CITATION Pak10 /L 1033
CITATION Pak10 /L 1033
Malcolm explains that taxation is the power vested in the legislature to impose burdens
or charges upon persons and property for the purpose of raising revenue for public
purposes.’
Much of the Government’s financial operations rely on taxation. Also taxation proves to
be a powerful mean to achieve the goals of social progress and the objectives of
The New York Times reports, ‘In Pakistan, the lack of a workable tax system feeds
something more menacing: a festering inequality in Pakistani society, where the wealth
of its most powerful members is never redistributed or put to use for public good. That is
creating conditions that have helped spread an insurgency that is tormenting the
country.’
According to a World Bank report, Pakistan’s taxation system has failed to safeguard
the common interests of taxpayers, policy makers, and tax administrators and boosting
The ‘low-yield’ tax system has weakened public services, increased inefficiencies while
unfairness has undermined economic growth and voluntary compliance. The complex
tax system has further made administration and enforcement complicated. Inefficient
administration and management is one major issues related to taxation in Pakistan.
Other Structural problems, such as a narrow tax base, tax evasion, distrust of taxpayers
and administrative weaknesses, have further damaged the taxation system of the
Pakistan's tax-to-GDP ratio is about 10 per cent, one of the lowest in the world.
Currently, the government generates only 17 per cent of its total tax revenues from the
services sector. The services sector, which comprises more than 50 per cent of the
Agriculture contributes about one-fifth of GDP, and amounts to no more than one per
cent of FBR revenue. Given the shortfall in agriculture and services, industry carries the
brunt of the tax burden, and its tax share is three-times as high as its GDP share. The
lack of a federal tax on agriculture, an industry that employs nearly half of Pakistan’s
population and whose profits go largely to the wealthy landowners, is a serious issue.
The Federal Board of Revenue detected 13,000 cases of tax evasion in 2009. The
chairman of FRB reported that in 2009, only 60 per cent of the 2.7 million National Tax
Number certificate holders had paid their taxes. In the same year, the recovery of taxes
amounting to Rs300bn to Rs400bn was blocked due to the referral of cases to courts
and tribunals. In most countries, tax evasion is being taken as a serious crime and tax
dodgers are prosecuted and punished, but in Pakistan no serious attempts have been
made as yet to curb and discourage tax evasion and to apprehend tax dodgers because
of the existing rules and policies. Strict and efficient measures need to be taken by the
government to ensure tax payment by the eligible populace and tax collection by the
concerned authorities and also penalize people who fail to pay their taxes on time.
The authorities have taken steps to improve the current situation of the country by
expanding the horizons and taxing profits from the stock market and real estate.
implement significant changes in tax policy aimed at increasing the effectiveness of the
tax system, expanding the tax bases, reducing misrepresentations and phasing out
exemptions. Such tax reforms are also required to deal with the risks arising from
persistent large budget deficits. Failure to address the problem now would result in
instability in the country, raising the probability of fiscal and financial chaos in the future
and the risk of constraining the policy flexibility in the future. [ CITATION PAK08 \l 1033 ]
In the following sections, we have tried to investigate in detail some of the most
pressing issues/areas responsible for these poor tax results in Pakistan and concluded
growth in the 1960s was followed by low growth in the 1970s and high growth in the
development record in this decade. Growth accelerated and fiscal and social indicators
improved. But, as in the past, the steps proved unsustainable, as economic policies
adjusted too little and too late to deterioration in the external environment. The alarming
Tax10 \l 1033 ]
development. The problem with high fiscal deficit high current account deficit and high
inflation are linked in one way or the other to Pakistan’s weak tax revenue.
Following are the major sources of tax revenues for Pakistan and policy issues that
Individual Income Tax: The individual income tax schedule is complicated with tax
brackets ranging from 14-21 furthermore the income tax threshold is too high with
due to tax evasion by individuals. The marginal tax rate for high income individuals is
applied to the complete income which creates a negative incentive to evade taxes. The
number of tax exemptions and concessionary rates are far more than the optimum
number.
Reforms
Improvements can be made to the income tax system by lowering the threshold and
introduced to tax slices of income with higher rates for high income individuals.
Corporate Income Tax: Overall a well designed structure but compliance to the
corporate income tax is not up to acceptable levels. Does not tax small businesses on
the incremental basis of their size of operations and exempts them completely from any
withholding obligations. Another major issue is the ill-treatment in terms of taxes a small
Reforms
The government should take measures to assure enforceability of the corporate taxes.
And taxation of small firms should be introduced as well to broaden the tax net.
Sales Tax: There are many gaps in the Sales Tax Act, allowing the Federal Board of
revenue the authority to determine its application with its own discretions. This results in
Reforms
The activities of the administration should be constrained and provided guidance with
complicating the system. Another major issue is the presence of few tax exemptions,
which has opened the door for a wide scale of tax evasions.
Reforms
The government needs to simplify the taxation system of oil and fuel products, by
Custom Duties: The issue with the custom duties is much similar to the excise taxes.
The system has become very complicated due to administrative problems and a wide
Reforms
Again there is a need to simplify the system and introduction of a uniform tax rate on all
The methodology we used to define and explain the issues regarding the taxation in
Pakistan is through
Research articles
Taxation websites
The limited tax collections due to tax umbrella in the Agricultural Sector
Moreover we studied how these variables individually and collectively created the cycle
of problems and issues that has raised the phenomenon of problematical taxation
procedures in Pakistan.
Findings
While studies and researches conducted by economists’ worldwide show that globally
tax reforms can deliver ambitious targets set by the government, Pakistan may first
need to identify what it is that it seeks to achieve from those tax reforms as the
problem with Pakistan’s tax system includes but is not limited to tax revenue
generation.
Taxation on agriculture in Pakistan had initially faced a major dilemma. The question
was to whether to tax agricultural income and wealth at all. Once it was established
that there was no enthralling economic reason that could support the notion to exempt
agricultural incomes, the issue became how agricultural producers should be taxed. In
The current agricultural tax policy and structure has loopholes with regards to its
Kha98 \l 1033 ]
Although agriculture is one of the largest sectors of the Pakistani economy, the taxes it
yields provide very little support to the provincial budgets. According to researches
carried out, it has been realized that the tax revenue potential of Pakistan’s agricultural
The tax revenue shortfalls that Pakistan faces in its tax base are due to exemptions.
The relative compliance rate and administrative costs for small and large farms are not
the same which further aggravates the problem. There is a dire need for the
would be automatically exempted from tax. Thus in this way there would be no tax
The present tax structure does not take into account crop viability and how lucrative
they are. For example: sugar cane’s net yield per acre is far greater than some of the
other crops’ and thus in this way, the current tax policy is unfair.
There are various administration weaknesses that plague the tax system. Despite
being properly documented in law, the administration system is not enforced in the
country. Neither the revenue officials nor the agricultural tax payers have the complete
information and are not sufficiently accustomed to and familiar with the legal
requirements. Holdings and crop values are not current and updated because proper
records are not maintained and an ad hoc system is used to determine gross income.
Economists seem to agree on the increment of the agricultural income tax. Since
agricultural income is not taxed, agricultural households face a low tax burden than
households that are not dependent on agriculture for their income. Also agriculture is
one of the largest sectors of Pakistan and saving it from taxation would mean exposing
the other sectors to a higher tax rate to offset the effect. This higher tax rate leads to
the non agricultural households to look for ways to avoid taxes and this results in the
The agricultural sector of Pakistan benefits from low interest rates on loans, public
research and development and subsidies on fertilizers, etc. Hence it is only rational
that the support provided by the government in this way is made use of by taxing
policies and thus recovery and revenue generation. Farmers could be contacted and
met with at the marketplace for tax assessment. [ CITATION Cha01 \l 1033 ]
Discussion:
In agriculture, there is tax evasion because of disparity in the tax treatment of different
types of income. There is false reporting of income therefore and there is also a lot of
complexity in maintaining the disparity and the rules, so there is more corruption then.
Collections costs become higher and cover a significant portion of the revenue
collected. The governments however, might not be aware of the collection costs
because these are borne by the taxpayers themselves in the form of compliance costs
(accounting, record keeping) or in interactions with the tax administration (rent seeking).
Administrative costs are also high because generally the staff is untrained and paid
poorly.
This exemption of the agricultural sector from normal income tax laws has led large
industrialists and feudal landowners to buy large fields and hide their real income and
block direct taxation of agricultural income using their power. Landowners form alliances
with the military to hide their incomes. These inequities need to be removed.
Social backwardness is a direct outcome of the power of these landowners in the rural
areas of the country. There is no human capital accumulation through education and
training. Furthermore, surveys indicate that large landowners have little incentive to tax
The tax net does not include significant portions of the total agricultural income. Only
standard crops are taxed. The non-crop income like livestock farming and forestry is not
included in this portion even though it contributes a lot to the agricultural income of the
rural households. The taxes on the other hand are only levied on the landowners. The
Indirect taxes:
Income tax in Pakistan comes under the category of direct taxes. These are taxes to be
paid by an individual personally and directly. Indirect taxes are those that are shifted to
the consumers such as customs duty, sales tax and federal excise. Like most
developing countries Pakistan has the same framing of the indirect taxes versus direct
taxes. That is, Pakistan also has more revenue generation through indirect taxes
The affect of the indirect taxes is significant because they affect the price of the
products. Also the raw materials used and their quality and this all has major impact on
the lower strata of the society that buys locally produce goods. Thus, they are exposed
to more tax burden because the prices of the commodities would affect the CPI and
The percentage of GST in the indirect taxes is 63%. After the GST Tax Reform in 1990
a higher proportionate GST tax burden is borne by the poor and the middle classes
compared to the richer segment of the population. Also, the results show that during the
period of 1990-91 to 2000-01 for the richest and the poorest households, the
expenditure reduced by 17 and 13 percent respectively. Tax liability for the poorest
increased by 3.74 and that for the richest increased by 2.41, thus poor households
appeared to be facing a much higher increase in tax incidence coupled with declining
expendituresi. According to these reforms, tax exemptions of consumption items such
as mutton, chicken meat and fruits are benefiting the rich more since these lie more
within the domain of the richer households consumption. Similarly, an additional benefit
to the rich is that most of the services are exempted from the tax net. These services
are more consumed by the rich households than the poor ones. They include financial
services, entertainment and recreation, real estate, lawyers, and dentists. Thus, these
households are benefiting from the failure of government to incorporate these services
within the GST net and so facing a proportionate lower level of GST incidence
seen that the very purpose of taxation to redistribute wealth is being defeated. [ CITATION
Pak \l 1033 ]
This has all resulted from the constitutional provisions that assign the function of taxing
goods to the federal government and that of taxing services to the provinces. Besides
this, the estimates also indicate that the exemptions under the GST have proved costly
for the government. Under GST the costs amounted to Rs. 230 billion and Rs. 80 billion
under duty free imports in 2006-07. These costs are in fact loss in the lost revenues.
Tax evasion is basically illegal reduction of one's tax liability, by either understating the
value of the income or improperly claiming deductions that are not authorized. The
taxpayers either intentionally or unintentionally fail to take into account certain taxable
activities when filing their tax returns. People are able to evade tax due to lack of
documentation on the business side. The fact that a large part of Pakistan’s economy is
informal sector, there are no records of transaction that are taking place from the buyers
side so the machines that are used to detect tax evasion cannot detect. The main
sectors that do not pay taxes appropriately include the transporters, traders, and
agriculturists. Transporters earn considerable money but they evade payment of taxes.
Because of no or poor documentation, the traders have a calculated move on their part
not to pay income tax. And lastly, the agricultural sector enjoys tax holidays for ever
under the Income Tax Ordinance, 2001. All these factors contribute to tax evasion. Tax
evasion has many harmful impacts on the economy. It contributes to revenue loss.
According to a news item, the tax evasion has been estimated at Rs 500 billion that is
almost half of the total tax collection of Rs 1,004 billion during the outgoing fiscal year. ii
Such level of evasion hampers the development of a developing country like Pakistan.
Various entities also “avoid” tax, as in they engage in tax avoidance. Tax avoidance is
basically interpreting the law in one’s own favor and then avoiding the tax. A taxpayer
may lawfully arrange his/her affairs to minimize taxes by such steps as deferring income
from one year to the next. This is legal and is called as tax avoidance. The corporate
sector in Pakistan actually hire accountants to study and find loopholes in the tax laws
and interpret them in their own favour and perform acts in such a way that is not illegal.
So the corporate sector in general, is involved in tax avoidance and not tax evasion.
They state their business expedience (justified business expense) to avoid the tax.
Comprehensive efforts are needed to tackle the main problem of tax evasion. The
government should be willing to solve this problem and the will on the part of the
government is important. Tax laws should be simplified. Proper education, awareness,
and enlightenment on the public’s part are very necessary. Tax machinery is required to
momentum needs to be built whereby tax rates are reduced and tax base is broadly
widened. This can be made possible by taxing the sectors which are currently enjoying
tax holidays, e.g. Agriculture. These steps should immediately be taken by the
government and the Federal Board of Revenue (FBR), so that the current inefficient
taxation system can be made efficient which will help Pakistan develop.
It is generally said that the tax base in Pakistan is very narrow. In this connection figure
of total taxpayers at 1.7 Million against total population of 157 Million is quoted to
highlight that only 1% of the total population pays tax. However, a large portion of our
population lives in rural areas, primarily engaged in agriculture – a sector, which falls
outside the taxable regime. Table 1 in the appendix depicts this situation more
precisely.
economically active. Out of this, people living in rural areas and not earning taxable
It needs to be seen, as to what number out of these 11 Million people should be paying
the taxes and how many happen to fall outside the tax regime. For this one has to take
1
Prof. Dr. Khwaja Amjad Saeed, “Understanding and tackling Tax Evasion”, available at:
http://www.kamjadsaeed.edu.pk/articles/TaxEvasion.pdf
into account the essential exclusions, which tantamount to system constraints which
Due to these and inefficiency the Income Tax Department has lost track of a large
dividend earners, prize winners and so on can help to be a source of estimate for the
presumptive taxpayers, for the Income Tax Department. [ CITATION Sab08 \l 1033 ]
The Federal Board of Revenue (FBR) has taken steps to broaden the Tax Base in
Pakistan. These include changes brought about the Income Tax Ordinance 2001, which
cover the Universal Self Assessment Scheme (USAS), Presumptive and Withholding
Tax Regime (PTR), Fixed Tax Scheme for Small Businesses, Reduced Income Tax
Rates, Amnesty Schemes for undisclosed wealth and Phasing Out of tax Holidays.
The Income Tax Department is now looking to book more and more new Tax Cases
and find out the people who are evading tax, to broaden their tax base and to reduce
the disparity brought about by the tax holidays between the upper and lower income
groups. The new approach by using the latest custom developed system, NEXUS, uses
Universities Enrolments and 7) Internal Survey (which includes going through the
Wealth Statements, Communication Slips, Business Directories and so on. The division
of Survey Teams is also taking place in which the teams are divided as per the
Geographical location. All these factors are aimed at contributing to the broadening of
the tax base, overall. Though there has been some increase compared to earlier years,
but in the overall macro scene, with growing GDP rate, expanding commercial and
Corporate Sectors, this kind of tax base and its consequential revenue generation is not
considered sufficient system for sustaining the system. Thus, there is a need to change
Tax Administration
Pakistan’s tax administration has generally been viewed as inefficient and corrupt. The
process of paying taxes has been cumbersome and painful, with massive
documentation, complex and arbitrary tax policy and non helpful tax officials. These
funds have been major reasons for the high rates of tax evasion in the country. The
military government led by General Musharraf which came to power in 1999 was
enthusiastic to raise levels of tax revenue and improve the tax-to-GDP ratio. To achieve
this objective it initiated the Tax Administration Reform Project (TARP). A large chunk
for financing the project came from the World Bank which gave around US$78.5 million
An important part of the TARP is to make the tax collection process more efficient and
transparent, by reengineering the entire taxation process. Efforts are being made to
facilitate the process for tax payers. This involved the following measures:
taxpayer unit at Karachi and Lahore encompassing all domestic taxes, Model Sales
2
Tax House at Karachi to test new business and customers’ services procedure.
Setting up of Taxpayer facilitation and education centers.
system and the Customs Administration Reform (CARE) which reduced the time
taken to process claims & also helped in reducing the chances of corruption.
The process has been simplified so as to minimize contact between tax officials and
administrative setup.
Tariff structures
Tariffs have an important impact on a country’s trade policy. High tariff’s imply a
protectionist policy stressing on import substitution while lower tariffs promote both
Pakistan’s policy shifted in the 1990’s with increased stress on trade liberalization,
which meant lowered tariffs. This policy was further stressed in 2001 under Musharraf’s
government. The underlying objectives of this policy are firstly to boost Pakistan’s
exports. An IMFv study in 2006 showed that lowering tariff barriers results in a boost of
exports. This model when applied to Pakistan indicated that removing import tariffs in
Pakistan will lead to a 16% increase in exports. However despite an increase in exports
since trade liberalization, Pakistan’s trade deficit has continued to grow, resulting in the
present day balance of payments crisis. As a state bank report reveal: During 2006-07
exports and imports of goods (general merchandise plus repairs of goods and goods
procured in ports by carriers) were $ 17,278 million and $ 26,989 million while the same
in 2005-06 were $ 16,553 million and $ 24,994 million respectively’ vi [ CITATION Haq08 \l
1033 ]
This situation supports the viewpoint that trade liberalization for developing countries
with developed nations makes the developing countries more vulnerable. This is
because generally developing countries tend to have low priced, primary products as
Another objective is that by removing protection there is improved efficiency in the local
industry’s which would otherwise not be able to survive. On the surface of it this has
been the case in Pakistan, because during the liberalization phase the revenue of
Another research paper also claims using simulation tools that tariff liberalization results
in greater household income equity. However this appears not to be the case in reality.
According to some sources Pakistan’s Gini coefficients has increased from 0.33 to 0.68
As the present balance of payments deficit shows tariff structures have important
lower tariffs ,which encourage export promotion, on its own is not enough and an
eclectic approach .which uses export promotion and import substitution needs to be in
is the characteristic of this industry. Many estimates have been made about the size of
the informal sector. Some officials of the Federal Bureau of Revenue estimate the size
of the informal sector to be around 30-40% of the total economy viii. In 2007, out of the
$160 billion size of country's economy, $32 billion plus was in the informal sectorix. The
size the informal sector and the impressive rate at which it is growing provides
around 70% of the total labour force of Pakistan x. The informal sector employs a variety
of tradesmen providing employment and various products and services at a low price to
a large and mostly poor section of the society. The businesses use small investments
and personal skills very efficiently. Some economists estimate that the informal sector is
70% more efficient than the formal sector. [ CITATION Iht08 \l 1033 ]
Taxing the informal sector is a daunting task. The nature of the informal sector is such
that it makes taxation difficult. Most of the transactions that take place are done in cash
and there is a general indifference to record keeping. Most businesses in the informal
sector are family-based enterprises that do not disclose all the information regarding
their business in fear of losing control of the business or in fear of excessive regulatory
requirements. Other reasons of not registering in the formal sector are cumbersome
laws and procedures, inhospitable environment, a higher cost of doing business but
Conclusion:
In conclusion what is important to note is that researches from over the developing
world show that tax administrative reforms are critical to revamping the taxation system
of a country. And the real impact of the reforms has to be judged over a long period of
time to ascertain whether they were successful or not. [ CITATION Rev07 \l 1033 ]
Recommendations:
Agriculture:
As we all know, Pakistan’s policy makers have always faced a great a dilemma in
deciding whether to tax agriculture or not. Our research, however, reveals that the
country can collect a great amount of money from this sector if the right people are
taxed. A sensible in this regard would be for the government to tax the feudal landlords
who own vast areas of land. The major problem with this strategy is that tax revenue is
pilfered and it allows the feudal landlords to evade taxes. All farmland should be taxed
however, and the rate should be decided according to the area of land in a farm. The
rate for peasants should be lower and for feudal landlords it should be higher. [ CITATION
HaqND \l 1033 ]
surplus produce. This is a very practical and progressive approach as it will allow for
progressive taxation. This tax is progressive because it will be greater for farms with a
vast area owned by a feudal landlord and less for farms with a comparatively smaller
area owned by subsistence farmers. Agriculture income taxes will go a long way in
bringing about some much needed frugality in the rich which would help stabilize, and
It is important to note here, however, that any taxation policy introduced in the
agriculture sector of Pakistan cannot succeed until and unless an audit system is
implemented. An audit of the farm owners and the farm lands would ensure a fair and
development friendly taxation system. It would allow for up to date assessment of land
which would in turn allow for a fair tax rate to be calculated. But the major problem with
this is the fact that land trading has been suspended in interior Sindh since the riots that
occurred when popular leader Benazir Bhutto was murdered. People are now trading
lands through illegal paperwork and would oppose practices such as audits tooth and
nail.
Another approach could be to ensure a gradual shift from land based taxes to
agriculture income based taxation. The obstacle facing this recommendation is the fact
that many feudal land lords who are also the policy makers of our country oppose such
suggestions whenever they are discussed in the national and provincial assemblies.
Informal Sector:
The informal sector causes great damage to the country not just by evading taxes but
also by demoralizing the honest businesses that do pay their taxes. Seemingly, the only
way for the government to curb this damage is to find a way to include the informal
sector in the formal sector. This can be done by providing incentives to the businesses
and the entrepreneurs who control them. The government should also remind these tax
evaders of the punishments of such a crime. Much like the KESC is doing nowadays.
Another reason why many people choose not to pay their taxes is because they believe
the tax authorities only tax the poor and the government uses this money for the benefit
of the people who are already rich. This can be put right through the use of marketing
Handling of taxes:
Another major problem is the fact that local tax authorities very often collude with the
feudal lords. This problem can be rectified by giving more authority to the federal tax
authorites.
Tax burden should also be reduced by including the service sector in the tax base. GST
exemptions should also be reduced and special treatment regimes should be put to an
end.
Administrative Changes:
Also, to make the tax system more effective the government needs to re-orient the tax
machinery towards developing capacity, capability and credibility. The tax base needs
to be broadened and the tax rates should be reduced. The whole burden of the tax
should not fall upon the middle class as is the case right now. The first step in this
direction would be to solve the land trade issue in interior Sindh right now. This will
allow for proper documentation to take place and rich feudal lords who are gaining
unfair advantage because of this will no longer be able to do so. The government also
needs up to date records of the land because many farm owner get away with tax
evasion because their lands are difficult to access. An up to date land record would
allow the government to tax all lands regardless of wherever they may be.
The government also needs to revise the country tariff structure because it has become
edged sword.
sense of transparency and efficiency to the system. Without transparency and efficiency
any government in the world would not be able to win the trust of the tax payers and as
we know if people don’t trust the tax machinery they will always look to avoid taxes. The
that will emerge as a result of educated tax payers will go a long way in helping the
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