by
Mr. Muhammad Abdullah Yusuf
Former Chairman
Federal Board of Revenue
Format of Presentation
Historical Prospective of Federal Board of Revenue
Revenues Collection Philosophy
Types of Taxes
Provincial Taxation System
Subsidiarity in Tax Collection
The IMF, WTO and Donor Conditionalities
Role of Taxation System in Pakistan
Revenue Collection
Historical Tax Collection (Federal)
Tax to GDP Ratio
Reasons for Low Taxation Performance
Remedies & Recommendations
The Federal Board of Revenue Historical
Perspective
Created on April 1, 1924 through enactment of the Federal 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 1960
On 31 August 1960, on the recommendations of the Administrative Re-
organization Committee, FBR was made an attached department of the
Ministry of Finance.
In 1974, the post of Chairman FBR was created with the status of ex-
officio Additional Secretary.
On October 22, 1991, status of Revenue Division was given to FBR. This
arrangement still continues.
Revenue Collection Philosophy
Indirect Taxes
Sales Tax
Customs Duties
Other Import Duties (e.g. anti dumping duties etc.)
Regulatory Duties
Federal Excise Duty
Tax Collection Procedures
Direct Taxes
Income Tax on individuals
Corporate Tax payable at end of financial year on
profits of a company
Withholding Tax payable on each payment for goods
or services.
Advance Income Tax payable quarterly when Income
exceeds a prescribed limit
Turnover Tax payable on the turnover of a company
Tax Collection Procedures Indirect Taxes
Sales Tax
Collected at Import stage on imported goods
Collected at each stage of value addition on
domestically produced goods
Adjustment of Sales Tax paid at previous stage allowed
Collected from the final purchaser at the point of
sale
Also leviable on Professional Services.
Payable to provincial governments.
Tax Collection Procedures Indirect Taxes
Customs Duties
Customs Duties - Levied on Import of goods at the
port of entry
Deferred payment allowed to Private & Commercial
Bonded Warehouses
Deferred payment on units manufacturing under
customs Bonds Scheme
No Customs Duties levied for imported raw material
for export.
Tax Collection Procedures Indirect Taxes
Excise Duty
levied on import of certain items
Levied on manufacturing of certain goods.
Major portion emanates from domestic sector
Federal excise duty has contributed 8.8% of total tax
collection during 2010-11.
It is a dying tax and would be eventually replaced
with Sales Tax
Provincial Taxation System
Every province has its own taxation system
Taxation systems of Punjab and Sindh are more developed
than KPK while Balochistan has weak tax system.
Sign
Security Agency
Boards
Mining & Exploration Services
Franchise
Advertising Agents
Motels, Guest Houses, Marriage Halls & Lawns
Share Transfer Agents
Property developers/promoters
Fashion Designers
Personal Care Services of Beauty Parlors, Clinics,
Architects, Town Planners & Interior Decorators
Management
Port Services
Toll manufacturing Services (industrial vending)
Excise and Taxation Department of Provinces
Direct Taxes
39.4 %
Sales Tax
42.6 %
Customs Duty
11.3 %
Annual Revenue Collection
(1996-97 to 2013-14) (Rs. in Billion)
Growth in Target
YEARS Target Collection Tax to GDP ratio
Collection (%) Achieved (%)
1996-97 286.0 282.1 5.2 98.6 11.6
1997-98 297.6 293.6 4.1 98.7 11.0
Corruption
Corruption is considered the root cause of all social problems including
lack of good governance and low tax to GDP ratio in Pakistan.
Tax Exemptions
Section 53 of the Income Tax Ordinance 2001, section 13 of sales tax act
1990 and section 16 of Federal Excise Act 2005 etc. empowers the Federal
Government to exempt from tax any income or classes of income, or
person. Tax exemptions are granted under restrictive set of conditions but
take many shapes with far reaching revenue implications. In certain cases
these are granted to promote investment, exports and growth, in other
cases privileged personalities are entitled to such exemption, or they are
allowed to vulnerable groups to preserve equity in the tax system.
The CNIC number of a person should be the identifier for all tax transactions,
both at the Federal and the Provincial level. National Tax Numbers should be
restricted to the companies only. A central number will make filing easy for the
tax payers, and will provide access to all information to all the relevant tax
collection authorities.
The complete filing and assessment process must be computerized, with proper
authorization checks and internal controls built into the system. Notices and
other communication made with the tax payers should be numbered, dated and
generated through the system. The system should provide audit trail of each and
every assessment, starting from filing till completion of the assessment; even
including the proceedings of the cases referred to the tribunals and the Courts.
Inland revenue (I/Tax, S/Tax and FED)
For Inland Revenue Integrated Management System (IMS) is required which is
already in advance stage of development. The concept of Data Warehouse
which collects and stores third party information of each and every person based
on his CNIC. This data is then compared with the return filed or not filed by the
Tax payers and non-taxpayers. After the automatic data mining there is an audit
tracking system which would track the actions taken for record purpose. One
latest part of the data warehouse information being used by a large number of
countries is online access to each and every transactions taking place in the
banks. If this is introduced, then this will take care of the huge tax gap that we
have of Tax to GDP ratio of almost 79%.
Computerized Information System
Efficiency and cost effectiveness can only be achieved if the available technology is
properly utilized. FBR has embarked upon a colossal computerization program,
which will bear fruit only when a central data warehouse links all departments
within FBR, and acquire and disseminate information from and to third party
sources especially Financial Institutions. Data mobilization with an integrated
database system linked with NADRA will facilitate in coordination and sharing of
information between the federal, provincial and local governments.
Strong Audit
In Pakistan the Universal Self Assessment scheme has not shown the desired results
because of lack of tax culture and effective and comprehensive audit to create
deterrence for the tax payers, so it must be backed by strong audit. There is now a
need to pursue planned and professionally supervised audits starting from LTUs
going down to RTOs. Care should be taken not to harass genuine tax-payers.
Moreover, audits of W.H. Agents have to be undertaken. In addition to own staff of
FBR, outsourcing of special audits should be considered again.
Public Awareness
Public awareness campaigns be launched on regular basis in order to facilitate the
public in understanding the complex tax laws besides emphasizing the positive
effects of tax compliance and inculcation of tax culture.
To Build Tax Revenues, Build New Businesses
New technology based firms entail risk, but they also represent the greatest
promise for value creation and a growing tax base. New businesses require not only
direct financial support from the country, but also greater access to early stage
private capital, business connections and insights, and competitive business costs.
Modernize Tax Administration
Stability in tenure of senior tax managers, investment in key soft
infrastructure (IT) and qualified human resources, and governance
improvements are all urgently required. These actions have been on the tax
reform agenda for years, if not decades. Their success depends largely on the
decision power and sustained implementation capacity of the political
leadership.
Consider presenting a bill to the Parliament converting the FBR into a
fully autonomous institution.
In order to make tax base as broad as possible the above guidelines have
to be followed by enforcement of system. Moreover, Exemption under
S.III (on foreign remittances) needs to be reviewed and Agriculture
Income tax beyond minimum threshold needs to be taxed like any other
source of income. Furthermore some of the tax rates need
rationalization.
Activate Tax Policy and Broaden the Tax Base
This reform aims to increase collection (tax policy) and buoyancy (broadening) by
removing exemptions. The latter agenda covers the sales tax, income tax, and
customs duties. The decision about the final mix of these measures would
involve political considerations.
Tax policy. Publishing a tax expenditure annex in the annual budget would
identify and facilitate gradual removal of most tax exemptions and zero ratings,
along with their projected fiscal. Position creating a joint FBR-Ministry of Finance
unit on tax policy would support sound policy design and solid revenue forecast
Corporate and individual income taxes. In the medium term, the high CIT needs
to be lowered from 35 percent to a 25-30 percent international benchmark and
its base widened with new registrations, as current coverage is low. A lower CIT
would encourage investment and attract new businesses to file.
Other Measures. A complementary measure to include reintroducing special
excise duties; introducing a retail tax similar to that introduced successfully by
China, which favors lottery tickets for new registered sales taxpayers; bringing in
a capital gains tax on property transfers; and increasing levies like those on
petroleum and gas.
Tax Amnesty and Money Whitening
Amnesty schemes are not be encouraged. These much hyped schemes
encourage the tax evaders on one hand, while lets down the diligent tax
payers who have been dutifully paying their share to the nation.
The result of previous experiences with such schemes shows that they result
in dismal collection, with almost no increase in the tax base. To discourage
the hopefuls that amnesty will not be announced in future, the power to
announce such schemes should be entirely abolished in the relevant
provisions of the law.
The hard work and effort put up by our countrymen in foreign lands is highly
commendable, and the remittances they send to support their families in
Pakistan are the backbone of the economy. However, these immunity
provisions in unscrupulous hands lead to large scale tax evasion. These
loopholes must be closed on a priority basis.
Incentives through tax rates
Developed economies use tax rates to attract investments. Schemes to provide higher
tax depreciation and capital allowances are introduced in the years of recession, with
the aim to stir up the economy. Different jurisdictions reduce corporate rates to
attract investment by foreign companies.
Similarly, to increase corporatization and documentation, tax rates applicable to
companies are to be made lower than those applicable to the individuals. Public
should be encouraged to do business through a corporate entity rather than by
themselves.
The government probably needs to step back and look at the entire
intergovernmental fiscal system, which is broken and unbalanced, and its revenue
mobilization, which has a narrow lens. At the heart of the tax problem is that
provinces have the wrong incentives to collect taxes, though from the pure
perspective of raising taxes, the provincial agenda is quite straight forward.