INCOME TAX SELF ASSESSMENT SCHEME

The major issues of the taxation system and revenue organization during pre-reform
period in Pakistan were; discretionary powers with tax officials, corruption, narrow
tax base, high tax rates, SRO culture, low share of direct taxes, low buoyancy,
heavy reliance on withholding taxes, delayed refund payments and a non-friendly
environment in tax offices. These factors not only reduced the tax collection but
also resulted in the loss of credibility of the tax machinery in public. Within income
tax, the rates for the corporate sector were exceptionally high which not only
discouraged tax compliance but also encouraged tax avoidance and evasion.
During the year 1992-93 banking, public and other companies were taxed at the
rate of 66 per cent, 44 per cent and 55 per cent, respectively. Similarly, income tax
returns submitted by the taxpayers were subjected to full assessment resulting
into un-manageable litigation process and un-necessary wastage of precious time
of taxpayers. It may be realized that the direct taxes are generally progressive in
nature, help in maintaining the overall proportionality of the taxation system and
equitable distribution of income. The direct taxes also play a key role in ensuring a
sustainable level of economic growth and development. Historically, the share of
direct taxes in total tax collection in most of the advanced countries has been
higher than indirect taxes. But, in Pakistan, the share of direct taxes in total federal
taxes has been historically low. In this backdrop there was a need to address these
issues in a manner that the taxation system becomes less complicated and
cumbersome. In year 2000, the government constituted a Task Force on Reform of
Tax Administration, which presented its report in April 2001. The focus of the
reform report was to raise tax revenues through simplified tax laws and
procedures and a congenial business environment and to regain the taxpayers’
confidence in revenue organisation. The old Income Tax Ordinance, 1979 has been
replaced with the Income Tax Ordinance, 2001. The fundamental change
introduced from July 2002 was the introduction of a regime of Universal Self-
Assessment Scheme (USAS) in income tax. The objective of USAS was to facilitate
the taxpayers, to minimize the contact between taxpayers and tax collectors and
to enhance income tax revenue through increased confidence of tax payers in the
system. On the other hand, the introduction of USAS had also put great
responsibility on the shoulders of the taxpayers to respond positively by assessing
their own income and to pay tax, due on them, honestly. The new law is in
accordance with the international practices in all developed countries around the
world and a first such experience in this part of the world, which has curtailed the
most abused discretionary powers of the taxation officers. Some of the salient
features of the Income Tax Ordinance, 2001 are: (1) The taxpayers themselves
assess their income and determine their tax liability. (2) The powers of the taxation
officer to make the assessment and impose tax have been reduced to a large
extent. (3) All income tax returns are accepted without any conditions of
compulsory enhancement of tax liability over previous year to qualify for
acceptance. (4) A certain percentage of returns filed are selected for tax audit on
the basis of risk assessment to verify the accuracy and correctness of income tax
returns.(5) Rates of tax for the banking and private companies to be gradually
brought down to 35 per cent by the year 2007.Impact on income tax revenue and
compliance: There are three major components of income tax in Pakistan, namely:
the collection on demand, voluntary payments, and withholding taxes. The
collection on demand includes arrear demand and current demand, voluntary
payments include; payments with returns and advance payments. Whereas,
withholding taxes are collected from more than 20 sources - the major sources are
salaries, bank interest, contracts, imports, exports, electricity and telephone bills.
Until the recent past, there was heavy reliance on withholding taxes and collection
on demand, contributing nearly 70 per cent of the total income tax collection
(Graph-1). However, the introduction of USAS in 2002 has proved to be a success
in the income tax regime, as it has shifted the focus from enforced collection to
voluntary compliance with the result that the voluntary payments (VP) have
emerged as a major source of income tax revenue. (see graph) In absolute terms,
the collection on account of VP was Rs50.1 billion in 2002-03 which has increased
to Rs165.6 billion in 2006-07. In other words, a growth of 207 per cent has been
recorded during this period. During the same period, even though withholding
taxes grew by 98 per cent, the overall contribution of WHT in income tax fell quite
rapidly. The acceptance of USAS and new system can be further validated through
the analysis of income tax returns during the last few years. (see table)It is evident
that the income tax filers have increased remarkably, after the introduction of
USAS. The new system has been helpful, not only in improving taxpayers’
confidence in the system; the revenue collection has recorded a notable growth of
78 per cent. Particularly, the response from the corporate sector and AOP has been
 very encouraging. More than 50 per cent growth in the number of returns filed has
been recorded in the categories of corporate and AOP during the last four years.
Moreover, during the year 2006-07, an unprecedented growth of 48 per cent has
been recorded in the net income tax collection. This remarkable performance of
the direct taxes enabled the CBR to achieve the rather ambitious target of Rs835
billion. To conclude, it is indeed very inspiring to observe that the government has
gone out of way to commit itself to bring about qualitative changes in CBR. The
reform program being undertaken in CBR through investment in technology,
infrastructure and human resources has been designed to make the organisation
efficient and transparent. The initial assessment is that reform objectives are being
achieved and there is a definite change in the way the new taxation regime is
evolving. The revenue collection is increasing significantly, a business friendly
environment has been created and tax laws have been simplified. The USAS has
been welcomed by the taxpayers by responding positively up to a large extent.
The taxpayers are now visiting CBR field formations without any hesitation and
fear. There is an unflinching resolve to pursue the reform process relentlessly with
the hoe that the new approach of the revenue organisation will pave the way for
further revenue generation, investment, economic growth, poverty reduction, and
a dawn of new economic era in the country.

Self Assessment Scheme

Self Assessment involves completing an online or paper tax return in order to

tell the government about your income and capital gains (profits on the sale of certain
assets), or to claim tax allowances or reliefs against your tax bill. The government uses
the figures on the tax return to work out your tax bill, or the applicant can work it out
themselves.

There are different types of tax return and different 'supplementary pages' the
applicant may need to complete depending on their circumstances. There are also
deadlines for sending your tax return in - and penalties and interest charges if it
arrives late.

Ref: http://www.hmrc.gov.uk/SA/introduction.htm

The Self Assessment Scheme (SAS) was introduced in Pakistan in 2001, where
the tax payer was given the leverage to declare their incomes themselves and file a
return annually declaring those incomes derived from other sources. The system was
introduced for the first time in the region of South Asia; keeping in mind the tax
payers will declare their incomes themselves in the best of their integrity.
 Though in developing countries like Pakistan, tax payers often try evasive
measure to avoid taxation but this resulted in a positive trend in our region. The
government collected more revenue than before in contrast to the old system where an
Income Tax Officers (ITO) used to go door step to door step to assess and collect the
income tax derived from the tax payer.

Income Tax

An income tax is a tax levied on the income of individuals or business

(corporations or other legal entities). Various income tax systems exist, with varying
degrees oftax incidence. Income taxation can be progressive, proportional,
or regressive.

A personal or individual income tax is levied on the total income of the

individual (with some deductions permitted). It is often collected on a pay-as-you-
earn basis, with small corrections made soon after the end of the tax year. These
corrections take one of two forms: payments to the government, for taxpayers who
have not paid enough during the tax year; and tax refunds from the government for
those who have overpaid. Income tax systems will often have deductions available that
lessen the total tax liability by reducing total taxable income. They may allow losses
from one type of income to be counted against another. For example, a loss on the
stock market may be deducted against taxes paid on wages.

Ref: http://en.wikipedia.org/wiki/Income_tax
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