Fiscal structure in Pakistan is divided between the Federal and the Provincial Governments. This structure was derived from the revenue-sharing provisions of the Government of India Act 1935 and has been incorporated into successive constitutional provisions delineating the respective revenue powers of the Federal and Provincial Governments. Under the present 1973 constitution, Federal and Provincial Governments are assigned separate revenue jurisdictions. The Federal Government has the constitutional right to levy a wide range of direct taxes including:
* Personal and corporate tax (excluding tax on agricultural income)
* Capital taxes (excluding tax on immovable property)
* Estate duty and gift tax (since abolished)
The Provinces are empowered to legislate in respect of direct taxes not reserved to the Federal Government. The provinces levy the following direct taxes:-
* Tax on agriculture income
* Urban immovable property tax
* Capital gains tax on land and building
* Land Revenue tax
* Taxes on professions, trades and callings.
History of Tax Policy Changes
Pakistan inherited a sophisticated taxation structure at the time of its independence in 1947. The system underwent substantive changes over the years with a view to augmenting the resources as well as meeting other economic needs. From 1947 to 1979, the changes made to the tax structure generally included:
* Granting industrial incentives by means of tax exemptions to industrial undertakings in specified backward regions or industries, i.e. area and activity-specific concessions.
* Extending the exemption of agricultural income to agricultural-related industry e.g. renting out of agricultural machinery, manufacturing of specified agricultural machinery, and providing agricultural related services.
* Suspending the operation of capital gains tax.
* Enacting capital taxes (Wealth Tax, Estate duty and Gift Tax - of which the latter two have been since repealed)
* Granting savings incentives to individuals e.g. investment allowance; and exemption of interest income from specified Government securities, etc.
* Enacting various ad hoc exemptions, e.g. exemptions to welfare trusts and foundations, certain pension incomes, etc.
In June 1979, the Income Tax Act of 1922, was replaced by the Income Tax Ordinance, 1979. It made no fundamental changes in the system of income taxation. Instead, as announced by the Government, the reasons for enforcing the new enactment were to arrange the provisions in more systematic and logical form, simplify the law plug the loopholes, remove lacunae and ambiguities, and to evolve a tax system which is fair, equitable and capable of voluntary compliance leading to effective administration. Thus, the fundamental concepts of fiscal policy as well as the basic features of the tax laws remained unchanged.
During the 1980's, certain clear departures were made from the concepts followed during the previous decades. In the area of personal taxes, the income threshold for tax purposes was substantially raised. Income computation provisions, particularly those relating to technical service fees, carry forward of losses, investment allowances and donations to charities were liberalised. Agriculture income was also included in the tax base for rate purposes. Investment income such as dividends, interest, capital, gains, etc. attracted a mixed approach, i.e. extension in certain exemptions and withdrawal of others.
Tax rates were gradually reduced during 1980s. The policy on depreciation of fixed assets was liberalised. Industrial investment incentives in the form of tax and investment credits and tax holidays were expanded along with the extension of existing concessions. The withholding taxes were extended as a measure of resource mobilisation as well as for expanding the tax base. The self-assessment scheme, as started in 1979, was continuously liberalised to promote better compliance. Anti-tax evasion and avoidance provisions were introduced.
These tax policy changes brought about in the wake of relatively increased economic activity to address the specific issues were not accompanied by adequate improvements in tax administration. The tax assessment and collection procedures/norms and the organization set-up followed the traditional pattern. The shift from 100 per cent audit of taxpayers' returns to selected 'test audit' in the short-run improved tax compliance but the inherent weakness in tax policy and administration did not permit adequate broadening of the tax base.
It is in this background that a comprehensive tax policy reform programme was undertaken in Pakistan in 1990. Government constituted a Committee on Tax Reforms "to review the existing taxation system and recommend a system that will substantially increase Government's revenues". While making its recommendations in February 1991, the Committee affirmed the need "to restructure the entire taxation system taking into account the revenue generating aspects, economic growth potential, removal of anomalies, complexity of law and procedures, and the inadequacy of tax administration". A wide range of recommendations on tax policy, procedures and administration were made. Fundamental direction of the tax reforms was aimed at broadening the tax base and simplification of tax system by removing causes, both legal and administrative, which may inhibit voluntary tax payments and mitigating exposure of the taxpayers to and open-ended assessments and appellate procedures.
The changes in tax design introduced in 1991 (as continued during 1992 and 1993) have attempted to partially reverse the existing distortions in resource use, inequities and revenue loss by phasing out some of the tax exemptions, streamlining the tax rate structure, adjusting the basic exemption for personal taxes to indices, and expanding the withholding taxes to several economic activities otherwise not contributing to the revenue effort. Major changes in the design of taxation system have been introduced in the form of presumptive basis of income taxation, schedular basis for taxation of dividends, bank profits and interest, prizes, winnings from lottery, etc; fixed tax on small business enterprises' minimum taxation on companies and registered firms based on turnover, and one time Corporate Assets Tax. These policy changes underline the on-ground economic realities in the background of difficult-to-implement conceptual norms.
Economic Objectives Assigned to Taxation
While resource mobilization remains as the primary objective of taxation system in Pakistan, through the medium of various exemptions and incentives, the tax system embodies a wide range of secondary objective as well. These include:
* Encouragement of savings
* Stimulation of certain industries
* Development of backward areas
* Encouragement of fixed investment
* Promotion of exports
* Promotion of capital markets
* Support for charity
* Support for welfare activities
* Promotion of house building
Description of Direct Taxes
As referred to in the beginning, the Federal Government levies taxes on income as well as capital. These include:-
i) Income tax on individuals, association of persons, unregistered firms, Hindu un-divided families, and Companies.
ii) Super tax on Registered Firms
iii) Wealth tax
iv) Capital Value Tax
v) Corporate Assets Tax
Income tax is levied on the total income of a person from all sources including salaries, interest on securities, income from house property, income from business, professional or vocation, capital gains, and 'other sources of income'. Income Tax Ordinance, 1979 and the rules made thereunder provide the mechanism for computation of income and tax. Wherever applicable, expenditure incidental to the earning of income is deductible from gross income. Personal expenditure is not allowed. Minimum threshold of Rs. 40,000 exists in respect of salaried persons as against Rs. 30,000 for taxpayers earning income from all other sources. Corporate taxpayers do not enjoy any minimum threshold.
Income from other sources, as referred above, includes dividends, interest on Bank deposits, royalties, directors fees, commissions, or remunerations other than those included in salary, business or professional income. All reasonable expenditure, other than personal expenses, incurred for the purposes of earning such income is deductible before subjecting it to tax.
Perquisites and allowances in respect of salaried persons are valued on a definite basis as provided in Rules 3 to 18 of the Income Tax Rules, 1982. Allowances and perquisites specially granted to meet expenses incurred wholly and necessarily in performance of the duties of an office are tax exempt. Travelling allowance and daily allowance granted to employees on official tour or transfer fall in this category,
Tax is levied on capital gains derived from disposal of capital assets other than shares of specified category of public limited companies (as are defined in the First Schedule of the Income Tax Ordinance, 1979). The exemption to the later expires on 30th June, 1996.
The law provides for a multitude of tax allowances, rebates, credits and exemptions. Investment credits are also admissible in respect of priority industrial undertakings. In respect of business income, losses are allowed to be off-set against current income from all sources and where these are not completely absorbed, these can be carried forward for six years to be set-off against future profits from the same business, profession or vacation. Losses from speculative transactions can, however, be set-off only against profits from such transactions. The six years time limit, however, does not apply to un-absorbed depreciation allowance which can be carried forward indefinitely. Separate rules for the computation of profits apply to undertakings engaged in the exploration, production and extraction of oil and gas, and mineral deposits as well as insurance business.
Extremely generous tax regime applies to income from exploration and production of petroleum. In addition to the general manner of computation of business income, special concessions are available to companies engaged in these ventures. These include:
* set-off of the expenditure allocable to a surrendered or dryhole against other income (except dividend) and its carry forward to the next six years;
* deduction of all expenditure incurred and not deemed lost prior to commencement of commercial production;
* depreciation (not earlier charged) on capital assets acquired before commencement of commercial production at original cost from the date of commencement of production;
* depletions allowance @ 15 percent of gross receipts representing well-head value subject to a maximum of 50 per cent of profits before deduction of the allowance;
* 100 per cent of the WDV as depreciation allowance for below-ground installations, etc; and
* the aggregate of taxes and other payments to government (royalties, etc.) in no case to exceed 50 per cent of the profits before deduction of payments to the government
Income from exploration and extraction of mineral deposits are similarly liable to a concessional tax regime. These concessions include the following:
* All expenditure on prospecting and exploration up to the date of commercial production, to the extent that it can not be set off against any other income, is treated as loss and carried forward for 10 years.
* After commencement of commercial production, depreciation on plant and machinery is allowed @ 100 per cent of the original cost.
* Depletion allowance is admissible at the rate of 20 per cent of income before deduction of allowance or at 50 per cent of the capital employed, whichever is less.
* Companies engaged in exploration of selected minerals and set up during the specified period are exempt for five years. After five years, tax on such income is charged at 50 per cent of normal rates for five years.
Industries set-up in Export Processing Zone enjoy concessional tax treatment in respect of profits and gains. Salary income of expatriate workers and technicians is tax exempt. Similarly, foreign investment enjoy extensive tax concessions.
It is imposed on the net wealth exceeding Rs. 1,000,000/- owned by a person. Taxpayers have the option to claim one house owned and occupied for the purposes of own residence exempt from net wealth. However, in such cases, exemption of Rs. 1,000,000/- does not apply. For the purpose of calculating wealth tax, net wealth includes:-
i) in case of an individual and a Hindu Undivided Family, property of every description, movable or immovable, except growing crops, grass or standing trees on agricultural land, and building owned or occupied by a cultivator or receiver of rent or revenue out of agricultural land.
ii) in case of a firm, an association of persons or a body of individuals, whether incorporated or not, and a company, immovable property held for the purpose of the business of construction and sale, or letting out, of property.
Corporate Assets Tax:
Corporate Assets Tax was introduced through 1991 budget. It is a one time levy payable by companies as defined in the Companies Ordinance, 1984 in respect of the value of fixed assets exceeding Rs. 5 million held by it on the specified date. Corporate assets tax is collected by Wealth Tax Officers. Default in payment calls for penalties and additional tax.
Capital Value Tax
The capital value tax is payable at the rate ranging between 2.5 per cent to 5 per cent by every individual, association of persons, firm or a company which acquires by purchase or transfer certain assets, or a right to use thereof for more than twenty years. However, in respect of certain type of assets if the purchaser is an income tax assessee and produces from the Income Tax Officer the certificate of having paid income tax in the latest assessment year, it is not liable to pay this tax.
Basis of Taxation
Income tax, over the years, has been levied on the net income at progressive rates and on a global basis. Determination of net income has involved application of suitable parameters on 'production', turnover and manufacturing and trade-related expenditures. These parameters reflect the 'expected profits' from various business on the basis of historical appreciation of each trade. Revenue efficiency of this system, of taxation has depended on the administrative capability to 'match' taxpayers' reported income with the relevant market data.
Taxation of net-income at progressive but differential tax rates on a global basis has signified the underlying principles of equity and neutrality in tax matters. The introduction of tax concessions for promoting preferred economic activities through granting of investment and tax credits, rebates and exemption of selected incomes, particularly during 1970s and 1980s, however, led to the use of several of the 'tax preferences and expenditure' instruments as 'tax shelters' by unscrupulous taxpayers. Consequently, fairness, and 'equity' aspects of the taxation system were gradually diluted in the process of reconciling diverse, multiple economic objectives. The Reform Package of 1990s, therefore brought comprehensive changes in the concepts and basis of taxation. There was a conscious departure from the age old net-basis of income taxation and its substitution by presumptive, schedular and fixed bases. The newly introduced concepts, as basis of income/tax determination, are explained as below:-
Presumptive Income Tax
The concept of 'presumptive income' was, first introduced in Pakistan in 1980 for taxation of income of foreign shipping and air transport enterprises (to mitigate the adverse effects of tax foregone as a consequence of deduction of huge depreciation allowances in computing income on a net-basis, and also to eliminate the comparative disadvantage Pakistani enterprises faced, particularly in countries following presumptive taxation on such profits). Gradually, and imperceptibly, this concept was extended to the technical services/knowhow fees received by the non-residents. The tax reforms initiated in 1990s has attempted, on a selective basis, presumptive taxation of resident and non-resident taxpayers, e.g. payments for supply of goods, execution of work contracts, imports and exports, investment income, payments to non-residents, etc.
The vital aspect of the new basis of taxation is that it is both presumptive and schedular in nature, particularly where the taxpayer's income is limited to the economic activities covered under this regime. For example, the new tax regime provides that the value of imports and exports, and payments for execution of contracts and supply of goods constitute the 'presumed income' of the taxpayer and is taxed at the prescribed rates. The tax deducted/paid at the withholding stage is treated as final discharge of tax liability. However, where the recipient also derives income from activities not covered under the 'presumptive or schedular' taxation, the 'presumptive income' is taxed on a global basis.
The 'Schedular tax' on a 'presumptive base' covers dividends, interest on bonds, certificates, debentures, securities or instruments, interest on deposits with banks, financial institutions and finance companies; prize money on bonds, and winnings from raffle, lottery and cross-word puzzles received by both resident (except for the corporate taxpayers) and non-resident taxpayers. Such incomes are treated as a separate block of income, no allowances or deductions permitted and subjected to a flat tax rate varying in respect of each type of income. The tax deducted at source at the prescribed rates is treated as the discharge of final tax liability. The requirement of filing tax return has been waived.
Minimum Tax on Companies and Registered Firms
A minimum tax equal to 0.5 per cent of the declared turnover of every company, body corporate, trust and registered firm resident in Pakistan has become payable as income tax. It is payable on the deemed income representing the total amount of the declared turnover from all sources falling under the head "Income from business or profession", i.e. gross receipts derived from goods sold, services rendered, given or supplied, benefits rendered, given or supplied: or contracts executed. Trade discount shown on invoices or bills does not form part of the declared turnover. In case of banking companies, interest, markup, discounts, commission, etc. is considered as turnover.
This minimum tax becomes payable by every company, body corporate, trust, registered firm even though it may be exempt otherwise due to tax holiday or may not be paying any tax under the Income Tax Ordinance 1979, for any reason including accounting concessions like depreciation allowances and tax credits or set off of losses.
Fixed Tax on Small Businesses
Fixed tax on small businesses, viz. small shopkeepers, traders and establishments engaged in any business or profession was introduced in 1991 in consequence to government's concern that the existing tax procedures are too cumbersome for small taxpayers to comply with. It also signifies administrative difficulties in reaching 'small business' earning taxable income. The scheme envisages a fixed tax charge - separate for rural and urban areas - on the basis of 'presumptive income' determined by taxpayer himself. The tax is payable in the Post Offices rather than the Income Tax Department. In 1992, this scheme was extended to the selective markets, with no reference to the 'smallness' of the business in. It has since been abandoned.
Rates of Income Tax (Individuals, Un-registered Firms, Association of Persons, Hindu Undivided Family) Where the total income does 10% not exceed Rs. 100,000 Where the total income exceeds Rs. 10,000 plus 20% of the Rs.100,000 but does not exceed amount exceeding Rs.100,000 Rs. 200,000 Where the total income exceeds Rs. 30,000 plus 30% of the Rs. 200,000 but does not exceed amount exceeding Rs. 200,000 Rs. 300,000 Where the total income exceeds Rs. 60,000 plus 35% of the Rs. 300,000 amount exceeding Rs. 300,000
Tax Rates, Applicability, Allowances, Exemptions
Rates of Tax in respect of various categories of tax payers and income are given on next page.
Tax allowance of Rs. 4,000 in respect of salaried persons and Rs. 3,000 in respect of persons deriving from all other sources is given. However, separate rates are applicable for income from:
a) dividends from companies, National Investment (Unit) Trust and Investment Corporation of Pakistan is 10%; and
b) income by way of a prize (on prize bond or income representing winnings from a raffle lottery or cross word puzzle) is 7.5%.
Where a person, not being a company, is not resident in Pakistan, the tax including super tax payable by him or on his behalf on his total income shall be an amount equal to:
a) the income tax which would be payable on his total income @ 30 per cent or the income tax which would be payable on his total income if it were the total income of the person resident in Pakistan, whichever is the greater.
b) the super tax which would be payable on his total income if it were the total income of the person resident in Pakistan.
In case the non-resident has made the declaration that the tax payable by him or on his behalf on his total income shall be determined with reference to his total world income, such tax shall be an amount bearing to the total amount of tax, which would have been payable on his total world income had it been his total income the same proportion as his total income bears to his total world income.
Rates of Income Tax on Companies (including Surcharge)
The rates of tax on companies have been reduced gradually from the assessment year commencing on July 01, 1993 as per the following chart:-
Public Companies Private & Banking other than non-listed Assessment Co's Banking public Year (%) Co's (%) Co's (%) 1993-94 64 42 52 1994-95 62 39 49 1995-96 60 36 46 1996-97 58 33 43 1997-98 55 30 40
Rates of Wealth Tax
In case of every individual, Hindu undivided family, firm, association of persons or body of individuals, whether incorporated or not, and a company following tax rates apply:-
On the first 400,000 of net wealth 0.5% On the next 400,000 of net wealth 1.0% On the next 400,000 of net wealth 1.5% On the next 400,000 of net wealth 2.0% On the balance of net wealth 2.5%
TABULAR DATA OMITTED
TABULAR DATA OMITTED
Corporate Assets Tax Where the value of assets is not more than 50 million Nil Where the value of assets is is more than Rs. 50 million but not more than Rs. 100 million Rs. 500,000 Where the value of assets is more than Rs. 250 million. Rs. 2,000,000
Double Taxation Treaties
Pakistan has an extensive treaty net with developed as well as developing countries. These include both comprehensive as well as limited purpose tax treaties. The latter generally cover income form international air and shipping operations. The existing tax treaties are a mix of those concluded since 1970 or the renegotiated treaties of 1950s and 60s. The number of operative tax treaties is 30 comprehensive and 10 limited purpose tax treaties. The treaty countries are listed as under:-
1. Austria 2. Bangladesh 3. Belgium 4. Canada 5. China 6. Denmark 7. France 8. Germany 9. Greece 10. India 11. Indonesia 12. Iran 13. Ireland 14. Italy 15. Japan 16. Japan 17. Korea 18. Lebanon 19. Libya 20. Malaysia 21. Malta 22. Netherland 23. Nigeria 24. Norway 25. Philippines 26. Poland 27. Romania 28. Saudi Arabia 29. Sri Lanka 30. Sweden 31. Switzerland 32. Thailand 33. Turkey 34. U.K. 35. U.S.A. 36. U.S.S.R.
Tax Administration and Management
Revenue Division is the apex body responsible for formulating policies and administering both direct and indirect taxes. The highest administrative authority is the Central Board of Revenue, which is responsible for implementation of tax laws. CBR was constituted under the Central Board of Revenue Act, 1924 as adopted by Pakistan. The Board comprises of a Chairman (who is also Secretary Revenue Division) and several Members dealing with various taxes. Member Income Tax and Member Incometax (Judicial) deal with the incometax administration and appellate work respectively.
At the operational level, for administrative purpose, the country is divided into three regions - each divided into Income Tax Zones, Ranges and Circles. Separate Wealth Tax zones exist for each of the Region. For collection, collation and dissemination of economic information relevant to assessment of income and capital, Commissioners of Survey and Registration have also been appointed on a regional basis. Separate company zones exclusively deal with the corporate taxpayers. For assessment purposes, several hundred tax circles exist. Functional distribution of work entails tax assessment and collection vested in the Income Tax Officer Incharge of a tax circle. The Assistant Commissioner and Commissioners exercise supervision, guidance and control of their work. The overall management and implementation of the taxation laws at operational level is the responsibility of the Regional Commissioners of Income Tax.
A well-organised system of appellate forums in the form of Commissioners of Income Tax (Appeals) and the Income Tax Appellate Tribunals is in place. The Zonal Commissioners of Income Tax are also empowered to review the orders of tax authorities sub-ordinate to them. Member Judicial (Income Tax) reviews the orders of Commissioners of Appeal, where the taxpayer exercises the option of pursuing such course of redressal.
Taxpayers Assistance Programme
Taxpayers' assistance programmes are a key to reducing the communication and information gaps. Several years ago, 'assisting taxpayers' meant helping taxpayers filing tax returns during the filing season. The concept has evolved considerably since that time. Central Board of Revenue now perceives it to be a continuous process round the year.
With this new perception in mind, Central Board of Revenue has established the 'Tax Education Wing' with the broad based objective of providing tax education and information to the taxpaying community in particular and the society in general. The matters covered include projecting Government's needs for financing of legitimate goods and services; produce attractive and readable guides, booklets and pamphlets on tax laws, rules, and procedures; and highlighting tax collecting agencies' performance to remove the misgivings. The methodology adopted includes preparation and distribution of printed tax material, advertisements in news papers, radio and TV, organizing workshops, symposia and conferences, and a continuous interaction with the representative bodies of industry and commerce.
The Tax Education Wing of the Central Board of Revenue is still in its formative stages. It is steadily endeavouring to establish technology-based information centers in all major cities. There has been substantial advertisement, motivational and informative campaign on various aspects of taxpayers' obligations in the news papers and on TV. The Tax Education Wing has also published comprehensive booklets on withholding taxes, Capital value tax, functioning of the Directorate general (Inspection and Audit), CBR Rulings in the form of Circular and Notifications, etc.
A full-fledged Directorate of Training, headed by full-time senior officers of the Income Tax Department exists at Lahore. Training facilities have also been expanded to the regional level. While the Directorate was essentially established for in-service training of newly-inducted officers and staff, it now offers refreshers and specialized courses for officers of various levels as well.
The training facilities at the Directorate of Training (Income Tax), both for the newly-inducted officers and in-service personnel in the recent years have been adequately improved and expanded. The qualitative and quantitative improvement in the activities of the Directorate of Training has been brought about by:
* enlarging the course contents and incorporating additional areas for training
* expanding the daily work schedule, thereby ensuring improved coverage of professionally relevant disciplines, and
* expanding the teaching facility into a qualitatively well-equipped team of experts.
In additional to comprehensive training in taxation laws and procedures, and accounts, specialised courses on computer handlings, budgeting and financial management, Income Tax Law and Procedures for staff and administrative officers are offered. The Directorate organises seminars on topical issues, and provides an 'open door counselling service' to facilitate smooth flow of information.
Research and Operation Analyses
Over the years, CBR's tax policy analyses were a seasonal exercise based on the proposals received from the Department, business and industry. The anamolies and conflicts observed in tax laws and procedures during their year round implementation also serve as inputs for the tax policy exercises. CBR's Directorate of Research and Statistics, has served as the 'repository and provider' of statistical information reports. The Computer Wing of the Income Tax Department generated voluminous annual 'All Pakistan Reports' on taxpayers. These reports by their sheer nature and size were not very convenient and helpful in policy formulation.
It is in this background that, on the recommendations of Tax Reform Committee, a full-fledged Tax Policy Department was established in the CBR during 1991. It is headed by a Member (Tax Policy) who is assisted by a team of Commissioners of Income Tax and Collectors of Customs. The Tax Policy setup has been given the mandate to examine the taxation system in the context of changing economic needs and the demands placed on the tax administration. It is required to carry out systematic studies on various aspects of laws and procedures. These studies are being carried out in collaboration with the professional and academic bodies in the country. Several aspects of policy and administration have been selected for this purpose and the work entrusted to the external independent researchers.
Computerization of Income Tax Department
Computerization of Income Tax Department started in 1983 with the installation of low-end multi-processing computer hardware at Karachi. The objective was to enhance administrative efficiency in the assessment and collection and improve taxpayer service through eliminating reporting delays, collection and matching of economic information with reported data, processing of tax returns and application of Automatic Data Processing to other legal and administrative functions, providing Management Information System for better administrative controls and policy formulation.
As a first step, with the assistance of several national institutions, tax assessment and accounting applications in COBAL were developed. This led to consolidating post-assessment data from IT-30 Assessment Forms and systematic recording of the tax receipts. Gradually, the hardware spread was expanded to other locations. Several other applications were developed on tax accounting, information gathering and dissemination, random-balloting for selection of test audit cases, assessment of salary and other cases involving simple arithematical computation, etc.
In 1990, the review of existing computing facilities indicated that inspite of impressive performance at the initial stages, both in establishing new facilities and expanding computer applications, the computer programme was merely 'afloat' due to several financial, hardware, technical and administrative constraints, and the Tax administration had made limited use of the available technology. Detailed reviews were, therefore, undertaken and a comprehensive strategy developed on future course of computerization. It was decided to induct high-end, multi-use equipment using RDBMS as the application software, 4 GEN. as the language for application development; expanding the existing applications incorporating tax assessment, audit, and collection functions through a comprehensive data base also to be used for information matching; move from batch-mode to distributive data processing, and, through the communication links, connect all data-entry centers to provide a single data base for analysis and quarry purposes. Recently, high-end multi-processing hardware at three major Computer locations in the Income Tax Department has been installed. Consultants are busy in developing various modules and converting the existing applications on RDBMS. It is expected that after the communication links are established and the relevant applications fully implemented, it shall significantly improve the administrative efficiency of the Income Tax Department.
Inspection & Audit
Inspection and audit function vests in an independent office of the Director General (Audit & Inspection). The purpose of creating this outfit was to arrest the declining standards of administrative efficiency, honesty and work quality through enforcing accountability of the tax officials. The primary functions of the Directorate General of Inspection and Audit are inspection of tax assessment and collection work, audit of tax computations and vigilance of the officers, conduct.
The internal inspection and audit by the Directorate General is supplemented by the external audit carried out by the office of the Auditor General of Pakistan. The two put together, are expected to favourably impact the tax effort. The 'life style audit' may discourage the corrupt practices amongst the functionaries of the Income Tax Department. Redressal of public grievances on tax matters through enquiries on complaints is expected to effectively reduce the existing credibility gap.
Current Trends in Policy and Administration
The types of issues that have arisen during the course of tax policy formulation and administration generally include insufficient revenues and fiscal imbalance, distortions in resource allocation, inadequate equity features of tax system and the administrative constraints.
Given these major tax policy issues, Pakistan tax administration considers that any tax policy reform package for implementation must aim at fundamental and comprehensive changes in emphasis and concepts. The policy reform package would cover fiscal structure and administration and implemented in totality.
The tax reform policy may be tailored around the key principles of:
i) primary objective to be raising of revenues, secondary objectives minimized;
ii) taxes are fair, progressive and equitable,
iii) income to be taxed in documented.
While tailoring the tax policy directions, broadening of the tax base must be given high priority so as to reduce reliance on relatively high tax rates to generate revenues. Within base broadening, the use of 'tax expenditures' (tax preferences and exemptions to promote specific economic and social objectives) should in general be reduced. While devising tax expenditures, the potential gains need to be weighed explicitly against the potential losses in revenues and efficiency that must be associated with these measures. The rate structure should be rationalised. Also tax reform should aim at lowering the burden on the poor.
Further, since tax reform typically involves the balancing of multiple objectives and evaluation of the interactions between different tax instruments and bases, a systematic approach to tax reform can yield major gains. The policy reform package must be accompanied by suitable improvements in tax administration. Excessive complexity of tax laws and procedures which places burden on the limited enforcement capabilities of tax administration must be reduced through simplification of tax laws and procedures.
As all objectives of tax reform cannot be satisfied simultaneously, trade-offs are unavoidable. Pakistan is, therefore, following the short-run policy of improving its revenue collection even through what can be termed as the distortionary instruments such as expanded withholding and presumptive taxes. Simultaneously, efforts are there to develop a comprehensive data base, improve administrative skills and work towards fully-documented economy to widen the tax base, and ultimately achieve the desired level of equity in tax matters. The recent steps towards bringing into tax net the agricultural assets and income, and phasing out the tax holidays, etc. are expected to reduce the use of these tax instruments as 'tax shelters'. There is an increased emphasis on training of personnel and providing adequate physical infrastructure. The process of simplifying tax laws and procedures continues. Rewards schemes for unearthing tax concealments are being reviewed and made more liberal. A Settlement Commission has been established for speedy settlement of tax disputes. Completion of strategic management process in several areas of tax administration is expected to contribute towards desired tax efforts in a major way.…