Transcript FISCAL REFORMS IN PAKISTAN*

FISCAL REFORMS
IN PAKISTAN*
By
Dr. Hafiz A. Pasha**
* Prepared for the Workshop on South Asia Tax Systems, 8-9 August 2010, Singapore.
** Dr. Pasha is Chairman of the Revenue Advisory Council of the Federal Board of Revenue
(FBR).
SOME SALIENT FEATURES OF PAKISTAN’S
TAX SYSTEM
A. FEDERAL
Income Tax
• Heavy Reliance (53%) on Withholding/Presumptive Taxes
• Progressive Personal Income Tax (max rate: 20-25%)
• Corporate Income Tax (35% rate)
• Universal Self-Assessment Scheme
• Advance Tax Regime
General Sales Tax
• On Goods only
• VAT features
• Zero Rating, also of domestic sales of exporters
• Standard Rate of 17%
• Exemptions to basic food items, agricultural inputs, medicines,
newsprint.
SOME SALIENT FEATURES OF PAKISTAN’S
TAX SYSTEM
Custom Duty
• Cascaded Tariff Structure (max rate: 25%; six slabs)
• Tariff Peaks in Automobiles and other luxury goods
• Share of Dutiable Imports (51%)
Excise Duties
• on few industries like cigarettes, beverages and cement
• on Services in VAT mode
• 1% Excise Duty across-the-board on manufacturing and imports
PROVINCIAL
Taxes
• AIT, Land Revenue, Stamp Duty, Motor Vehicle Tax, Property Tax, Excises
• Sales Tax on Services
TAX-TO-GDP RATIO OF PAKISTAN
2000-01 To 2009-10
(% of GDP)
Direct
Taxes
Indirect
Taxes
Surcharge
/Levy*
Total
Taxes
FBR
Revenue
Share of
Direct Taxes
2000-01
2.99
6.89
0.73
10.61
9.42
28.18
2001-02
3.20
6.41
1.23
10.83
9.11
29.54
2002-03
3.17
6.94
1.41
11.53
9.57
27.49
2003-04
2.92
6.84
1.09
10.84
9.25
26.94
2004-05
2.72
7.01
0.41
10.14
9.05
26.82
2005-06
2.82
7.06
0.67
10.54
9.36
26.75
2006-07
3.85
6.41
0.74
11.00
9.76
35.00
2007-08
3.79
6.47
0.34
10.60
9.83
35.75
2008-09
3.46
6.00
0.99
10.44
9.08
33.14
2009-10
3.66
5.83
0.90
10.39
9.05
35.23
Year
* On petroleum products and natural gas
Source: Ministry of Finance, Government of Pakistan.
THE IMBALANCED SECTORAL DISTRIBUTION
OF THE TAX BURDEN
2004-05
(%)
Share in
GDP
Share in Tax
Revenue
Ratio
Agriculture
22.5
1.2
0.053
Industry
23.5
70.4
2.995
Services
54.0
28.4
0.526
Total
100.0
100.0
1.000
Source: Ministry of Finance, Fiscal Policy Statement.
WHY THE TAX-TO-GDP RATIO
DID NOT RISE DURING THE PERIOD
OF FAST GROWTH, 2003-04 To 2006-07?
• Tax-to-GDP ratio remained, more or less, constant at 11% of
GDP
• Due to Large Tax Exemptions
~ on Capital Gains on Shares and Properties
~ Withdrawal of Wealth Tax
~ Withdrawal of Excise Duties on Consumer Durables
• Due to Reduction in Tax Rates
~ Maximum Tariffs on Imports down from 35% to 25%
~ Corporate and Personal Income Tax rates brought
down
WHY THE TAX-TO-GDP RATIO DID
NOT RISE? (Contd.)
• Due to Slackening of Fiscal Effort
~ Self-Assessment Scheme without Audits in Income Tax
and Sales Tax
~ Number of Income Tax returns filed at only 2.2 million
(one per 75 persons)
~ Provincial governments continue to slacken fiscal
effort due to high dependence on transfers
• Due to high variability in revenue from Surcharges
The Government essentially followed supply-side economics to
stimulate growth. Growth did rise but not enough to raise the
tax-to-GDP ratio.
RECENT REFORMS (2008-09 ONWARDS)
Carbon Tax
• Introduction of Fixed Levy on Petroleum Products as ‘Carbon Tax’ with
large revenue yield of over Rs 110 billion ($1.3 billion)
Direct Taxes
• Taxation of (Short Term) Capital Gains on Shares
• Extension of the Withholding Tax Net (Bank Cash Withdrawals, Air Travel)
• Introduction of Minimum Tax on Turnover (of 1%)
• Random Ballot for Audit with Outsourcing to private Accounting Firms
• Detection of New Tax Payers through Collateral Evidence
Sales Tax
• Enhancement in Rate from 15% to 17%
Excise Duty
• Introduction of Across-the-Board Special Excise Duty at 1%
PROPOSED REFORMS
Introduction of Comprehensive VAT (or reformed GST)
• Objective is to broaden tax base and reduce tax rate (17%
15%)
• Elimination of exemptions on goods, except basic foodstuffs
and life-saving drugs, could generate ¼% of GDP
• Enhanced coverage of services (excluding education and
health) could increase tax revenues in the medium term by
1½ % of GDP
• Reduction in tax burden on industry
• Introduction delayed till 1st October 2010 due to
~ issue of collection by provinces of the sales tax on services
~ lobbies (especially the trading community)
PROPOSED REFORMS
Provincial Taxes
Areas of focus:
~ Capital Gains Tax on Property
~ Urban Immovable Property Tax
~ Agricultural Income Tax
• The target in the on-going IMF Program is to raise the tax-toGDP ratio by 3½ percentage points by 2012-13.
Thank You.