tax reforms in pakistan

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Aksa KhalidSomia Zahid

Waqas Siddique

Sameer Tariq

Abdur Rehman


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The process of changing the way taxes arecollected or managed by the government.

Tax reformers goals:

Some seek to reduce the level of taxation of allpeople by the government.

Some seek to make the tax system moreprogressive.

Others seek to simplify the tax system and makethe system more understandable or moreaccountable.


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Direct taxes include the personal income tax, thecorporate income tax and the wealth tax.Recommendations made by the Commission are asfollows:

1) No interference be made in existing rate structure forpersonal 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 taxbase should be reviewed so as to remove the existingdifference.


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4) Existing pattern of tax incentives should be reviewedand the exemptions that favor specific entities shouldbe terminated.

5) Salaried Persons be required to file the standardreturn 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 subjectto an annual tax of Rs.600/=.


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8) Tax payers maintaining regular books of account for theirbusiness or profession be eligible for self assessmentscheme.

9) In order to enable taxpayers to discharge their liabilitieswith convenience, authorized branches of all nationalizedbanks 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 itsofficers and the existing system of advice notes in respectof refunds be discontinued.


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12) A time limit be fixed in law for disposal of appeals on the pattern ofthe time-limit specified for assessment purposes.

13) All authorities engaged in survey also be directed to identify thedefaulting officials, determining their responsibility and recommend

suitable action so warranted.

14) VIP in the state hierarchy may create a demonstrative effect inrespect of legal and social responsibility towards the national treasuryby filing their own tax returns regularly.

15) Tax evaders may be isolated and subjected to social rejection bydebarring them from holding social and political positions.

16) Information network be strengthened and the administrative set-upfor utilization of information collected from various sources bestreamlined.


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Major indirect taxes in Pakistan include the customduties, the sales taxes and the central excise duty.The recommendations of the National TaxationReform Commission with respect to indirect taxes areas follows:

Custom Duties:

1) Custom duties should not be used as the principalsource of revenue generation.

2) The base of custom tariff should be broadened andthere should be no duty exempt items at all.


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The rates of duties should be kept as low aspossible because high tariff is responsible for

inducing smuggling and under-invoicing.

There should be a thorough re-examinationof the standard rates of rebate and issue ofnotification in individual cases should bestopped.


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1) Role of revenue generation should be assigned to the salestax which should emerge as the major revenuegeneration tax.

2) Though value added tax (VAT) may not be implemented inPakistan in its ENTIRETY at present, it should be viewed asour objective in domestic taxation.

3) Sales tax should be levied across the board on all the

imported goods and domestic production other thanagriculture produce and unprocessed food.

4) Standard rates of adjustment for different raw materialsmay be prescribed.


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1) The system of self-clearance should be extended to industrial units atpresent under the supervised system.

2) Proper safe-guards such as prescribing detailed accounts for raw

materials and other items (electricity, gas, water, wages, social welfarecontributions) involved in the process of manufacturing should beprovided.

3) Services of outside independent accountants/auditors/industrialexperts 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 reallydeterrent and the defaulters prosecuted.


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1) Establishment of Departmental ombudsman.

2) Creation of Judicial Tribunal for indirect taxes.

3) A new Revenue Division should be created. Revenue Divisionwill have economic administrators and research scholarsworking around the year in evolving a comprehensivetaxation policy.

4) The existing Reward Scheme for taxation officials should bemade more effective.

5) The possibility of improving the emoluments of the taxationofficials should be examined by the Pay Commission.


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Keeping in view the large fiscal deficits, mounting publicdebt and debt servicing, narrow tax base and poorcompliance, the first phase of tax reforms was initiated inearly 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 tominimize tax expenditures and cascading.

To reduce the share of trade related taxes.

To reduce the share of central excise duties.


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The initial reforms introduced in early 1990s were followed bya 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 investmentto consumption and income.

Reducing tax rates and rationalizing tariff rates.

Improving the efficiency of tax administration


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Tax to GDP ratio is very low in Pakistan and all efforts tobroaden the tax base and raising more tax revenue havenot materialized.

Since 1990s the share of tax revenue in total revenue hasdeclined gradually from 80% to almost 70% whilst theshare of non-tax revenues has increased from 20% toalmost 30%.

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


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On the other hand, the share of direct tax has more thandoubled over the past twenty years from 18% in 1990 to 40%in the FY 2010. This clearly shows that efforts to improve taxstructure 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 havealso 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 throughtransparency, training, auditing and up-gradation ofinformation gathering and processing system.


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As a result of administrative reforms, it was expectedthat tax compliance and overall tax culture willimprove but no significant progress seems to havebeen made in this regard.

Tax evasion by elite class and big land lords shows theinability of the state to extract resources from upperclass.

The size of informal sector is still very large.

Cash transactions, smuggling and corruption are widespread.


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1. For the welfare of individuals with low income earnings, the basic

exemption limit is proposed to be enhanced from Rs.300,000/- toRs.350,000/-. However individual taxpayers whose normal income isbetween 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 tonew corporate industrial undertakings established on or after 1st July2011, with 100% equity financing, a tax credit equal to 100% of taxpayable is proposed. The existing companies may also take benefit underthis 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 tobe reduced to 0.2% from existing 0.3%, for bringing in improvement inthe liquidity position of eligible taxpayers.


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4. In order to harmonize the existing tax credits available to

individuals for investment in shares and for premium paidto Insurance Company, the maximum cumulative limit for

both the investments is fixed @ 15% of the taxableincome, with maximum upper limit for investment uptofive 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 proposedto be enhanced to 15%.


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7. For the national cause of Broadening of Tax Base and utilization of

third party databases, NTN and CNIC of eligible taxpayers areproposed to be provided expressly along with other particulars, inthe withholding tax statements filed by withholding agents.

8. For the purpose of identification of eligible taxpayers, therequirement of mandatory filing of return of income by thecommercial and Industrial consumers of electricity with annualbilling above one million rupees, is proposed. This measure willalso help in Broadening of Tax Base in the country.

9. In order to discourage the practice of arbitrage by banks forreceiving dividends from Asset Management Companies, the rateof tax on such return is proposed to be enhanced from 10% to20%.


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10. For encouraging investments made by non-residents in Government

Securities, the withholding tax on profit on debt deductible @ 10% isproposed to be a final tax. This measure will relieve the non-residentsfrom 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 frominvestment in Government securities by individual is also proposed to bea final tax. This measure will relieve such taxpayers from the statutoryrequirement of filing of return of income, and will also encouragedomestic investments in the Government Securities.

12. After imposition of capital gain tax on Modarba certificates andinstruments of redeemable capital traded at stock exchange throughFinance Act 2010, the 0.01% CVT on such instruments is proposed to bewithdrawn in order to encourage their trade.


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The State Bank of Pakistan (SBP) has saidthat the failure of tax reforms program and

the flood relief expenditures have renderedthe fiscal imbalance of Pakistanunsustainable.


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Achieving the deficit target of 4.7 percent setfor FY11 seems highly unlikely in the absence

of a clear strategy to increase the tax base bybringing untaxed sectors into the tax net;there is also a need to rationalize electricitytariffs and subsidies on POL product.


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The ratio of total expenditures to GDP rose to8.6 percent in the first half of FY11, which was

relatively lower than the level observed in thesame period last year. The report alsounderlined that at the federal level; about69.5 percent of the increase in spending wasdriven by defense, running of thegovernment and net lending activities.


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As the government moves forward with itsagenda to transfer key ministries to provinces

under the 18th Amendment, the fiscalbalance could deteriorate further in theabsence of strict discipline on spending.


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Receipts under the head of defense, however,increased appreciably in -FY11compared to

the same period in the last five year asUS$743 million were received on account oflogistics support.


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Although this increase appears to besignificant, 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 percentover collections in H2-FY10. Although taxcollection tends to improve significantlyduring the second half of a fiscal year, thistarget may be difficult to achieve.


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FBR has enforced display of National Tax Numbers(NTN) outside the shops/retail outlets and businesspremises as per provisions of the income tax law.

Tax administration and enforcement initiativeproposed by the Federal Board of Revenue (FBR) wasapproved which seeks to document 3.8 millionpotential income taxpayers currently outside the taxnet.

New technology through NADRA accounts for theability of the FBR to put in place a process whereby itcan collect and recheck data at the touch of a button.


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To tempt them into the programe, tax cheatswill only need to pay a flat fee of aroundRs40,000 for any amount of income they bring in

over the next year. The following year, they willhave to pay Rs40,000 more in taxes.

At the end of the second year, the tax rate willbe re-evaluated and could return to normalrates, which run as high as 25%.

NADRA) had profiled more than 2 millionoffenders


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3 Bills Proposal in NA:

Tax Registration Enforcement Initiative Scheme, will

ask tax-cheaters to pay a fixed sum upfront andbecome taxpayers and the Tax Investment Scheme toincentivize people to declare their assets, whetherheld in Pakistan or abroad.

3rd bill effect the proposal of paying 30 per cent of therecovered amount to informers who will give anyinformation about those who are liable to pay tax, butprefer to remain outside the tax net.


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FBR has amended its laws and inserted Clause 214-Cin the Income Tax Ordinance, which empowers theFBR to conduct an audit of taxpayers.

Opposition to broad-basing the VAT was from severalpolitical parties in parliament with support baseamongst traders who quite naturally oppose the VAT.It is to be hoped that political parties come togetherto approve this proposal.

Customs Automated Clearance System, namely, Web-Based On Customs (WeBOC), an RMU is functioningat Karachi.


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Transparency International Pakistan (TIP) has placed thetaxation system and the FBR among the top corruptinstitutions in the country.

FBR devises 9-point agenda to streamline operations;fairness, documentation, effective enforcement,accountability and transparency, technology andintegration, competence and integrity, business friendly,automation, and simplification.

To achieve fairness in taxation system, the FBR has takendecision to remove exemptions in all taxes especially inincome tax, sales tax and federal excise duty.


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FBR would move ahead with electronic documentation ofeconomy and taxes, mapping of key regions in terms of revenuepotential and incorporation of data from other governmentsources to identify and target the potential tax dodgers.

To ensure effective enforcement under the reform plan, the FBRdecided to implement en-masse enforcement ofpenalties/punishment, electronic enforcement by moving aheadwith suspension of CNIC and effective use of media to createawareness among the masses.

FBR also finalized to utilize technology up to maximum level byestablishing one centralized database, integrated tax ecosystem,come up with individual friendly system and develop software thatallows monitoring and evaluation while sitting in Islamabad.


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For the objective of competence and integrity, the FBRwould come up with electronic monitoring, put in placeemployees 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 taxrates would be reduced and corporatization would beincentivized 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 toavoid lengthy litigation process.


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Original Project Development Objectives:

1) Improve the effectiveness, responsiveness,efficiency, integrity and fairness of taxadministration

2) Promote compliance with tax laws and

broaden the tax base.3) Promote trade facilitation.


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Macro indicators:a) total tax revenues collected by tax/GDP ratiob) tax revenues collected by sector/GDPc) average time taken by new businesses to register with

tax authorities.

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

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


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To improve the effectiveness the objectiveswere improved:

1) FBR gross and net revenue collection aspercentage of tax revenue target.2) Increase in tax/GDP3) Survey based ratings for the FBR.4) Modernize FBR organizational structure.


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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.


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Original components were reorganized intofour components for simplification and more

effective implementation and monitoring:

1) Enforcement2) Organization and management for increased

efficiency.3) Information technology.4) Project management and implementation.


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World Banks supervision was strong at the beginning of theproject but overtime became weaker.

Feedback and requests for clearances took longer, leading to

many procurement delays.

The authorities said 58 percent of expenditure occurred afterrestructuring; moreover, during the first five-and-a-half yearof the project, total expenditure was Rs2.1 billion ($30.8

million), while after restructuring (18 months) it was Rs3.4billion ($41.6m).

The World Bank has criticized the government of Pakistan forinconsistence commitment to tax administration reformagenda, which affected projects implementation.


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FBR has failed to implement key taxation reforms agreed with IMFincluding RGST, reduction of sales tax exemptions and zero rating.

Tax authorities had prepared a detailed time-bound action plan forVAT implementation, but the government was unable to introduce

this key reform measure due to strong political resistance.

A National Intelligence Division (NID) encompassing RiskManagement 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 ofGoods, auctions and refunds still need to be carried .out as per re-engineered processes.


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The IT System was to be developed which was supposed toprovide necessary cargo accounting controls throughreconciliation of manifests and Goods Declarations and toreport un-cleared cargo for auction. Same has not been done.

The new improvised transshipment procedures relating tocomputerization of document and reconciliation betweensending and receiving Customs offices have not beenimplemented fully.

For imports under concession, FBR was supposed to developelectronic profiles of users of concessionary duty regimes,including their past imports and compliance history.


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The removal of zero rating (apart fromexports), exemptions, and special treatments

under the sales tax act has not beenachieved.

All this point in time, implementation of HRM

policies has not been completed.


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tax reforms in pakistan

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