TERM PAPER

TAX STRUCTURE OF PAKISTAN

Instructor:
Honorable Sir: Lecturer Atif Khan jadoon
Submitted by:
Muhammad Mubashir Khan
Roll no: 42

University of the Punjab, Lahore New

Campus
Department Of Economics
Post Graduate Diploma in Applied
Economics

1 | Page

Acknowledgement:
I would like to gratitude to respected teacher Mr. Atif Khan Jadoon
without whom this research would just be a dream. He is really
energetic and kind teacher who always helped and teach me that
how to do this work and make me able to conduct a detailed
research which has also increased my knowledge. Due to his
extensive guidance and enlightening meetings, training and help I
became able to conduct this research and produce this document.
He teaches us in detail on each and every point with his
comprehensive valuable knowledge.

I also thank all those people who helped me in any way during
doing my term paper.

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TABLE OF CONTENT:
Page No
I.

Abstract

II.

3
Introduction

III.

3
Definition

IV.

5
Review

V.

8
History

VI.

of

literature

of

taxes

10
Broad features of the taxation structure of the Pakistan

VII.

13
Types

VIII.

16
Positive and negative aspects of direct and indirect taxes

of

IX.

19
Maxims

X.

21
Agreements for

XI.

22
Views

of

on

XII.

25
Conclusion

XIII.

29
References
30

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taxes

avoidance
taxes:

is

taxes
of
it

double
fair

or

taxation
unfair?

Abstract:
This paper studies the tax structure of Pakistan. This study shows
a brief introduction about tax system of Pakistan, introduction
include the definition of tax and a table of fiscal indicators of
consolidated federal and provincial governments (as percent of
GDP). Later it shows the literature review about the tax system
and their effect on GDP of the country this is different from
countries with advanced taxation systems mainly relying on
allowances followed by tax rate and exemptions. Then it include a
brief history of tax system of Pakistan, broad features of the
taxation structure of the Pakistan in which it include a table of
federal tax collections over different years in Pakistan, this study
also include a survey on people perception of taxes in Pakistan.

Introduction:
Pakistan is the sixteen largest country of the world with a
population of approximately 184.35 million despite its large
human resources, Pakistan is an underdeveloped country with
GDP per capita of $1,256.8 in 2011-12*.Collection of taxes is an
important aspect of Government policies on economy.
Since ancient times, government has been collecting revenues
from their population in different forms. It was necessary in order
to meet the different expenditures which the government had to
4 | Page

incur. The nature and the extent of expenditures incurred by the

governments have under gone a lot of changes in the modern
world. New sources of collecting the necessary amounts have also
been found. Now a state has to spend a lot of money on its
defense requirements. Developments expenditures and
expenditures on general public services (schools, hospitals, etc.)
have also been increased manifold. New sources of receiving the
necessary amounts have also emerged. For example now a
country can receive some resources from another country, or an
international organization either as loans or as aids. However,
collecting the amounts from its own population still remains as a
major and popular source. A government tries to generate
internal revenue from different sources. The stability of any state
and its economic structure is strongly correlated with the shape
and framework of its taxation system.
In our country also, like all other countries of the world, the
government receive different types of taxes in order to finance its
day to day expenses, defense requirements and development
projects. These taxes include Customs and Exercise duties,
Income tax, Sales tax, etc. The government has recently
introduced the zakat and Usher system, the income from which is
spent only according to the Quranic injunctions.
The federal board of revenue is the highest administrative
authority of the federal government for the purpose of tax
collection in the country. It controls the whole working of tax
machinery and matters regarding employees of tax department in
the country. The Federal Government appoints the members and
the chairman of the Federal Board of Revenue.

The Income tax and the Sale tax are administered by the board
through Chief Commissioners Inland Revenue, Assistant
Commissioners Inland Revenue, and Officers of Inland Revenue
and Inspectors Inland Revenue. The Deputy Commissioners Inland
Revenue is responsible for ascertaining the amounts due from the
taxpayers in the areas assigned to them.
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Responsibility for administering the customs and Exercise duties

has been assigned by the Board to the collectors of Customs and
Central Exercise. The Assistant Collectors and Superintendents
assist Collectors. There are separate administrative organizations
for land customs and sea customs.
Taxes are broadly classified into two categories viz. direct taxes
and indirect taxes. Whether these are collected by the Federal
Government or the Provincial Government, the division broadly
remains the same. These are both income based and / or asset
ownership based, depending upon the nature and type of the levy.
Direct taxes are those where the incidence is borne by the person
from whom the tax is collected whereas, in the case of indirect
taxes, the person from whom the tax is collected acts only as an
agent/intermediary and the incidence of tax is borne by another
person (from whom the tax is eventually collected by the agent in
the due course and deposited in the government treasury). Few
examples of direct taxes, collected by the Federal Government,
are Income Tax, Wealth Tax, and Capital Value Tax. Urban
Immoveable Property Tax Professional Tax and Motor Vehicle Tax
etc. are types of direct taxes collected by the respective Provincial
Governments.

Definition:
The tax revenue is the most important source of public revenue. A
tax is a compulsory payment levied by the government on
individuals or companies to meet the expenditure which is
required for public welfare.
(By Adam Smith)
"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
offence."
(According to Hugh Dalton)
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Pakistans tax system has undergone profound changes since the

nineties, but
Despite these changes tax revenue in relation to GDP has
remained remarkably stable over the last two decades. Federal
tax revenue as a percent of GDP during the last two decades
averaged around 13 percent never falling below 10 percent of
GDP (International Monetary Fund, 2001). The overall revenues
still appear to be dominated by revenues collected by the federal
government and these mainly comprise direct taxes (Income and
corporation tax) and indirect taxes (custom duties, sales tax and
excise duties).
The purpose of this chapter is to analyze the structure of the
countrys federal
Taxation in conjunction with the reform process, also called the
first generation
Of tax reforms, that took place during the 90s in Pakistan. The
main focus of
This reform process was to impose direct taxes as well as replace
trade
Revenues with GST/VAT revenues. This process approximately
ended in 2001.
And shortly after, Pakistan initiated the second generation of tax
reforms
Which are purely administrative in nature and are not the focus of
this study?
There is a table which shows the fiscal indicators of consolidated
federal and provincial governments (as percent of GDP) over
different years. In 2006 the real GDP growth is maximum which
6.6% and in this year total revenue of the government is 14.9 %, in
which tax revenue is 10.2% and non-tax revenue is 4.7%.

Fiscal Indicators of Consolidated Federal

and Provincial
Governments (as Percent of GDP)
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years

199798
199899
199900
200001
200102
200203
200304
200405
200506
200607
200708
200809
200910
201011
201112
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GDP
real
Growt
h

Over
all
Fiscal
Defici
t

3.5

Expenditures

Revenues

Total

Curren
t

Dev.

Total
Rev.

Tax

NonTax /1

7.7

23.7

19.8

3.9

16

13.2

2.8

4.2

6.1

22.0

18.6

3.3

15.9

13.3

2.7

3.9

5.4

18.8

16.4

2.5

13.4

10.6

2.8

1.8

4.3

17.4

15.3

2.1

13.1

10.5

2.6

3.1

4.3

18.3

15.7

2.8

14.0

10.7

3.3

4.7

3.7

18.5

16.2

2.2

14.8

11.4

3.4

4.5

2.4

16.7

13.5

3.1

14.3

11.0

3.3

5.5

3.3

17.2

13.3

3.9

13.8

10.1

3.7

6.1

4.3

18.5

13.6

4.8

14.2

10.6

3.6

6.6

4.2

19.1

14.9

4.2

14.9

10.2

4.7

5.0

7.3

21.4

17.4

4.2

14.1

9.9

4.2

0.4

5.2

19.2

15.5

3.6

14.0

9.1

4.9

2.6

6.2

20.2

16.7

3.5

14.0

10.1

3.9

3.7

6.5

18.9

15.9

2.8

12.4

9.3

3.0

4.4

6.8

19.6

15.5

3.6

12.8

10.3

2.4

201213

3.6*

4.7

19.0

14.6

4.4

*: Real GDP estimated for 2012-2013

Source: Economic Survey of Pakistan (various years).

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14.3

11.1

3.2

18
16
14
12
10
8

Column2
13.2

6
4
2
0

Literature review:
Several empirical studies have been undertaken to assess tax
performance across different countries. Most of the studies have
used tax share in GNP/GDP or tax ratio as the dependent variable
with different combinations of explanatory variables.
Ahmad and Mohammad (2010) examined the determinants of tax
buoyancy of 25 developing countries by using the cross section
data for the year 1998 to 2008 and pooled least square method
for result analysis. For agriculture sector it showed insignificant
effect and for services sector it showed positive and significant
effect instead of past insignificant result of many researches.
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Monetization and budget deficit showed positive influence while

growth in grants showed negative impact on tax buoyancy.
Fauzia (2001) examines the elasticity and buoyancy of major
taxes in Pakistan over the period 1981-2001 by using the Chain
Indexing Technique. She used the least square method for
measuring the elasticity. Result reveals that estimates of elasticity
and buoyancy are higher for direct taxes. However, customs and
excise duties appear to be relatively rigid, due to which the
overall tax elasticity is also low. Further, the estimates of
buoyancy are higher than their corresponding elasticitys for all
the taxes, confirming thereof that most of the growth in revenues
has been achieved due to enhanced tax rates and broadened tax
bases instead of automatic growth.

VAQAR and Cathal (2006) studied Redistributive effect of personal

income taxation in Pakistan in (2002-2005). They took the data
of these years (2002-2005). They decomposed the overall tax
system in order to evaluate the contribution of rate, allowances,
deductions, exemptions and credits. They used the regression
model to compute the income to be taxed. The results show that
the overall personal income tax structure seems progressive for
system and redistributive. Income Tax Ordinance resulted in
greater redistribution. The redistributive effect increases as we
move from 2002 to 2005 tax assessment. Deductions for salaried
tax payers contribute the most towards progressivity. This is
different from countries with advanced taxation systems relying
mainly on allowances followed by tax rate and exemptions. Given
the increasing pre-tax income gap, reforms in taxation cannot be
entirely relied upon for a reduction in inequality in the society.
Akbar and Ahmed (1997) examined the elasticity and buoyancy of
various taxes and expenditures of Federal Government during the
period 1973-1990 by using the Presto methodology (1962). They
found that the overall elasticity and buoyancy of taxes were low
because of the low elasticity and buoyancy of customs duty and
excise duty. The elasticity and buoyancy were found to be
relatively higher for sales tax followed by income taxes.
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Gillani (1986) estimated the elasticity and buoyancy of Pakistans

federal tax system for the years 1971-72 to 1982-83 by using the
Divisia Index Method (DIM) and the Proportional Adjustment
Method (PAM) and found different results. Her study showed that,
with a few exceptions, almost all the growth in various taxes
stemmed from endogenous factors and was not due to the
discretionary changes.
Jetton (1978) studied the direct and indirect taxes of Pakistan and
found direct and indirect taxes of Pakistan very inelastic over the
period 1960-61 to 1975-76. Among indirect taxes, customs duties
appeared to be more elastic, followed by import duties, excise
duties and sales taxes respectively. The main reason for the low
elasticity was found to be the low tax-to-base elasticitys.
Tierra (2002) examined the tax system and tax structure of
Uganda to investigate the factors effecting tax revenue in the
country. He used the time series data of the period 1970 to 2000
and estimated a model. His results showed that agriculture ratio,
population density and tax evasion affect all type of taxes. GDP
per capita showed the surprising negative sign. Tax evasion and
openness (as measured by import ratio) showed the significant
negative impact. Aid variable showed positive sign since aid in
Uganda always supported imports especially raw material so not
surprisingly.
Ahsan and Waqar (2005) examined the tax share in GDP for
developed and developing countries for 1979-2002 and found the
negative and significant relation of agriculture share, GDP per
capita, and population growth to the tax ratio while trade share in
GDP has positive and significant relation but corruption has
negative and insignificant relation.

History of tax structure in Pakistan:

In Undivided India (now consisting of Pakistan, Bangladesh and
India) income tax was introduced for the first time in the year
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1860, and exactly the same pattern was followed that was
prevailing in those days in the United Kingdom. This Act came into
force on 31 July 1860 and continued for only 5 year up to 1
August 1865 when it was completely withdrawn. A major
characteristic of this act was the agriculture income from land,
above the rental value of Rs.600 per annum, was taxable.
After Independence from British rule on 14 August 1947, the
Pakistan Government adopted the income tax Act, 1922, as
amended up to the date. The provisions of the act were extended
to the whole Pakistan except the special areas.
Taxation Inquiry Committee was setup in June 1958.On this
committee besides officials, reprehensive of trade & commerce
were also taken as members. The said committee submitted its
report to C. B .R after long deliberation .In 1959, supper Tax was
abolished on income of all people except registered firm and
companies. The rates of each slab were expressed as percentage
of income. In1960, the financial year was changed to commerce
on 1 July and end 30 June. In 1965 Self-Assessment Scheme was
introduced.
The income tax Act, 1922 continued for 57 years till 1979.During
this period, a lot of amendment were made in original Act.
Between 1922 and 1979, as many as 71 amendment acts were
passed by the legislature. The purpose of most these changes is
check evasion of tax. Act was not kept in mind. The result was
that keeping these difficulties in view the govt. introduced a new
income tax law namely income tax ordinance 1979.The
ordinance replaced the income tax act 1992 and was enforced as
from 1st July 1979.
The self-assessment scheme was further broad-based in this
ordinance. However the job of improving the law continued after
the promulgation of this ordinance also. In 1985 the government
set up National Tax Reforms commission to suggest always and
means to improve existing tax structure in the country. As result
all these efforts the Income Tax Ordinance 2001 is in force in
Pakistan.
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Sales tax:
Generally speaking Sales tax is a tax levied on the sale of goods and services. It
has been explicitly defined in the Sales Tax Ordinance under section 2 subsection
(29A) as (a) the tax, additional tax, or default surcharge levied under this Act; (b) a
fine, penalty or fee imposed or charged under this Act; and (c) any other sum
payable under the provisions of this Act or the rules made there under. The
Ordinance also provides proper format for the levy of Sales Tax. The Sales tax
amount is usually calculated by applying a percentage rate to the taxable price of a
sale. In Pakistan the contribution of Sales Tax in the revenue collection is
Most sales taxes are collected from the buyer by the seller, who remits
the tax to a government agency. Sales taxes are commonly charged on sales of
goods, but many sales taxes are also charged on sales of services. Ideally, a sales
tax would have a high compliance rate that could be difficult to avoid, and be
simple to calculate and collect.
As the evolution of the recent Sales Tax scenario goes in which it has been
extracted from the Customs group and given to be the part of the Inland Revenue
Service; the Sales Tax was primarily a provincial subject under the Indian Act of
1935. Sales Tax was centralized in the year 1948 through the law of the Pakistan
General Sales Tax Act 1948. Later the Sales Tax Act of 1951 was adopted. It was
one staged tax. 1990 Ordinance of the Sales Tax further incorporated many
changes. Today the Sales Tax stands at the point where it collects maximum
revenue.
Federal excise duty:
Federal excise duty is a tax that is levied on production or consumption of goods in
a country. An excise is considered as an indirect tax. The producer or seller who
pays the tax to the government is expected to try to recover the tax by raising the
price paid by the buyer. This tax is for immediate payment, applied to the
production or consumption of certain products.
The excise laws goes back to the year 1934 when a compendium was drafted
which agglomerated more than ten separate excise acts which had grown up
piecemeal over many years. Another useful effort was made in the year 1944 when
a consolidated and single enactment saw the light of the day and which still holds
the field in the excise laws to be called as the Central Excise Act, 1944.
History of CBR:
The Central Board of Revenue was created on April 01, 1924
through the Central Board of Revenue Act, 1924. In 1944, a fullfledged Revenue Division was created under the Ministry of
Finance. After independence, this arrangement continued up to
14 | P a g e

31st August, 1960 when on the recommendations of the

Administrative Re-organization Committee, CBR 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 CBR was created
with the status of ex-officio Additional Secretary and Secretary
Finance was relieved of his duties as ex-officio Chairman of the
Board. 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, it was decided to restore the status of the CBR as a
Division under the Ministry of Finance. Thus, Revenue Division
was re-created on October 22, 1991. This experiment continued
for a short period. In January, 1995, Revenue Division was
abolished and CBR reverted back to the pre-1991position.
However, from December 01, 1998, Revenue Division was once
gainer-created and it continues to exist as such.
History of FBR:
On July 15 2006, the government has decided to convert the
Central Board of Revenue (CBR) into an independent entity as
'Federal Board of Revenue' (FBR), enhancing its financial and
operational autonomy for smooth functioning, with additional
powers to take decisions on taxation/reforms related matters, and
to authorize it to demand taxpayer's related information from any
department/bank/financial institution/housing society to maintain
a 'national database'.
The CBR has drafted 'Federal Board of Revenue (FBR) Act, 2006'
which would repeal the 'Central Board of Revenue (CBR) Act,
1924'. The FBR would have provisions to override any other
government law. The 'FBR Act' would set up an 'Advisory Board'
comprising Minister of Finance or Advisor to Prime Minister on
Finance and Revenue; Chairman CBR and three other members
from the public/private sector. The 'Advisory Board' would be a
supervisory body to monitor the functioning of 'FBR' and
independently make annual budget allocations.

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Broad features of the taxation structure of the

Pakistan:
Taxation generally known as a way to raise government revenue
is an effective instrument for regulating income flows and income
distribution, generating savings and directing investment. In a
developing country like Pakistan, the role of taxation in public
finance is of great importance. Efforts are being made to improve
the taxation structure. Substantial improvements were
undertaken in the income tax structure during 1979-80. An outline
of the taxation structure of Pakistan under the constitution is
given below.
Federal taxes:
Under the constitution of the Islamic republic of Pakistan
promulgated on the 14th of august, 1973, the federal government
has to power the legislate for the following taxes and duties:
o Duties of the customs including export duties.
o Duties of excise including duties on salt, but excluding duties
on alcoholic liquor, opium or other narcotics.
o Taxes on incomes and corporations.
o Estate duty in respect of property.
o Duties in respect of succession to property.
o Taxes on capital value assets, not including taxes on capital
gains on immovable property.
o Taxes on purchase and sales.
o Taxes and duties on the production capacity plant,
machinery, undertaking establishment or installation.
o Terminal taxes on goods or passengers carried by railways,
air and sea and taxes on their fares and freights.
o Taxes on mineral oil, natural gas and minerals used in
generation of nuclear energy
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o Fees in respect of any of the matter enumerated in the

Fourth Schedule, but not including fees taken in any court.

Federal Tax Collections

Period

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

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Direct
taxes

85,060
103,182
110,207
112,950
124,585
142,505
151,898
165,079
183,372
224,988
333,737
387,487
440,271
528,649
602,451

Indirect
taxes
Sales

Excise

Customs

55,668
53,942
72,105
116,71
1
153,56
5
166,56
1
195,13
9
219,16
7
238,53
7
294,79
8
309,39
6
376,93
0
452,29
4

55,265
62,011
60,905
55,784
49,080
47,186
44,754
45,552
53,104
55,272
71,804
92,185
116,055
121,182
137,353

86,094
74,496
65,292
61,659
65,047
47,818
68,836
91,045
115,374
138,384
132,299
150,579
148,382
161,489
184,853

Total

Total Tax
Collection

197,027
190,449
198,302
234,154
267,692
261,565
308,729
355,764
407,015
488,454
513,499
619,694
716,731
799,973
955,563

282,087
293,631
308,509
347,104
392,277
404,070
460,627
520,843
590,387
713,442
847,236
1,007,181
1,157,002
1,328,622
1,558,014

517,30
2
633,35
7

*Source: Federal Board of Revenue

Provincial taxes:
The provincial governments are entitled to legislate in any field
not reserved for the Federal Government. The main sources of
revenue for the provincial governments in the field of taxation
are:
o
o
o
o
o
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Water rate
Tax on trade, professions, callings and employment
Duty on items not included in the federal excise
Stamp duty
Electricity duty

o
o
o
o
o
o
o
o
o
o

Entertainment duty
Taxes on motor vehicles
Tolls on roads and bridges
Urban immovable property tax
Betterment tax
Capital gains tax
Taxes on cinemas and hotels
Arms license fee
Cotton fee
Court fee

The provincial governments are not authorized to collect taxes in

the cantonment areas; however the cantonment broads pass on a
certain percentage of the tax to provincial government.

Types of taxes:
Direct and Indirect Taxes:
There are lots of ways in which taxes can be categorized. Who
collects the tax? The Inland Revenue or Customs and Excise
(there are some taxes that neither of these bodies collect)? What
is being taxed? Income, capital or expenditure (again, there are
some taxes that do not fit into any of these three categories)?
Most textbooks and economists like to start by categorizing taxes
into direct and indirect taxes.
19 | P a g e

A direct tax is one that is paid directly by the individual worker or

firm. Income tax is the best example, usually being paid directly
through PAYE. Firms pay corporation tax on their profits, which is a
bit like an income tax for business? Others include Capital Gains
tax, Inheritance tax, Stamp duty (paid when buying a house) and
Petroleum tax (paid on North Sea Oil revenues).Technically,
National Insurance contributions are a direct tax, but the Inland
Revenue as with all the other direct taxes does not collect them.
Officially, they are called 'Social Security receipts', probably
because they are payments towards the state pension and other
benefits that one might require in times of need.
An indirect tax is one that is only paid indirectly through a third
party. Consumers pay Value Added Tax (VAT), for example, but
only if they actually buy the good or service in question. The
retailer officially pays the tax, although it is likely that the price is
raised to reflect the tax, so, effectively, the consumer ends up
paying. Others include tobacco and alcohol duties, fuel duties (on
petrol) and betting duties.
Direct taxes primarily comprise income tax, along with
supplementary role of wealth tax. For the purpose of the charge
of tax and the computation of total income, all income is classified
under the following heads:

Salaries
Interest on securities;
Income from property;
Income from business or professions
Capital gains; and
Income from other sources.

This is the table which shows the revenue from taxes and other
sources in the financial year 2011-2012. Revenues from direct
taxes is 779100, revenues from indirect taxes is 1,345,475.
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Revenues of the Government

CLASSIFICATION

TAX REVENUES
Direct taxes
Indirect Taxes
NON-TAX REVENUE
Income from Property and Enterprise
Receipts from Civil Administration and
Other
Functions
Miscellaneous Receipts
Gross Revenue Receipts
Less Provincial Share
Net Revenue Receipts

AMOUNT(Rs in
Millions)
2,124,575
779,100
1,345,475
711,987
108,637
385,215
218,136
2,836,562
1,221,022
1,615,540

This is chart which shows the contribution of direct taxes and

indirect taxes in Government revenues. So, we can analysis the
contribution of both, the share of indirect taxes is greater as
compared to direct taxes. Direct taxes only contribute 5% in the
government revenues
21 | P a g e

TAX REVENUES(2011-2012)
Direct taxes; 5%

Indirect taxes; 95%

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Positive and negative aspect of direct and indirect

taxes:
Positive aspect of direct taxes:
o
o
o
o
o
o

Flexibility
Elastic
Economical
Fairer then indirect taxes
Give confidence and self-esteem to the payer
Reduce income inequalities

Negative aspect of direct taxes:

o Painful for tax payer
o Direct taxes are arbitrary
o Induce evasion
Positive aspect of indirect taxes:
o Evasion is almost impossible
o Indirect taxes are equitable only when imposed on luxury
items
Negative aspect of indirect taxes:
o Regressive in nature
o No self-esteem and confidence
o Inflation

23 | P a g e

Progressive and proportional taxes:

These terms are important when assessing whether a tax is fair or
unfair. They are important concepts to understand as they relate
to whether or not a tax is redistributive or not.
Progressive taxes:
A progressive tax is one where, as one's income rises, one pays
more tax as a percentage of one's income. The percentage part is
important. Obviously higher income earners pay more tax than
those on low incomes, but are it more as a percentage of their
income?
Proportional taxes:
A proportional tax is one where, as one's income rises, one pays
more tax, but the amount that is paid as percentage of one's
income remains unchanged.
Regressive and digressive taxes:
Regressive taxes:
A regressive tax is one where, as one's income rises, the amount
that is paid as a percentage of one's income falls. Notice, though,
that a higher earner may be paying more of the tax in absolute
terms, but as a percentage of their income, the amount is falling.
These taxes are, obviously, considered to be unfair as they
redistribute money from the poor to the rich (in relative terms).
Digressive tax:
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A regressive tax on the other hand is one which least effects the
higher income groups. This may be progressive tax with the rate
of progression declining with increase in income.
Specific and ad-valorem taxes:
A specific tax is expressed us as a fixed sum per unit of a
commodity.
An ad-valorem tax is the one which is expressed as fixed
percentage of the value of the commodity. GST in Pakistan is an
example of ad-valorem.

Maxims of taxes:
There are some important principles which must be taken into
consideration while formulating a taxation policy. In the following
we have discussed nine principles. First four of these principles by
Adam Smith and the remaining five were added by different later
day economists. We shall call these principles maxims of taxation
as did Adam Smith.
Equality:
First of these maxims is the maxim of equality according to this
maxim the burden of tax should fall equally on the people
according to their ability to pay tax. In the words of Adam Smith.
The subject of every state ought to contribute towards the support of the
government as nearly as possible, in proportion to revenue which they
respectively enjoy under the protection of the state.

This maxim emphasizes the importance of equality in the

collection of taxes.

Certainty:
The second maxims of taxation are that of certainty. It means that
the taxpayer
Should be certain about the amount payable and about the time
and the place of payment.
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
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paid, ought all to be clear and plain to contributor and to every other
person. (Adam Smith).

The authorities must make all possible efforts to ensure that this
maxim is followed. The tax collector can make the tax-payer
grievous by charging offensive rate of tax. This brings certainty in
the taxation system. The certainty in the words of Adam Smith.
This maxim is considered as an important maxim. It is said that
every effort become fruitless if certainty is not observed. A tax
system must be despotic. The collection of the tax and must also
provide the tax-payers proper information. The stat and the taxpayer both should practice the maxim of certainty while imposing
and paying the taxes.
Convenience:
Even when the people believe that the taxes being levied upon
them are just and equitable, they are always considered as a
burden at the time of payment. Thus, the taxes must be made
convenient and easy so that the loss borne by the tax-payer is
minimum. Adam Smith states this maxim as
Every tax ought to be levied at the time, or in manner, in which it is most
likely to be convenient for the contributor to pay it.

Economy:
A tax which cost more to collect than it rises in revenue is a sheer
wastage of effort on the part of government. Adam Smith stated
the maxim of economy in collection as
Every tax ought to be so contrived as both to take out and to keep out of
the pockets of the people as little as possible, over and above what it brings
into the public treasure of the state.

Impartiality:
This maxim is satisfied only by the direct taxes. Indirect taxes do
not satisfy this maxim unless the scale of preference for goods
and services of all the tax-payers becomes the same which is
impossible. Complete impartiality is obtained when progressive
direct taxes are fairly design according to changing needs of the
economy. Impartiality means that the two men earning the same
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income have to pay the same amount of tax. In other words, the
incidence of tax must be equal for each of them.
Harmlessness:
The taxation system must be framed in such a way that it
provides incentive to the people of the country to invest and work
hard for their own prosperity and wellbeing as well as for
wellbeing of the whole nation. Taxes must not be charged heavily
that production and investment become unattractive and
profitless. In such circumstances people might immigrate to other
countries in search of good return on their investment.
Elasticity:
This principle calls for such a system of taxation which
automatically generates more revenue as incomes increase. This
feature of elasticity is the essence of a progressive tax system.
But even a proportional tax can be elastic if the consumption of
the commodity on which it is imposed increases with increase in
income. However, a progressive tax is consider in more elastic
provided that it does not courage evasion . over all elasticity of
the system can be calculated as:
T =

proportionate change tax Revenue

propotionate changenational income

Flexibility:
Tax structure should be designed that it has some degree of
flexibility. I.e. its rates should easily be adjustable so that in case
of this section t urgent need to raise funds government does not
have to introduce new taxes.

Diversity:

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As we said the starts of this section that governments normally

impose many taxes in order to ensure maximum revenue and
distribute the burden of tax. This action confirm to the maxim of
diversity which calls for broadening the base of tax system. The
principle of diversity also implies that the rate of tax should be
low and if government s need to generate more revenue it should
broaden the base of taxes and not increase the tax rates.

Agreements for avoidance of double taxation:

The aforesaid universally applicable principle of taxing the
resident (on world income) and non-residents (for income
accruing in the territory of a state) by any state gives rise to a
possibility of double taxation in the case of residents i.e. once in
the other state where the income is earned (under the principle of
territorial jurisdiction) and once in Pakistan (under the principle of
residency). In order to eliminate the incidence of possible double
taxation, the law allows a credit for taxes paid abroad. Besides,
there are Agreements for Avoidance of Double Taxation, which the
states sign to limit their rights to tax the income. These
Agreements, generally known as double tax treaties, are a
complete code in itself and have an overriding status vis--vis the
local laws. Pakistan has signed double tax treaties with over 50
states. From a practical perspective, an understanding of the
philosophy and rationale of these treaties is essential.

The Government of Pakistan has so far signed agreements to

avoid double taxation with 49 countries including almost all the
developed countries of the world and such agreements are being
signed with other countries as well. These agreements lay down
the ceilings on tax rates applicable to different types of income
arising in Pakistan. They also lay down some basic principles of
taxation which cannot be modified unilaterally. The list of
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major countries with which Pakistan has tax treaties is given

below:
1. Australia
2. Hungary
3. Qatar
4. Austria
5. Indonesia
6. Russian Federation
7. Argentina
8. Iceland
9. Saudi Arabia
10. Bahrain
11. Iran
12. Singapore
13. Brazil
14. Ireland
15. Slovakia
16. Belgium
17. Italy
18. South Africa
19. Brunei
20. Japan
21. South Korea
22. Canada
23. Kuwait
24. Spain
25. Chile

26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.

Luxembourg
Sweden
China
Malaysia
Switzerland
Czech Republic
Mexico
Thailand
Denmark
Netherlands
Turkey
Finland
New Zealand
U.A.E.
France
Norway
United Kingdom
Germany
Oman
USA
Greece
Poland
Hong Kong
Portugal

Views on taxes: is it fair or unfair?

Is It Fair Or Unfair To Impose Tax?
Question: Some people think that the taxes that the Government
collects from us are fair. Others consider them to be unfair. What
do you think?
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2010
No response; 1%
Fair; 32%

Unfair; 67%

*Source: Gallup & Gilani / National Surveys, 2010

Most of the people think that the composition of the taxes is not
fair because the government revenue is based on indirect taxes.
The major part of indirect taxes is sale tax which is impose on
even necessities of life directly related to poor and middle class
peoples and he pays for it.

Comparative data

Fair
Unfair
Dont Know/ No
Response
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200
2
45
%
54
%
1%

200
3
42
%
56
%
2%

2005 200
6
64% 37
%
34% 63
%
2%
-

200 200 201

7
9
0
38% 27% 32
%
60% 72% 67
%
1%
1%
1%

*Source: Gallup & Gilani / National Surveys, 2002, 2003, 2005 2006, 2007,
2009 and 2010

WHO BENEFITS FROM THE TAXES?

WHO IS THE BENEFICIARY OF TAX REVENUE?
Question: Whenever Government imposes a new tax then who benefits from
the money obtained from this tax?

2004
Don't Know; 9%
Others; 1%
whole society; 18%
No one; 17%

some people; 55%

*Source: Gallup & Gilani / National Surveys, 2004

Government uses the tax revenue in their different types of expenditures
(current, development). Most of the part of government revenues used in
current expenditures and some is used on development expenditures.

VIEWS ON REFORMED GENERAL SALES TAX (R.G.S.T) ?

Do people favor or oppose it?

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Question: Do you favor or oppose R.G.S.T (tax)?*

2010
Favor; 5%
Neither favor/nor oppose; 12%

oppose; 83%

*Source: Gallup & Gilani / National Surveys, 2010

People obviously oppose it because it imposed even necessities of life which
is directly related to poor people.

VIEWS ON REFORMED GENERAL SALES TAX (R.G.S.T)

Will it affect poor people or not?
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Question: Some people say that R.G.S.T will not affect a common man i.e. it
wont affect people with low income whereas others say that it will also
affect
low income group. What is your opinion?*

2010
No response; 8%
low income group will not be effected will be ; 16%

low income group will be effected will be ; 76%

*Source: Gallup & Gilani / National Surveys, 2010

Conclusion:
Pakistan like other developing economies has a narrow tax base
with high enforcement costs, making personal income taxation an
unlikely cornerstone of a comprehensive inequality reduction
agenda. Progressive tax is better than the proportional taxes.
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Progressive are those taxes whose rate increases with increase in

value of commodity, asset or income on which it is imposed. But
the proportional tax is charged as a fixed % of income,
consumption, value of the asset or whatever may be the case. In
this type of taxes mostly the low level income group people are
effected which is not fair. Government should adopt the better
method to imposed taxes on nation.

References:
Income tax: Principles & practice (2011-2012)
By Muhammad Muazzam Mughal.
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Monetary theory and public policy (1996)

By Aamir Rafique Hashmi
Federal board of revenue
State bank of Pakistan
Annual budget 2013-2014
Ministry of finance
Economic survey of different years
Dawn news
www.gallup.com.pk

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