a criminal offence - no deterrent
effect.
– Regressive tax policy hampering the economic growth.
– Lack of Political will to stream line and make consistent
tax policy
– Universal Self-Assessment Scheme
– Complexity in tax Civillaws
Services Preparatory School: CSPs
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 Issues in Tax Collection
– Administrative Issues
• Lowest cost of tax collection by FBR in
comparison to neighboring countries
• The countries having Tax to GDP ratio of 20 %
and above at least get at an average of 1.5% of
the revenue collected.

Civil Services Preparatory School: CSPs

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 Country-wise cost of collection
(in percentage points)
1.8 1.71
1.6

1.4 1.33
1.2 1.14
1 0.93 0.84000000
0000001 0.79 0.63000000
0.8
0000001
0.6

0.4

0.2

0
Japan Canada United Turkey Korea Germany Pakistan
Kingdom
Civil Services Preparatory School: CSPs
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 Issues in Tax Collection
– Administrative Issues
• No District Outreach of Tax offices
– No proper tax offices in the major districts of the country.
– 65% population of the country lives in rural Areas of
Pakistan.
• Shortage of skilled man power.
• Extremely low ratio of tax collector to taxpayer - 1
tax collector to 1000 taxpayers.
• Weak Enforcement of Tax Laws

Civil Services Preparatory School: CSPs

0316-5701593
 Issues in Tax Collection
• Low Tax Morale/ Weak Tax Culture
– Tax Morale is internal motivation of citizen to
pay taxes.
– State creates sense of National Duty among
the citizen that makes them pay taxes
– Governments spending is not pro public
– Pakistan is largely an agrarian society, the
trend of tax compliance is weak in such
societies in comparison to industrial
economies
Civil Services Preparatory School: CSPs
0316-5701593
 Issues in Tax Collection
• Facilitation of Taxpayers
– Half-cooked automation of business
processes.
– Conventional outlook of tax offices
– Compliant taxpayers are not satisfied- the way
they are treated by tax officers/officials

Civil Services Preparatory School: CSPs

0316-5701593
 Issues in Tax Collection
– Pakistan is low ranked in Ease of doing
business-paying taxes and filing of mandatory
declarations.
– The ranking has improved this year from 136
to 108.

Civil Services Preparatory School: CSPs

0316-5701593
 Issues in Tax Collection
• Provincial taxes.
– Prior to 18th amendment provinces has Agriculture
Income Tax, capital gain tax, property taxes, token tax,
professional tax etc
– Agricultural Income tax collection in 2013-14 was Rs 2
Billion and share of agriculture in GDP was 22%
– All these revenue streams have been highly under utilized
by the province
– 18th amendment also gave provinces right to collect sales
tax on services
– The revenue streams for provinces are still under utilized
primarily.
– Increased burden and cost of compliance for taxpayers
Civil Services Preparatory School: CSPs
0316-5701593
 Issues in Tax Collection
• Amnesty Schemes
– Purpose of amnesty scheme- documentation/
or benefit of privileged class
– Amnesty being offered after regular intervals?
– Reason for failures
– No threat of penalty and prosecution.

Civil Services Preparatory School: CSPs

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 Tax-to-GDP Ratio
Pakistan Neighboring Countries

Civil Services Preparatory School: CSPs

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 UNEQUAL BURDEN ON ECONOMIC
SECTORS

Sector Share in Contribution to

GDP Tax Revenue
Agriculture 18.5% <1%
Service 58% 25%
Manufacturing 23% 74%

Civil Services Preparatory School: CSPs

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 Recommendations

• Broadening of tax base

• Simplifying tax laws
• Elimination of exemptions
• Documentation of economy
• Automation of Business processes
– IT based deterrence
– Modern means of documentation of economy
– Example of China, Singapore, Japan etc
Civil Services Preparatory School: CSPs
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 Recommendations

• tax evasion to be made criminal offence

• Harmony in federal and provincial taxes
• Predictive analytics/ data sciences to unearth high
risk areas.

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THANK YOU

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Q/A Session

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