Aksa Khalid Somia Zahid Waqas Siddique Sameer Tariq Abdur Rehman

The process of changing the way taxes are collected or managed by the government.
Tax reformers goals:

Some seek to reduce the level of taxation of all people by the government. Some seek to make the tax system more progressive. Others seek to simplify the tax system and make the system more understandable or more accountable.

Direct taxes include the personal income tax, the corporate income tax and the wealth tax. Recommendations made by the Commission are as follows:

1) No interference be made in existing rate structure for personal income tax.

2) The basic rate of tax for private companies should be reduced from 55% to 45%. 3) The existing pattern of elimination from the wealth tax base should be reviewed so as to remove the existing difference.

4) Existing pattern of tax incentives should be reviewed and the exemptions that favor specific entities should be terminated. 5) Salaried Persons be required to file the standard return of total income under Self Assessment Scheme.
6) All business income of charitable and religious trusts and welfare foundations may be made subject to tax. 7) Small retailers without account books and with annual turnover not exceeding Rs.350,000/= be made subject to an annual tax of Rs.600/=.

8) Tax payers maintaining regular books of account for their business or profession be eligible for self assessment scheme.
9) In order to enable taxpayers to discharge their liabilities with convenience, authorized branches of all nationalized banks may be allowed to collect government dues. 10) Accounting records of the Income Tax Department should be computerized. 11) The CBR should assign only gross revenue targets to its officers and the existing system of advice notes in respect of refunds be discontinued.

12) A time limit be fixed in law for disposal of appeals on the pattern of the time-limit specified for assessment purposes. 13) All authorities engaged in survey also be directed to identify the defaulting officials, determining their responsibility and recommend suitable action so warranted.

14) VIP in the state hierarchy may create a demonstrative effect in respect of legal and social responsibility towards the national treasury by filing their own tax returns regularly.
15) Tax evaders may be isolated and subjected to social rejection by debarring them from holding social and political positions. 16) Information network be strengthened and the administrative set-up for utilization of information collected from various sources be streamlined.

Major indirect taxes in Pakistan include the custom duties, the sales taxes and the central excise duty. The recommendations of the National Taxation Reform Commission with respect to indirect taxes are as follows:

Custom Duties: 1) Custom duties should not be used as the principal source of revenue generation. 2) The base of custom tariff should be broadened and there should be no duty exempt items at all.

The rates of duties should be kept as low as possible because high tariff is responsible for inducing smuggling and under-invoicing.
There should be a thorough re-examination of the standard rates of rebate and issue of notification in individual cases should be stopped.

1) Role of revenue generation should be assigned to the sales tax which should emerge as the major revenue generation tax.
2) Though value added tax (VAT) may not be implemented in Pakistan in its ENTIRETY at present, it should be viewed as our objective in domestic taxation. 3) Sales tax should be levied across the board on all the imported goods and domestic production other than agriculture produce and unprocessed food. 4) Standard rates of adjustment for different raw materials may be prescribed.

1) The system of self-clearance should be extended to industrial units at present under the supervised system.
2) Proper safe-guards such as prescribing detailed accounts for raw materials and other items (electricity, gas, water, wages, social welfare contributions) involved in the process of manufacturing should be provided. 3) Services of outside independent accountants/auditors/industrial experts should be utilized in determining the presumptive production.

4) Surprise checks may continue to be conducted but by senior officers.

5) Penalties in the event of violation of rules shall have to be really deterrent and the defaulters prosecuted.

1) Establishment of Departmental ombudsman. 2) Creation of Judicial Tribunal for indirect taxes. 3) A new Revenue Division should be created. Revenue Division will have economic administrators and research scholars working around the year in evolving a comprehensive taxation policy. 4) The existing Reward Scheme for taxation officials should be made more effective. 5) The possibility of improving the emoluments of the taxation officials should be examined by the Pay Commission.

Keeping in view the large fiscal deficits, mounting public debt and debt servicing, narrow tax base and poor compliance, the first phase of tax reforms was initiated in early 1990s. The main objectives were:

To increase the share of direct taxes in total tax revenue.

To reform GST and ultimately replace GST by VAT to minimize tax expenditures and cascading. To reduce the share of trade related taxes. To reduce the share of central excise duties.

The initial reforms introduced in early 1990s were followed by a series of marginal tax reforms. A concerted reform effort, however, was launched in the early 2000 with main focus on: Improving fiscal transparency.

Encouraging documentation.
Simplifying procedures. Shifting the incidence of taxes from imports and investment to consumption and income. Reducing tax rates and rationalizing tariff rates.

Improving the efficiency of tax administration

Tax to GDP ratio is very low in Pakistan and all efforts to broaden the tax base and raising more tax revenue have not materialized.
Since 1990s the share of tax revenue in total revenue has declined gradually from 80% to almost 70% whilst the share of non-tax revenues has increased from 20% to almost 30%.

Improve tax structure by reducing the reliance on indirect taxes like import duties and central excise duties and increase the share of direct taxes. The share of indirect taxes in total tax revenue was above 80% in 1990 and has declined continuously to a level of 60% in the FY 2010.

On the other hand, the share of direct tax has more than doubled over the past twenty years from 18% in 1990 to 40% in the FY 2010. This clearly shows that efforts to improve tax structure have succeeded to some extent. The efforts to reform GST and gradually moving from GST to VAT, however, have not succeeded.
The efforts to broaden the personal income tax base have also not materialized and reliance on indirect taxes has further increased. Another important objective of the tax reforms was to improve the efficiency of tax administration through transparency, training, auditing and up-gradation of information gathering and processing system.

As a result of administrative reforms, it was expected that tax compliance and overall tax culture will improve but no significant progress seems to have been made in this regard.
Tax evasion by elite class and big land lords shows the inability of the state to extract resources from upper class.

The size of informal sector is still very large.

Cash transactions, smuggling and corruption are wide spread.

1. For the welfare of individuals with low income earnings, the basic exemption limit is proposed to be enhanced from Rs.300,000/- to Rs.350,000/-. However individual taxpayers whose normal income is between Rs.300,000/- to Rs.350,000/- shall be required to file return of income and statement, for the purposes of documentation. 2. In order to encourage enhanced equity financing, and to provide relief to new corporate industrial undertakings established on or after 1st July 2011, with 100% equity financing, a tax credit equal to 100% of tax payable is proposed. The existing companies may also take benefit under this arrangement if investment in BMR is financed through their 100% equity, on or after by 1st July 2011. 3. The rate of tax deductible on Cash Withdrawals from Banks is proposed to be reduced to 0.2% from existing 0.3%, for bringing in improvement in the liquidity position of eligible taxpayers.

4. In order to harmonize the existing tax credits available to individuals for investment in shares and for premium paid to Insurance Company, the maximum cumulative limit for both the investments is fixed @ 15% of the taxable income, with maximum upper limit for investment upto five hundred thousand. 5. Tax relief is proposed to be provided to withdrawals exceeding Rs.500,000/- from a Voluntary Pension Fund. 6. For encouraging companies enlistment on stock exchange, the existing tax credit equal to 5% is proposed to be enhanced to 15%.

7. For the national cause of Broadening of Tax Base and utilization of third party databases, NTN and CNIC of eligible taxpayers are proposed to be provided expressly along with other particulars, in the withholding tax statements filed by withholding agents. 8. For the purpose of identification of eligible taxpayers, the requirement of mandatory filing of return of income by the commercial and Industrial consumers of electricity with annual billing above one million rupees, is proposed. This measure will also help in Broadening of Tax Base in the country. 9. In order to discourage the practice of arbitrage by banks for receiving dividends from Asset Management Companies, the rate of tax on such return is proposed to be enhanced from 10% to 20%.

10. For encouraging investments made by non-residents in Government Securities, the withholding tax on profit on debt deductible @ 10% is proposed to be a final tax. This measure will relieve the non-residents from the statutory requirement of filing of return of income, and will boost national economy. 11. The withholding tax on profit on debt deductible @ 10% arising from investment in Government securities by individual is also proposed to be a final tax. This measure will relieve such taxpayers from the statutory requirement of filing of return of income, and will also encourage domestic investments in the Government Securities. 12. After imposition of capital gain tax on Modarba certificates and instruments of redeemable capital traded at stock exchange through Finance Act 2010, the 0.01% CVT on such instruments is proposed to be withdrawn in order to encourage their trade.

The State Bank of Pakistan (SBP) has said that the failure of tax reforms program and the flood relief expenditures have rendered the fiscal imbalance of Pakistan unsustainable.

Achieving the deficit target of 4.7 percent set for FY11 seems highly unlikely in the absence of a clear strategy to increase the tax base by bringing untaxed sectors into the tax net; there is also a need to rationalize electricity tariffs and subsidies on POL product.

The ratio of total expenditures to GDP rose to 8.6 percent in the first half of FY11, which was relatively lower than the level observed in the same period last year. The report also underlined that at the federal level; about 69.5 percent of the increase in spending was driven by defense, running of the government and net lending activities.

As the government moves forward with its agenda to transfer key ministries to provinces under the 18th Amendment, the fiscal balance could deteriorate further in the absence of strict discipline on spending.

Receipts under the head of defense, however, increased appreciably in -FY11compared to the same period in the last five year as US$743 million were received on account of logistics support.

Although this increase appears to be significant, FBR will have to collect Rs 942.7 billion in -FY11 to meet its end-year target. This amounts to a growth of 26.3 percent over collections in H2-FY10. Although tax collection tends to improve significantly during the second half of a fiscal year, this target may be difficult to achieve.

FBR has enforced display of National Tax Numbers (NTN) outside the shops/retail outlets and business premises as per provisions of the income tax law. Tax administration and enforcement initiative proposed by the Federal Board of Revenue (FBR) was approved which seeks to document 3.8 million potential income taxpayers currently outside the tax net.
New technology through NADRA accounts for the ability of the FBR to put in place a process whereby it can collect and recheck data at the touch of a button.

To tempt them into the programe, tax cheats will only need to pay a flat fee of around Rs40,000 for any amount of income they bring in over the next year. The following year, they will have to pay Rs40,000 more in taxes.
At the end of the second year, the tax rate will be re-evaluated and could return to normal rates, which run as high as 25%. NADRA) had profiled more than 2 million offenders

3 Bills Proposal in NA:

Tax Registration Enforcement Initiative Scheme, will ask tax-cheaters to pay a fixed sum upfront and become taxpayers and the Tax Investment Scheme to incentivize people to declare their assets, whether held in Pakistan or abroad.

3rd bill effect the proposal of paying 30 per cent of the recovered amount to informers who will give any information about those who are liable to pay tax, but prefer to remain outside the tax net.

FBR has amended its laws and inserted Clause 214-C in the Income Tax Ordinance, which empowers the FBR to conduct an audit of taxpayers. Opposition to broad-basing the VAT was from several political parties in parliament with support base amongst traders who quite naturally oppose the VAT. It is to be hoped that political parties come together to approve this proposal.
Customs Automated Clearance System, namely, WebBased On Customs (WeBOC), an RMU is functioning at Karachi.

Transparency International Pakistan (TIP) has placed the taxation system and the FBR among the top corrupt institutions in the country. FBR devises 9-point agenda to streamline operations; fairness, documentation, effective enforcement, accountability and transparency, technology and integration, competence and integrity, business friendly, automation, and simplification.
To achieve fairness in taxation system, the FBR has taken decision to remove exemptions in all taxes especially in income tax, sales tax and federal excise duty.

FBR would move ahead with electronic documentation of economy and taxes, mapping of key regions in terms of revenue potential and incorporation of data from other government sources to identify and target the potential tax dodgers. To ensure effective enforcement under the reform plan, the FBR decided to implement en-masse enforcement of penalties/punishment, electronic enforcement by moving ahead with suspension of CNIC and effective use of media to create awareness among the masses. FBR also finalized to utilize technology up to maximum level by establishing one centralized database, integrated tax ecosystem, come up with individual friendly system and develop software that allows monitoring and evaluation while sitting in Islamabad.

For the objective of competence and integrity, the FBR would come up with electronic monitoring, put in place employees benefits for honest and competent people, extend training, ensure new hiring of employees and implement the concept of change management.
To place business friendly environment under which tax rates would be reduced and corporatization would be incentivized while whistle blowing would be introduced to apprehend tax dodgers. FBR aimed at placing simplified tax system, processes and dispute resolution mechanism would also be devised to avoid lengthy litigation process.

Original Project Development Objectives:

1)

2) 3)

Improve the effectiveness, responsiveness, efficiency, integrity and fairness of tax administration Promote compliance with tax laws and broaden the tax base. Promote trade facilitation.

Macro indicators: a) total tax revenues collected by tax/GDP ratio b) tax revenues collected by sector/GDP c) average time taken by new businesses to register with tax authorities.

Organizational efficiency and effectiveness: a) amount of taxes collected/number of administration staff.

tax

Compliance management: a) number of registered active taxpayers b) tax revenues paid on time/total revenues assessed

c) ratio of additional taxes collected after tax audit/number of tax audits conducted d) stakeholder opinion on quality of services provided (collected through a structured survey conducted by an independent firm and through report cards introduced). Trade facilitation: a) reduction of the average customs clearance time to less than one day.

To improve the effectiveness the objectives were improved: 1) FBR gross and net revenue collection as percentage of tax revenue target. 2) Increase in tax/GDP 3) Survey based ratings for the FBR. 4) Modernize FBR organizational structure.

TARP comprised of seven components:

1) Management and institutional development. 2) Improving revenue operations. 3) Strengthening revenue services. 4) Creating a tax compliant culture. 5) Adopting responsive IT systems. 6) Infrastructure up-gradation and development. 7) Project Management and implementation.

Original components were reorganized into four components for simplification and more effective implementation and monitoring:

1) Enforcement 2) Organization and management for increased efficiency. 3) Information technology. 4) Project management and implementation.

World Banks supervision was strong at the beginning of the project but overtime became weaker.
Feedback and requests for clearances took longer, leading to many procurement delays. The authorities said 58 percent of expenditure occurred after restructuring; moreover, during the first five-and-a-half year of the project, total expenditure was Rs2.1 billion ($30.8 million), while after restructuring (18 months) it was Rs3.4 billion ($41.6m). The World Bank has criticized the government of Pakistan for inconsistence commitment to tax administration reform agenda, which affected projects implementation.

FBR has failed to implement key taxation reforms agreed with IMF including RGST, reduction of sales tax exemptions and zero rating.
Tax authorities had prepared a detailed time-bound action plan for VAT implementation, but the government was unable to introduce this key reform measure due to strong political resistance. A National Intelligence Division (NID) encompassing Risk Management Unit (RMU) was to be created but still in limbo. Customs and Tax Fraud Division (CTFD) was to be established. The legislations relating to electronic assessment, examination of Goods, auctions and refunds still need to be carried .out as per reengineered processes.

The IT System was to be developed which was supposed to provide necessary cargo accounting controls through reconciliation of manifests and Goods Declarations and to report un-cleared cargo for auction. Same has not been done. The new improvised transshipment procedures relating to computerization of document and reconciliation between sending and receiving Customs offices have not been implemented fully.
For imports under concession, FBR was supposed to develop electronic profiles of users of concessionary duty regimes, including their past imports and compliance history.

The removal of zero rating (apart from exports), exemptions, and special treatments under the sales tax act has not been achieved.
All this point in time, implementation of HRM policies has not been completed.