Merits and Demerits of Self Assessment Scheme

Taxation Report
Tooba Iqbal 10478 Syed Zain Junaid 11934

Table of Contents
Introduction- Self Assessment Scheme ........................................................................................................ 3 Self Assessment Scheme: Advantages .......................................................................................................... 6 Disadvantages of Doing taxes ....................................................................................................................... 6 Macroeconomic Disadvantages .................................................................................................................... 6 Business Community Perspective ................................................................................................................. 7 The Government Perspective ....................................................................................................................... 8

Introduction- Self Assessment Scheme

The major issues of the taxation system and revenue organisation 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 realised 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 minimise 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
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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. Positive 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. 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
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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. 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 hope 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: Advantages

Self Assessment involves completing an online or paper tax return in order totell 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. Self-assessment of one's own taxes has advantages and disadvantages; one of the biggest "pros" of doing your own taxes is ease, convenience, and affordability. Today, there are many ways to do your own taxes - these include software packages that guide you through the process, step by step, and then calculate what you owe, or what refund you are due. Many people are tired of filling out forms when they do their own taxes, so they find the convenience of a software application very appealing. In time, people may cease to fill out tax forms "the old-fashioned way". However, there are drawbacks, or disadvantages, to using software, or doing other self-assessments of your own taxes.

Disadvantages of Doing taxes

You will not understand the tax system the way an accountant or tax specialist would You may not know how to claim the full amount of deductions you are eligible for You may make mistakes that lead to an audit or other problems with the tax department.

Macroeconomic Disadvantages
Higher tax evasion Lower tax revenue Lower economic growth Higher corruption and frauds

Since accountants and tax specialists are there to help clients pay the least amount of taxes they can (within the boundaries of federal law), hiring a financial specialist to help you file your taxes can be very wise. However, if your income is not very high, and your tax returns are usually very simple and straightforward, hiring an accountant may not be cost-effective. On the other hand, if your taxes are complicated, it may be worth your while to pay for the professional services of a tax specialist. Computerised solutions to help execute this problem are also not available in Pakistan making it a system, with low check and balance and a tedious process.

Business Community Perspective

Self-Assessment Scheme (SAS) 2000 has started new debate among the business community and traders with its unprecedented tough conditions and limitations. SAS announced when only two weeks remaining to file tax returns. SAS mainly aims at inviting applications for the tax returns without having troublesome routine process of normal tax assessment. But experts and traders are of the view that due to its complications and harsh terms SAS will not be able to produce any fruitful results. Bashir Miandad, Central Chairman Pakistan Small Chamber of Commerce and Cottage Industry said, SAS scheme announced by the government seems contradictory to their claims to benefit the traders and business community. He further said that majority of tax payer would be excluded to avail the SAS due to provisions and limitations. The cases which had been filed for preceding two immediate assessment years will not be eligible for SAS is an irrational step and conspiracy to exclude the majority to come to avail SAS, he added. He said that these provisions would shrink the scope of the policy and would be resulted in a drastic decline in revenues. Bashir Miandad also criticized the 9 page form with high degree of complexity will raise fears among tax payers. With the present conditions only few per cent of tax payer would get benefit out of the scheme and majority will not be benefited. Policy also provided that persons who have whitened their money through (Tax Amnesty Scheme)TAS will only required to declare those assets and sources of payment which remain
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undeclared through TAS. Scheme also demands 20 per cent more taxes as compared to last year's 10 per cent is also a big question mark. Another question mark arises regarding the detailed audit of the 10 per cent filed returns but Central Board of Revenue have not capacity to do so. He further said that policy has excluded the large number of tax payers from the scheme, only salaried class and house property owner are mainly focused. All cases of public limited companies engaged in a leasing, modarbas and banking, companies filing returns as new tax payer will not be eligible for the scheme. A chain of harsh conditions show that scheme is not focused to make all new tax payer to avail the scheme. He also called the decision unjust in which tax payers are bound to get registered with the Sales Tax Act1990. This condition once again has opened the door for new controversies as tax survey dispute has not been completely settled so far, he added. He said that government should take steps to encourage tax evaders to come under the tax net but these conditions would further alienate government and detriment to increase the tax base in the country. Regarding tax collection issue, restriction to get registered with GST has also made this scheme controversial, he added. This will not only create problems for under net traders but it too discourage the new tax payers. So government must realize that SAS should be subject to facilitate the tax payers rather than create further problems and controversies.

The Government Perspective

Income Tax Universal Self-Assessment Scheme (USAS) would not be eliminated, however, its audit functions under USAS would be streamlined and audit would cover past one-year accounts only, instead of past five-year. Addressing a post-budget briefing at Federal Board of Revenue (FBR) house Chairman FBR Sohail Ahmed said USAS was announced to facilitate the taxpayers. Audit was not carried out from last many years and it was started in currant fiscal year 2008-09, he added. However, income tax authorities opened past five-year cases that amounted to harassment. FBR has

decided to conduct income tax audit based on accounts of past one-year only under USAS in 2009-10, he explained. He said some 5 percent income tax returns from potential sectors would be selected through computer based Pera-metric selection for audit in 2009-10. Third party system would be adopted and in this regard private chartered accountants would be involved. Explaining the tax revenue budget methodology for 2009-10, the chairman explained that this was based on four guiding principles supporting the manufacturing sector especially export oriented industries, restraining un-necessary imports, broadening the tax base and improving tax collection through improvement in system and laws. In this raged, he said that FBR has provided possible protection to the local industries through import tariffs, tax burden has been shifted where it was non-existent in the past. Explaining broadening the tax base, he added that it would be done without harassment, valuation system at import stage to be improved and would effectively check the mis-declaration and underinvoicing. He termed the tax collection target of Rs 1.377 trillion for 2009-10 as challenging but getable fixed on sound analysis of economic activity in the country. Some 40 percent revenue would come from direct taxes side and 60 percent would come by indirect taxes during 2009-10, he added. The chairman said that it has been fixed by keeping in view the inflation and GDP. An amount of Rs 1.286 trillion would be achieved through normal growth in economy, Rs 70 billion new taxation measures announced in the budget would take it ahead and FBR authorities would endeavour to add Rs 25 billion to Rs 30 billion in total through revenue efforts in 200910. He hoped that FBR would be able to achieve Rs 1.178 trillion revised tax collection target for outgoing fiscal year as the collection in the first 10 days is projecting 25 percent to 30 percent increase in the last month of June. He said that those that would be achieving tax collection targets and would be instrumental in increase in revenues would be getting rewards in 2009-10 and remaining would not get anything.

During the question answer session, the FBR chairman explained that 16 percent general sales tax would be applicable on commission earned by advertising agencies that book advertisements for television channels and newspapers. This levy would not be applicable on advertisement charges received by the television channels and newspapers, he clarified. He explained that Alternate Dispute Resolution (ADR) system is being revamped to resolve tax disputes within minimum time frame. In this regard, committees would be formed within 30 days, committees would be required to submit their recommendations within the next 60 days and decisions would be announced within the next 30 days. The committees that would not be able to forward their recommendations within stipulated time would be dissolved, he said. He also outlined measures to broaden the tax base and promote documentation of economy. Importers, exporters and service providers are required to file normal return of income instead of simple statement. Further tax deducted/collected from such taxpayers would be treated as minimum instead of final tax. NTN has been made mandatory for purchase of property, obtaining commercial and industrial gas/electricity connection and opening of a bank account. All NTN holders are also proposed to file returns necessarily. In order to ensure filing of income tax returns by all persons having reasonable resources and income, it has been proposed that any person owning immovable property with a land area having 500 sq yards, flat having covered area 2000 sq ft or owns a motor vehicle having engine capacity of 1000CC or more shall file return of income. Taxation officers are being empowered to pass best judgment assessment orders in the cases of the taxpayers who failed to furnish statutory statement as required under section 115 of the Income Tax Ordinance, 2001. To accelerate the pace of documentation of the economy and broadening of tax base the manufacturer is being given incentives by allowing tax credit at 2.5 percent of the tax payable if they are able to make at least 90 percent of their sales to sales tax registered persons.

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