TAX SYSTEM OF PAKISTAN

                                 

                                           What is Tax?

• Taxes are generally an involuntary fee levied on individuals or companies that is enforced by a government entity, whether local, regional or national in order to finance government activities.

•  A fee charged by a government on a product, income, or activity

•   A compulsory contribution to state revenue, levied by the government on workers' income  and business profits, or added to the cost of some goods, services, and transactions.

              

 Importance of tax

Every government needs money to perform civil operations and to administrate the running of the state. This money is generally collected from the citizens of the state in the name of the tax. State is represented by the government. Hence, the government of any country performs a number of activities in order to maintain law and order, peace and security, satisfying with the requirement of basic needs and public utilities etc. It also initiates various development programs and maintains peaceful and friendly relation with other nations in the world. In order to carry out all these activities it needs sufficient revenue. Such revenue is known as government revenue. It is also known as public revenue. Government revenue is collected through various sources and   such sources of revenue are taxes, fees and charges, fines and penalties, foreign grants etc. Among them, tax is the main sources of collecting the government revenue.

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Objectives of tax

It includes an improved distribution of income and wealth, equitable access to social services, meeting the basic needs of poor, promoting investment in public goods and enhancing efficiency with which public and private sectors produce goods and services and their  responsiveness to the needs of consumers. 

The main objectives of taxes are:

1.       Raise More Revenue

The fundamental objective of taxation is to finance government expenditure. The government requires carrying out various development and welfare activities in the country. It needs a huge amount of funds. The government collects funds by imposing taxes. So, raising more and more revenues has been an important objective of tax.

Prevent Concentration Of Wealth In A Few Hands

Tax is imposed on persons according to their income level. High earners are imposed on high tax through progressive tax system and low earners have to pay low tax. This prevents wealth being concentrated in a few hands of the rich. So, tax helps to narrowing the gap between rich and poor.

Redistribute Wealth For Common Good

                                                                     

Tax collected by the government is expended for carrying out various welfare activities. In this way, the wealth of the rich is redistributed to the whole community.

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Boost Up The Economy

Tax serves as an instrument for promoting economic growth, stability and efficiency. The government controls or expands the economic activities of the country by providing various, rebates and other facilities. The effective tax system can boost up the economy. Similarly, taxes can correct for externalities and other forms of market failure. Import taxes may control imports and therefore help the country's international balance of payments and protect industries from overseas competition.

Reduce Unemployment

The government can reduce the unemployment problem in the country by promoting various employment generating activities. Industries established in remote parts or industries providing more employment are given more facilities. As a result, the unemployment problem can be reduced to a great extent through liberal tax policy.

Remove Regional Disparities

Regional disparity has been a chronic problem to the developing countries. Tax is one of the ways through which regional disparities can be minimized. The government provides tax exemptions for industries established or activities carried out in backward areas. This will help increase economic activities in those areas and ultimately regional disparity reduces to minimum.

Tax structure of Pakistan

Federal taxes in Pakistan like most of the taxation system in the world are classified in two main categories i-e, Direct taxes and Indirect taxes.

 

DEFINITION of 'Direct Tax '

A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets. Direct taxes are different from indirect taxes. Direct taxes which are collected directly from income and wealth are known as direct taxes.

TYPES OF DIRECT TAXES

Income tax

Income tax is collected on all incomes received by private individuals after certain allowances are made. In most of the economies Income tax is a major source of Government revenue.

Corporation tax

This tax is levied on profits earned by companies. It is a proportional tax which is levied at the constant rate. Companies operating in India are taxed as per the corporate tax rate on their income. This tax is one of the major sources of revenue for government.

Capital gains tax

Capital gains tax is charged on the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Property Tax

Many countries have Property tax. It is the tax which the owner pays on the value of the property being taxed.

 

Stamp duty

Stamp duty is a form of tax that is levied on documents relating to immovable property, stocks and shares. Apart from transfers of shares and securities, stamp duties are also charged on the issue of bearer instruments and certain transactions involving partnerships.

DEFINITION OF INDIRECT TAXES

                                 

An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. Tax payer recovers the indirect taxes paid from their consumers and clients and finally pays it to government.

Brief about various types of indirect taxes is given below:

TYPES OF INDIRECT TAXES

Excise Taxes

A common form of indirect tax is the excise tax, which is added to specific products or services, such as alcohol, fuel, tobacco products, vehicles, some hunting and fishing products, tires and utilities. Some politicians make campaign promises that they will not raise taxes, putting them in a bind when they agree that their state or the country needs to raise revenues. To get around this, local, state and federal government agencies institute “fees” that are tacked on to consumer and business transactions and which, for all intents and purposes, affect buyers in much the same way as taxes. For example, cigarette consumers pay federal and state excise taxes in addition to local and county sales taxes on their purchases.

Sales Tax                  

One of the most common indirect taxes is a sales tax. Sales taxes apply to everything from groceries and fast food to electronics and clothing. Sales taxes vary by the city, county or state where the transaction takes place.

Custom Duty                      

 Custom duties are indirect taxes which are levied on goods imported to/exported from different countries. There are different rules for different types of goods and sectors. Government keeps on changing these rates so as to promote import/export of specific goods.

RATIO OF TAXES

Only 0.3 percent of the population pays income tax and files a tax return one of the lowest ratios in the world. Around 7 million Pakistanis are estimated to be eligible to pay income tax, but only less than 0.5 million do. Around 75 percent of the direct income tax collected is from businesses, and the rest from individuals.  Industry contributing an estimated 73 percent to total tax revenue of the government. Agriculture has a share of less than 2 percent in total tax collected, while the tax contribution of the services sector is less than half its share of GDP.55 percent of government tax revenue comes from indirect Taxes.

                                                           TAXES IN 2015-2016

                         

                               TAX COLLECTIONS DURING 2015 SELECTED MONTHS

                                   

                                       TAX GDP RATIO OF SOUTH ASIAN COUNTRIES

                                       

                       

                         

                       EXPENSES INCURRED IN VARIOUS SECTORS OF PUBLIC LIFE

 FEDERAL BOARD REVENUE

The Federal Board of Revenue  is the semi-autonomous, supreme federal agency of Pakistan that is responsible for auditing, enforcing and collecting revenue for the government of Pakistan.

 FEDERAL TAX OMBUDSMAN

Tax ombudsman office is the highest applicant body in the taxation system of Pakistan. this is a constitutional body which heir the appeals against the decisions of central board of revenue decisions. 

General features of Pakistan tax system

1.      Pakistan tax system is a three tier tax system:

·         Central taxes includes custom duty, excise, sales tax, income tax.

·         Provincial taxes includes property tax, land revenue, stamp duty, registration fee etc.

·         Local taxes includes toll tax, marriage registration by local governments.

2.      Pakistan’s tax system is flexible in a way that new taxes added, some old ones which had lost their utility have been abolished.

3.      To some extent Pakistan’s tax system is simpe in a way that taxpayers knows the amount as well as the rate of tax.

PROBLEMS IN TAXATION SYSTEM OF PAKISTAN

• The taxation system of Pakistan is not very effective it has many issues and problems regarding collecting the taxes or paying the taxes. Both tax collectors and tax payers have to face many problems I-e,
• ·         Almost 7 million Pakistanis are estimated to pay taxes but only 0.5 million people pay taxes.
• ·         The ratio of agriculture taxes is very low, it contributes only 2 percent in total tax collection.
• ·          Administration problem in the tax system. The people working in the tax department are corrupt.
• ·         There is a long process to pay the taxes, People feel it difficult to pay taxes.
• ·         It is very time consuming so many avoid to pay the taxes.
• ·         Taxpayers have fear about dealing with the Tax department which may be aggressive
• ·         Due to loopholes in Pakistan’s tax system, the government has not been able to reduce the gap between rich and the poor.
• ·         Unnecessary concessions have been given to industry or exporters.  
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•            These are the main issues and problems of Pakistan’s tax system. 

Conclusion

It can be concluded that the taxation system of Pakistan is not very effective and good. There are many problems in our tax system. Our tax system is not well planned there are many outcomes in our tax system people have to face many difficulties for paying taxes and most of the people are unaware about the advantages of taxes. People have to fill many forms and many other things for paying tax due to this process many people find it difficult to pay tax. The most important is the people who are sitting in the offices for receiving taxes are not fair with their work. The ratio of tax is not equal in Pakistan indirect taxes are more than direct taxes which create difficulties.

Recommendations

• 1.  Simplify and standardize the tax system.
• 2. Create Taxpayer assistance units as a point of contact between the department and the taxpayer.
• 3.  For large corporate taxpayer, develop system audits of their record keeping and accounting systems to control procedures.
• 4. Revenue targets should be based on gross receipts.
• 5. To facilitate the taxpayer stay of recovery shouls be allowed on submission of bank guarantee.
• 6. Make the compulsory registration process more systematic.
• 7. Improve the task of taxpayer education bt publishing booklets.
• 8. Give maximum autonomy to the tax administration.
• 9. Introduce systematic, effective and quality training for the support group of tax administration.
• 10. Establish customer service centers at all locations where there are significant numbers of taxpayers