OPTIONS FOR PRO-POOR

TAXATION POLICY
IN PAKISTAN

REVENUE AND EXPENDITURE

(percent age of GDP)

GOVERNMENT REVENUE TYPOLOGY

The revenue derived by the Government is categorised as Tax
Revenue and Non-Tax Revenue.
The Tax revenue is further segregated into Direct Taxes and
Indirect Taxes, which are separately enforced by the Federal
Government and Four Provincial Governments.
The Non-tax revenue comprises of income from property and
enterprises, civil administration income and miscellaneous
receipts.
The major component of Governments revenue, however,
comprises of tax revenue levied and enforced by the Federal
Government through Federal Board of Revenue (FBR).

GOVERNMENT REVENUE TYPOLOGY

Figure 2: Revenue Typology

12.00

10.00

8.00

Percent of GDP

6.00

4.00

2.00

0.00
Tax

2000
10.60

2001
10.50

2002
10.70

2003
11.40

2004
11.00

2005
10.10

2006
10.50

2007
10.20

2008
10.60

2009
9.50

2010
10.20

2011 (B)
10.50

Non-Tax

2.80

2.60

3.30

3.40

3.20

3.70

3.60

4.70

4.40

5.10

3.90

3.80

Years

Tax

Non-Tax

FEDERAL TAXES
Federal taxes primarily consist of direct and indirect taxes.
Direct Taxes are those taxes whose incidence is borne by the
person from whom the tax is collected. The major direct taxes
enforced by the Federal Government are Income Tax, Workers
Welfare Fund, Workers Profit Participation Fund and Capital
Value Tax.
Indirect Taxes are those added to the cost of goods or services
and ultimately borne by the consumers. These are General
Sales Tax, Federal Excise Duty and Customs Duty.

HEAD WISE SHARE IN FEDERAL TAXES

DIRECT TAXES
Conceptually direct taxes are those taxes whose incidence is borne by
the person from whom the tax is collected.
The largest share of direct taxes in Pakistan comprises of Income Tax,
which accounts for almost 97 per cent of total direct taxes.
The other forms of direct taxes are the Workers Welfare Fund and
Workers Profit Participation Fund, which are primarily labour levies
paid by the Industrial Undertakings and enforced by the FBR.
Capital Value Tax (CVT) was also being collected by FBR, which was
applicable on transfer of certain properties, however, the same is now
transferred to Provinces by virtue of amendments made in the
Constitution of Pakistan through Eighteenth Amendment Act, 2010.

INCOME TAX LAW

Income Tax is payable by every person (subject to the exemptions
and exceptions given in the law) with regard to his taxable income
for the tax year (period of 12 months ending on June 30th) under
the two tax regimes viz. Net Income Basis (NIB) and Final Tax
Regime (FTR).
NIB is the conventional basis of taxation whereby a person is liable
to pay tax on net taxable income arrived at after deducting all
admissible deductions and allowances from the gross revenues /
receipts for a particular tax year. Generally, under this basis, a
person is only liable to pay tax when he derives profit for the year
as computed under the tax rules whereas no tax is payable in case
of loss. Losses are also allowed to be carried forward for
adjustment against future tax profits.

NET INCOME BASIS

For income covered under NIB (i.e. Salary, Business Income and
Capital Gains on certain assets), persons are required to file a
detailed return of income on a yearly basis, alongwith the audited
financial statements (only for companies) which is then assessed
under self assessment scheme.
The tax authorities are, however, empowered to conduct a tax
audit by scrutinising the accounts and if they found any
inadmissible deductions or under-declaration of income, they are
empowered to pass assessment orders by making adjustments to
the declared income.
In case of any disputes, the taxpayers are permitted to challenge
the action of the tax authorities in further appeals or through
administrative hierarchy of the FBR.

INCOME TAX RATES UNDER NIB

CLASS OF TAXPAYER / NATURE OF INCOME

APPLICABLE TAX RATES
Salaried Individuals (whose Salary Income is Taxable Threshold Rs 400,000
more than 50 per cent of their total income)
Slab rates maximum rate is 20%
Non-Salaried Individuals and Association of Taxable Threshold Rs 400,000
Persons (Partnerships)
Slab rates maximum rate is 25%
Small companies having annual turnover
below Rs 250 Million

25 per cent

Companies (other than small companies)

35 per cent

Capital gains on sale of securities (including

listed shares)

Holding period upto 6 months 10 per cent

Holding period upto 12 months 8 per cent
Holding period above 12 months 0 per cent

FINAL TAX REGIME

FTR was introduced in 1991, which prescribed a transaction based
tax liability and, therefore, a major shift from the traditional
income tax, which was always based on NIB.
FTR is a flat tax regime, whereby tax is charged on the basis of gross
receipts / turnover for the year, irrespective of whether or not the
person ultimately derived any profits from the respective activity.
By nature, FTR is akin to transaction tax and, therefore, its impact is
regressive.
No adjustment for any deduction or losses is allowed under this
regime. Usually, tax under FTR is paid by way of withholding tax.
A person covered by FTR is only required to file a simplified
statement in lieu of return, which is not scrutinized.

INCOME TAX RATES UNDER FTR

NATURE OF INCOME

RATE OF TAX

Dividends

10%

Commercial Imports

5%

Interest on bank deposits (Individuals)

10%

Contractors

6%

Sale of goods (other than manufacturers)

3.5%

Brokerage and Commission

10%

Income from Property

5 10%

Petrol Pump Operators commission

10%

CNG stations

4%

Goods transport vehicles

Non-residents technical fees and royalty

Varied rates
15%

ADJUSTABLE WITHHOLDING TAXES

In addition to the withholding taxes levied as final taxes,

following further withholding taxes are applicable which are
adjustable against the payers ultimate tax liability.
Nature of payments

Rate of withholding tax

Telephone users

10%

Sale of property by auction

5%

Purchase of air tickets

5%

Electricity bills of commercial

Various rates

Cash withdrawal above Rs 25, 000

0.2 to 0.3 per cent

Purchase of Motor cars & Jeeps

Rs 7,500 to Rs 50,000

Distributors, wholesalers of
manufacturing sector

0.5% of purchase value of

goods

TAX COLLECTIONS UNDER NIB AND FTR

MAJOR EXEMPTIONS IN INCOME TAX

Agricultural Income having wide scope;
Foreign exchange remitted through normal banking channel and
encashed in Pak Rupees;
Pension received by former Government and Armed forces
employees;
Capital gains from sale of listed shares and other securities held for
more than one year;
Capital gains from sale of immovable properties held for more than
two years;
Income of Funds, Board of Education, Universities;
Income of Religious and Welfare trusts; and
Income of Power Project Companies.

GENERAL SALES TAX

GST was a provincial subject at the time of Pakistans Independence, however, it

was subsequently converted into Federal Subject and extended to imports and
domestic sale of goods by manufacturers and wholesalers;
In 1995-96, GST was converted into a full-fledged Value Added Tax model and in
1997 the scope was extended to importers and in 1998 to wholesalers and
retailers;
There are various distortions and exemptions in GST regime e.g. the services were
outside the purview of GST with certain exceptions.
Since the Constitutional right to GST on services vest with the Provinces, the
scope of GST was extended to certain services through Provincial Sales Tax in
2000, however, the collection was administered by the FBR. until 2011 when the
Province of Sindh started collecting sales tax on a wide range of services through
its own revenue Board called Sindh Revenue Board.
Punjab has also introduced its own Sales Tax law and established Punjab Revenue
Authority to collect sales tax from July 1, 2012.

SCOPE OF GST
GST in its present form was introduced in Pakistan at the standard rate of
12.5 per cent in 1992, however, to meet the conditionality of the
Structural Adjustment Program of the IMF for reducing the budget deficit,
the rate of GST was raised to 18 per cent in 1995 with a reduced rate of 2
per cent introduced to bring the small businessmen into the tax net. The
said rate was, however, subsequently curtailed to 15 per cent due to the
pressure from the taxpayers. In 1999, further tax of 3 per cent was
introduced on supplies made by registered persons to unregistered
persons. By 2004, GST was administered at five different rates i.e. 2 per
cent, 15 per cent, 18 per cent, 20 per cent and 23 per cent. Finally, the
anomaly of different rates was removed by introducing a uniform rate of
15 per cent with effect from July 2004. The said rate was subsequently
increased to 16 per cent in 2007 and 17 per cent in 2009.

SCOPE OF GST CONTD

With effect from July 1, 2011, the rate of GST was again reduced to 16 per
cent, which is now presently applicable on the value of goods imported
into Pakistan and taxable supplies made by following persons (subject to
certain exemptions and concessions).
Manufacturers;
Retailers having annual turnover of Rs 5 Million and above;
Importers;
Wholesalers and distributors; and
Certain services.
On a broader basis, the components of GST can be segregated into imports
and domestic consumption. The collection trends of GST into these two
components can be seen in the next slide.

CONTRIBUTIONS TO GOVERNMENTS TAX REVENUE

COMMODITY-WISE GST COLLECTION ON IMPORTS

(Last two years average)

GST COLLECTION ON DOMESTIC

SALES AND SERVICES

Commodity-wise GST collections Domestic

(2 years average)

GST Collection on domestic sales

0
11%

2%

2%

3%
3%
4%

45%

2%

6%

6%

16%

POL Products
Telecom Sector
Natural Gas
Other Services
Electrical Energy
Cigarette
Beverages
Sugar
Tea
Cement
Others

FEDERAL EXCISE DUTY

FED is levied on domestic production, imports and

services rendered in the country. The FED is an
important component of Indirect taxes, whose main
objective in addition to generation of revenue is also to
regulate the consumption of certain commodities and
services.
Prior to 2005, the Excise Duties were governed by the
Central Excise Act, 1944, which was replaced by Federal
Excise Act, 2005.

SCOPE OF FED
The FED is collected both at domestic and import levels as per
specified rates. The FED is payable on Excisable goods produced or manufactured in Pakistan;
Goods imported into Pakistan; and
Such goods as notified, which are produced or manufactured in nontariff areas and are brought into tariff area for sale or consumption
therein; and
Services rendered or provided in Pakistan.
There is a list of goods and services annexed with the FE Act, which
are chargeable to FED alongwith the rate applicable. The standard
rate of FED is in line with the rate of GST i.e. 16 per cent, however,
for certain goods and services, there are special rates.
It was envisaged that FED will be gradually repealed as the scope of FED
is presently confined to a very limited number of commodities.

Commodity-wise FED collection 2 years average

CUSTOMS DUTY
Customs Duty is levied under the Customs Act, 1969 on goods
imported into Pakistan. Despite broad-based tariff reduction in last
two decades, customs duty is still one of the most important
sources of tax collection of the Federal Government as it has
contributed around 12 per cent in total federal tax receipts during
the last fiscal year 2010-11. Since the collection of GST and Income
Tax on imports is based upon the Customs landed value of
imported goods as enhanced by the amount of Custom Duty levied
thereon, the volume of Customs Duty collection forms basis for
calculation of such taxes.
The composition of gross customs duty collection consists of Import
duties, Warehouse Surcharge, Export Development Surcharge and
Miscellaneous.

COMMODITY-WISE CUSTOMS DUTY COLLECTION

(2 years average)

KEY RECOMMENDATIONS

PROVISION OF ESSENTIAL SHARED

SERVICES TO THE TAXPAYERS
Whilst it is not necessary that the amount of taxes paid by a
particular taxpayer would exactly correspond to the services he
received from the State but in the longer run, the taxpayers
should be satisfied that their contributions to the Government
Exchequer are being pooled to fund essential shared services,
such as education, health care, law and order, social services, etc.
Again, under the democratic rule, the citizens have a right to vote
against the Government which did not utilise the tax money in the
right direction.
In order to achieve the Exchange Equity and Fairness in the tax
system of Pakistan, it is most important that measures should be
taken by the GOP to invest in Infrastructure, and other essential
shared services so as to justify the collection of taxes from the
taxpayers.

TAX ADMINISTRATION

The Government may, therefore, consider an option of converting

FBR into an Independent revenue agency providing more
competitive salaries to attract and retain staff; greater flexibility
over pay structures, particularly for management and scarce skills
and greater freedom to hire and fire besides an ability to recruit
from outside the civil service.
In order to bring process equity and fairness, it is important that
the tax administration should be professionally competent and
fair in terms of their dealings with the taxpayers. Merely
implementing the Information Technology systems of the tax
administration are not enough to achieve process equity and
fairness rather there is a need to change the mind-set of tax
administrators.

EQUITABLE TAXATION OF
ALL ECONOMIC SECTORS
There are various segments of Economy, such as Agriculture,
wholesalers, distributors and retailers, real estate, stock exchange,
etc. which are not contributing towards the tax revenue in
proportion to their contribution in Economy. There is a dire need to
make necessary corrections in the tax system to have equitable
distribution of tax incidence on all sectors of the Economy rather
than a concentration on some selective sectors as the same would
result in achievement of horizontal equity.
The taxation of all economic sectors on equitable basis would
automatically remove the present distortions in the tax system
whereby the honest taxpayers are being compelled to pay more
than their ability, which instigates even the compliant taxpayers to
adopt tax avoidance measures.

AGRICULTURAL INCOME TAX

Agricultural sector represents almost 21 per cent of the total
GDP of Pakistans Economy, however, there is no contribution
in Federal Income tax because of the specific exemptions given
in the Income Tax Ordinance, 2001.
Measures should be taken to ensure that Agricultural sector is
taxed on equitable grounds and in this regard, Provincial laws
on Agricultural Income Tax are required to be amended (by the
respective Assemblies) to remove the anomaly in the tax rates.
An Independent agency should be formed with the assistance
from World Bank or other foreign donors to collect the relevant
information on the agricultural income, which should be
accessible to the FBR and other Government agencies to have
the definite information on the income derived from
agriculture sector.

REAL ESTATE SECTOR

There is a need to review the local and provincial laws relating to

transfer of immovable properties so as to provide for payment of
transfer related taxes either on the basis of fair valuation of the
properties at the time of sale and not on the declared value.
Also, the Income tax authorities should scrutinize the transactions
relating to immovable properties to identify those who are in the
business of selling such properties and escaping tax on such gains
under the garb of income tax exemption, which is now available
on immovable properties held for more than two years.

FOREIGN EXCHANGE REMITTANCES

The Income tax authorities are empowered to impose tax and
penalties on person, who are not able to explain the source of their
valuable assets or income. This provision is a major check to catch
those taxpayers, who own assets out of the money not earlier
offered to tax.
There has been a demand from some Professional associations
(such as Institute of Chartered Accountants of Pakistan) to abolish
the above provision, however, the same has not been done by the
Federal Government as yet.
It is suggested to link the immunity of foreign exchange remittances
with the payment of a small percentage of tax on such remittance,
which would further enhance the documentation.

FTR

The overall contribution of taxes collected under FTR is more than 40 per cent of the
total income tax collections, however, the same is resulting in encouragement of nondocumented sector and a disincentive for the documented sector. Also, the FTR is
mostly operating as a transaction based tax and, therefore, in practice, the effect of
the tax chargeable on FTR is embedded in the transaction cost resulting in a higher cost
of business.
Considering the higher contribution of FTR, it is very difficult decision to completely
eliminate the FTR, however, at least those sectors, which should otherwise maintain
proper books of accounts (such as Commercial Importers, Traders, Contractors, etc,)
should be taken out of the FTR and taxed on NIB.
In the Budget for 2012-13, the Government has given a conditional option to
Commercial Importers, Exporters and Traders to opt for the normal tax regime. This is
a positive step, however, the FTR should be eventually phased out in a gradual manner
for all such sectors where documentation can be maintained.

TAXATION OF SERVICES SECTOR

Services sector contributes almost 53 per cent of the countrys GDP and
comprises of various sub-sectors including wholesale and Retail Trade,
Transport Storage and Communication, Finance and Insurance, etc. Out of the
above, the biggest contributor is the Wholesale and Retail Trade, which
constitutes almost 32 per cent of the total services sector.
The tax contribution by Services sector is, however, very negligible. Various
measures have been taken by the Government in the past, such as Universal
Self Assessment Schemes for income tax and minimum / fixed tax regimes for
retail sector; however, no significant improvement has been achieved. Even
for GST, varied regimes were introduced; however, it appears that there is no
significant contribution of taxes from this sector.
There is, therefore, a need for all the Provinces to jointly formulate a policy
framework to extend the scope of GST on those services, which are not
presently taxed either due to expressed exemptions or due to evasions.

ACKNOWLEDGEMENT

The research was carried out by

Mansoor Raza and Muhammad Raza for
Church World Service Pakistan/Afghanistan
with financial and technical support
by Christian Aid