Tax structure in Pakistan
What is tax?
“Tax (from the Latin taxo; "I estimate") is a compulsory contribution by the people to the state to enable the state to discharge its political responsibilities and duties towards society”. And failure to pay is punishable by law
In accordance to its definition tax become different from “gift” or “donations” and “fines” or “penalties”. Gifts or donations are voluntarily whereas tax has to be paid not on ones violation but under compulsion and also not in consequence of committing any offences compulsion.
Tax objectives:
The normally accepted tax objectives in the present day economic systems of the western world are:-
Ø Promotion of sustained and balanced economic growth in the country.
Ø Increase in capital formation to enable economic growth.
Ø Removal of the disparities in the distribution of income and wealth in the society.
Ø Control of inflation, which is common economic problem being faced by most of capitalist world.
Ø Protection of industries in home countries against encroachments of foreign nations.
Ø Promotion of trading and other economic activity between friendly countries.
Types of taxes
Ø Direct tax
Ø Indirect tax
Ø Proportional tax
Ø Progressive tax
Ø Regressive tax
Direct Taxes
Direct taxes primarily comprise income tax, along with supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads: Salaries, Interest on securities, Income from property, and Income from business or professions, Income from other sources.
Indirect tax
A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An indirect tax is most often thought of as a tax that is shifted from one taxpayer to another, by way of an increase in the price of the good. Fuel, liquor and cigarette taxes are all considered examples of indirect taxes, as many argue that the tax is actually paid by the end consumer, by way of a higher retail price.
Proportional tax
Any tax in which the rate is constant as the amount subject to taxation increases. This tax has no link with income of an individual. It is applicable on all people equally. See annexure 1
Progressive tax
Any tax in which the rate increases as the amount subject to taxation increases. In this rate of tax increases as income or amount subject to taxation increases. In Pakistan we follow progressive tax. See annexure 2
RegressiveTaxthis is opposite to progressive tax. In this rate of taxation decreases as income increases.
Principles of tax system:
Basic concepts by which a government is meant to be guided in designing and implementing an equitable taxation system. These include:
Ø Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services.
Ø Broad Basing: taxes should be spread over as wide as possible section of the population, or sectors of economy, to minimize the individual tax burden.
Ø Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of good governance.
Ø Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent possible.
Ø Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct cost-and-benefit link between the tax source and the expenditure, such as use of motor fuel tax for road maintenance.
Ø Equity: taxes should equally burden all individuals or entities in similar economic circumstances.
Ø Neutrality: taxes should not favor any one group or sector over another, and should not be designed to interfere-with or influence individual decisions-making.
Ø Restricted exemptions: tax exemptions must only be for specific purposes (such as to encourage investment and for a limited period.
Ø Simplicity: tax assessment and determination should be easy to understand by an average taxpayer.
Tax structure in Pakistan
Ø FEDERAL TAX
The federal government collects a number of federal taxes that are used to fund federal programs to include government salaries, highways, military, schools, roads and more. Most citizens pay federal taxes in one form of another, either through purchasing taxed goods or paying income and employment taxes.some of fedral taxes are discussed below:
o Customs
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 there on, the volume of Customs Duty collection forms basis for calculation of such taxes. See annexure 3
o Income and corporate Tax
It is a type of direct tax and income tax is 97% of total direct tax. 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).
o General sales tax
GST was a provincial subject at the time of Pakistan’s 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;
o 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.
The FED is payable on
Ø Excisable goods produced or manufactured in Pakistan;
Ø Goods imported into Pakistan; and
Ø Such goods as notified, which are produced or manufactured in non-tariff areas and are brought into tariff area for sale or consumption there in; and
Ø Services rendered or provided in Pakistan.
Ø There is a list of goods and services annexed with the FE Act, which are chargeable to FED along with 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.
o Wealth tax
A wealth tax is generally conceived of as a levy based on the aggregate value of all household assets, including owner-occupied housing; cash, bank, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.[1]
It is yet another branch of complicated taxation system in our country which increased the gap between tax payer and the tax collector. This is a type of direct tax.Wealth tax was introduced in Pakistan in 1963. It is a tax on net wealth and is payable by a person namely:
Ø Individual (the net value of all assets exceeding Rs. 10 lacs is liable to wealth tax at the slab rate ranging between 0.5% to 2.5%)
Ø Hindu undivided families
Ø Association of persons
Ø Firms(if chargeable wealth exceeds Rs. 10 lacs)
Ø Private limited companies
See annexure 5 for head wise share in federal taxes
PROVINCIAL TAX:
1. Property Tax
“A capital tax on property imposed by municipalities; based on the estimated value of the Property”. It is generally levied at a flat rate of 10% but the tax rates vary, depending on the province. Property tax is levied at progressive rates in the Punjab province. In the province of Sind, property tax is levied at a flat rate of 20% on the annual rental value of the land and building.
2. Vehicle Tax
State law levies a tax upon every motor vehicle. The county wide average mill rate is the total amount of general property taxes levied. Vehicle tax in Punjab and sindh are in annexure 6.
3. Stamp Duty
A tax on legal documents such as those used, e.g., for the sale or purchase of shares or the conveyance of a property to a new owner . As defined by section 2(23) for any money or other Property the amount or value of which.
a. where such amount exceeds one hundred and sixty
Rupees but does not exceed five hundred rupees; One rupee
b. Where such amount exceeds five hundred rupees Two rupee
4. Entertainment Tax
Taxes on entertainment consist of any taxes which are levied specifically on the entertainment itself (such as on an entry ticket) and which are not part of some broader tax such as a value added tax.
Entertainment Duty is levied on entertainment places such as
Dramas, Palys, Amusements, Parks, Variety Programmes and Sports etc on the
following rates.
Ø Presently no duty is being collected from Cinemas.
Ø Dramas, plays, variety Programmes 10% of the payment for admission
Ø Games and Sports 5% of the payment for admission
Ø Items of amusement other than above 25% of the payment for admission.
5. Capital Value Tax
Individuals who purchase real property in urban areas or acquire the right to use the real property for more than 20 years are liable to pay capital value tax. The tax is levied at 4% on the property’s recorded value. If no property value is recorded, the tax is levied at PKR50 (US$0.53) per square yard of the property.
The local Taxes:
The local bodies like municipalities, Zilla councils and local councils are allowed to levy, subject to the previous approval of provincial government, and of the taxes which the provincial govt. have been authorized to levy under constitution.
The taxes, rates, tolls and fees leviable by the local bodies are enumerated in and governed by the Local Government Ordinance.
PART I
Taxes of Union Council:
(1) Health tax
(2) Tax on birth of child
(3) Marriage tax
(4) Fees for licenses, sanctions and permits granted by a union council
(5) Market fees except cattle markets and fairs
(6) Tax on animals etc.
PART II
Taxes of Zilla Councils:
(1) Fees for slaughtering of animals
(2) Education tax
(3) Tax on vehicles other than motor vehicles like carts, tonga and rikhshaws
PART III
Taxes of Urban Local Councils:
(1) water rate
(2) Drainage rate
(3) Tax on advertisement lighting rate
(4) Tax on feast when people more than 20 not belonging to the households of person arranging the feasts are entertained with foodstuff
Penalties
The penalty for failure to file a tax return is 0.1% of the amount of the tax payable for each day of default. The minimum penalty is PKR 500 and the maximum is 25% of the amount of tax payable. Tax Filing status Joint tax returns are not permitted; each individual must file a separate tax return. Real property tax A 6% tax is imposed on the value of real property
Central and provincial governments get most of their income through taxes. In Pakistan most of the taxes are indirect taxes. Central govt. gets 68% income through indirect taxes and 32% through direct tax. Indirect taxes are burden over poor people as this tax is added to the things of daily use and poor men spend most of his income on buying these things. In Pakistan tax system is in-effective because it is dividing country in two groups i.e. poor and rich. This in-effective tax system is making richer more richer and poor more poorer. On other hand this system is an elastic system. In hour of need govt. could impose more taxes e.g. in 1973 because of flood govt. introduced new taxes to increase revenue same steps were taken in 1998 after atomic blasts. There is much tax evasion in Pakistan. Business men and industrialist often get relaxations by unfair means. Tax evasions and burden of indirect tax are major obstacles in the way of economic development and Pakistan always waits for foreign loans.
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