System of Taxation in Pakistan targeting only people with no Bread and Shelter

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Budget for FY 2018 and thereafter interim budget of Assad Umar have arrived with new finance bill and new taxes just to nip the down troddens and saving elites.

According to recently received Pakistan’s first-ever official report on multidimensional poverty four out of 10 Pakistanis are living in acute poverty with the population of Baluchistan faring the worst among the provinces.

Now coming to Government revenue, one can say that more people are flying in an airplane at any given time then there are people paying direct taxes, such as income tax, in Pakistan in a year.

Pakistan suffers from endemic tax evasion, corruption, and inefficiencies in tax administration, leading to a poor tax-to-GDP ratio, according to information in a new report issued by the Research and Advocacy for the Advancement of Allied Reforms.

Pakistan currently has a tax-to-GDP ratio of 9.4-11 percent, one of the lowest in the world.

The poor tax performance has been attributed to a pervasive “non-tax culture”, which itself is caused by persistent tax evasion, corrupt tax officials, and significant inefficiencies of the tax authorities in their efforts to

Tax is defined as the charge levied by the government of a country upon its habitants for its support or for the purpose of facilitating the public of that country. It is neither a voluntary payment by the tax payer nor like a donation. Rather it is an enforced payment to the government.

In case of direct taxes, the taxpayers are generally more curious to know about their taxed income. That’s why they stress the government for the representation of its consumption. Taxes are levied at different percentage rates. These percentage rates are determined by comparing with income or consumption level. It has three basic types that are progressive, regressive and proportional rates. There are two major types of taxes which are direct and indirect taxes.

In simple words direct taxes are those the burden of which is directly born by the tax payer and contrary to this if the burden of taxes is transferred to other or public, are called indirect taxes.

In Pakistan, at the time of independence, the fiscal system was followed by the Government of India Act 1935. Later it was followed in accordance with Islamic Republic of Pakistan Act 1973. Federal government levy taxes in Pakistan and provincial governments are also assigned powers to impose certain types of direct taxes. At the time of independence, Income Tax Act 1922 was applicable in Pakistan. After independence it was converted into Income Tax Act 1979. In 1980s major economic changes took place due to centralization. In 1990, tax policy reforms were made to meet the changing requirements of the economy.

At present, the Income Tax Ordinance 2001 rules are followed. The income tax is the main source of direct tax and indirect tax and there are several others that may be included in it such as property tax, poll tax and foreign travel tax etc.

Indirect taxes include custom, sales tax, airport value tax etc.

Like other countries in Pakistan an appropriate fiscal policy is a vital ingredient for economic development. Despite being a short run policy measure, fiscal policy can have lasting macroeconomic consequences. In the debate about economic policy, fiscal policy is viewed as an instrument used to mitigate short run fluctuations in output and employment and bring the economy closer to potential output. Fiscal policies are in large part contingent on government’s expenditure allocations and revenue collections. Persistent budget deficits could be avoided if policy makers understand the nature of the nexus between expenditure and revenue.

Restructuring the tax system at federal level is central to the entire process of economic reforms. Direct tax reforms at federal level forms key component of wider reforms in fiscal and economic sector.

The rise of the value-added tax (VAT) around the world has been one of the most important tax developments of recent times. This tax is considered to have advantages compared with other taxes, because it eliminates cascading, allows for zero rating of exports, and is broad based and difficult to evade. A very slightly modified form of VAT is general sales tax (GST) which was imposed in Pakistan in 1991 tax reforms. It has always been considered that VAT, Withholding tax and GST are regressive taxes.

From a global tax perspective, global aid inclusive of the tax revenue must ensure that it must generate not only a positive income effect but also this effect must be large enough to more than compensate for the tax’s excess burden and administrative costs. Whether such a condition can be satisfied by any global tax is highly questionable, or at the very least remains opens empirical issue.

Indirect taxes are mostly politically favorable because the burden can be hidden. These taxes give consumers a choice. An individual consumer can decide whether to buy a product and, assuming he is aware of the tax at all, whether to bear the burden of tax. Indirect taxes contain their own protection against abuse. They cannot be raised too high or revenue will decrease because consumption will decline. In contrast, direct taxes hit the pocketbooks of taxpayers painfully, with little if any option to avoid paying.

The Personal Income Tax Rate in Pakistan stands at 20 percent. Personal Income Tax Rate in Pakistan averaged 20.91 percent from 2006 until 2016, reaching an all time high of 30 percent in 2006 and a record low of 20 percent in 2007.

In Pakistan, the Personal Income Tax Rate is a tax collected from individuals and is imposed on different sources of income like labor, pensions, interest and dividends. The benchmark we use refers to the Top Marginal Tax Rate for individuals. Revenues from the Personal Income Tax Rate are an important source of income for the government of Pakistan.

Here we may know that in Pakistan, more revenue is charged by levying indirect taxes where as India is on the opposite side of it. The results of these two types of fiscal policies can be very different. Literature supports that the proportion of the indirect taxes must be less than that of direct taxes. The more the indirect taxes in country, the more will be increasing gap between rich and poor and thus the more will be the exploitation of labor class. Pakistan is failing to reduce its fiscal deficit despite large parts of the country’s economy, including rich landlords, not being taxed. About 65% of the country’s budget goes to debt retirement, defense expenditures and the current expenditures of the government, while 60% of the economy is outside the tax net. Currently, Pakistan is also facing the threats of IMF for changing the structure of taxes to get more aid. In such situation, Pakistani fiscal policy makers need careful analysis of long term planning. The more attention should be given on direct taxes otherwise the rich and poor increasing gap would be harmful for the country. The corrective action must also be taken to reduce the tax evasion, tax base should be increased to generate more revenue, and the major problem of corruption should be given high attention

Nations within the European Union have been found to levy average indirect taxes of 20 percent of total taxes. Luxembourg and Cyprus hold the lowest indirect tax rates in the EU, at 15 percent. Denmark, Hungary and Sweden levy the highest, at 25 percent. In Pakistan it varies in between 60-80%.

The current slabs for taxable income under Finance Act 2008

On Prize bonds 15% for filer and 25% for non filer

On transfer of property filer 1% non filer 2%

On purchase of property immovable property up to Rs 4 million no tax above Rs 4 million filer 2% non filer 4%

On general and life insurance premium –general insurance non filer 4% life insurance over 0.2 million annual non filer 1%.

On banking transactions-over Rs 50000 filer 0.3% non filer 0.6%. On demand draft, payment order CDR, STDR, RTC or similar instruments over 25000 filer 0.3% non filer 0, 6%. On online money transfer or other electronic mail-over Rs 25000 filer 0.3% non filer 0.6%.

Advance tax on sale of demand draft pay order etc filer 0% non filer 0.6%.

Withholding tax on motor vehicles on-

Registration up to 850 ccs filer Rs 10000 non filer 10000.

851 cc to 1000 cc filer Rs 20000 non filer Rs 25000

1001 to 1300 filer Rs 30000 non filer Rs 40000

1301 to 1600 filer Rs 50000 non filer Rs 100000

1601 to 1800 filer Rs 75000 non filer Rs 150000

1801 to 2000 filer Rs 100000 non filer Rs 200000

2001 to 2500 filer Rs 150000 non filer Rs 300000

2501 to 3000 filer Rs 200,000 non filer Rs 400000

Above 3000 cc filer Rs 250000 non filer Rs 450000

Transfer of registration or ownership

Up to 850 cc filer Rs 0 non filer Rs 5000.

851 cc to 1000 cc  filer Rs 5000 non filer Rs 15000

1001 to 1300 filer Rs7500 non filer Rs 25000

1301 to 1600 filer Rs12500 non filer Rs 65000

1601 to 1800 filer Rs18750 non filer Rs100000

1801 to 2000 filer Rs25000 non filer Rs135000

2001 to 2500 filer Rs37500 non filer Rs200000

2501 to 3000 filer Rs50,000 non filer Rs270000

Above 3000 cc filer Rs62500 non filer Rs 300000

At the time of sale of new vehicle from manufacturer

Up to 850 cc filer Rs10000 non filer Rs10000.

851 cc to 1000 cc filer Rs 20000 non filer Rs 25000

1001 to 1300 filer Rs30000 non filer Rs 40000

1301 to 1600 filer Rs50000 non filer Rs 100000

1601 to 1800 filer Rs75000 non filer Rs1500000

1801 to 2000 filerRs100000 non filer Rs200000

2001 to 2500 filer Rs150000 non filer Rs300000

2501 to 3000 filer Rs 200000 non filer Rs400000

Above 3000 cc filer Rs250000 non filer Rs450000

Private Vehicle Tax

Up to 850 cc filer Rs 800 non filer Rs 1200.

851 cc to 1000 cc filer Rs 1500 non filer Rs 4000

1001 to 1300 filer Rs 1750 non filer Rs 5000

1301 to 1600 filer Rs 2500 non filer Rs 7500

1601 to 1800 filer Rs 3750 non filer Rs 12500

1801 to 2000 filer Rs 4500 non filer Rs 15000

Above 2000 cc filer Rs 10000 non filer Rs 30000

 

Income on dividend/payment of dividend Filer 12.5% non filer 20%

Income on Sukuk filer 10% to 15% non filer 17.5%

Profit on NSS/post office savings Filer 10% Non filer 17.5% (over Rs 5 lac)

Profit on debt paid by banking company Filer 10% Non filer 17.5% (over Rs 5 lac)

Profit on bonds certificates debentures securities Filer 10% Non filer 17.5% (over Rs 5 lac)

On extraction of minerals Filer 0% Non filer 5%

On brokerage or commission-

Advertizing agents Filer 10% Non filer 15%

Life insurance agents Filer 8% Non Filer 12%

On construction related contracts Filer 7% Non Filer 12%

On other services and TV advertisements Filer 7% Non Filer 12%

Sale of goods company Filer 4% Non Filer 6%

S. No. Taxable income Rate of tax.
1. Where taxable income does not exceed Rs.400,000 0%
2. Where the taxable income exceedsRs400,000 but does not exceed

Rs.1,200,000

 5% of the mount exceeding Rs 400,000
3. Where the taxable income exceedsRs.1,200,000 but does not exceedRs.2,400,000 Rs 40,000 +  10 % of the mount exceeding Rs 1,200,000
4. Where the taxable income exceeds Rs 2,400,000.but does not exceedRs.3,600,000 Rs 160,000+  15% of the mount exceeding Rs 2,400,000
5. Where the taxable income exceedsRs.3,600,000 but does not exceed

Rs.4,800,000

Rs 340,000+ 20 % of the amount exceeding Rs3,600,000
6. Where the taxable income exceedsRs.4,800,000 but does not exceed

Rs.6,000,000

Rs 580,000 + 25.0% of the amount exceeding Rs 4,800,000
7. Where the taxable income exceedsRs.6,000,000 Rs 880,000 + 30% of the amount exceeding Rs 6,000,000
Chart 1 Share of population of Pakistan in total income
Population distribution in Pakistan Share in income

 

Income % Cost of essential food and items to survive under GST of 17% amounting Rs 5000/- It result in actual tax paid as % of income.
Lowest 30% 5 % 3.05 850/3.05= 278.68
Next 20% 15%

 

6.45 850/6.45= 131.78
Next 20% 15%

 

10.45 850/10.45= 81.33
Next 20% 15 %

 

23.15 850/23.15= 36.71
Next 10 % 40 % 24.87 850/24.87=  34.17
Gini Coefficient= 0.43
How cruel and exploitative it looks that lowest 30% of population is paying Rs 278.68 and highest 10% is paying just Rs 34.17 as tax to the government.

Forward going it is being said that Rate for companies now at 29% would be reduced to 25% by 2023. For small companies the rates would be reduced to 20% by 2023.

Super tax on banking companies now at 4% would be reduced to 2% by 2021.For persons with income of Rs 500 million or more the rate would be at 0 in 2021.

Another debate going on is the issue of withholding tax (another indirect tax) on banking transactions for non-filers. According to a report the State Bank has again asked the government to reconsider the in the budget for next fiscal year (2018-19), especially for vulnerable groups of population. It has specifically been argued that this levy of 4 percent on non-filers (now 6%) adversely affects the deposit base of banks and this was a matter of concern because Pakistan has one of the lowest saving rates as a percentage of GDP among regional countries and imposition of advance tax on banking transactions is further discouraging the public from using banking channels for their financial transactions.

Additionally, withholding tax on banking transactions is creating problems for the low income groups such as pensioners, retirees, farmers, students, etc, who fall below the taxable threshold limit yet they are charged the higher non-filer rate. Also, the salary of an employee is subject to deduction of tax at source and tax applicable on the entire salary is deducted by the employer for deposit in the government treasury. At the time of withdrawal of salary, tax is again imposed which amounts to double taxation and is grossly unfair. Considering all the factors, SBP has proposed to remove section 236 and if that is not possible, exemption should be provided to students, widows, pensioners, salaried class and farmers. In case this is not done, threshold of transfers/transactions should be increased to Rs 100,000.

We feel that the State Bank’s proposal on withholding tax on banking transactions is very genuine and needs to be considered seriously by the government. It also needs to be asserted that this is not the first time that such a proposal has been made. Both the banks and the business community have been arguing for the withdrawal of this levy but the government has refused to yield to the advice because of budgetary reasons and to punish the non-filers and force them to be “filers”.

The State Bank’s argument to abolish this levy altogether is based on very sound arguments. The saving rate in Pakistan’s economy is one of the lowest in the world and this is a great constraint for investment and growth. The government’s claim of raising the growth rate to above 5 percent on a sustainable basis in the coming years would turn out to be meaningless if saving/investment rate is not increased to nearly 20 percent or so. The levy of withholding tax on banking transactions certainly discourages the savers and is not helpful for economy. Also, it is a matter of concern that withholding tax is deducted on the withdrawal of deposits held by vulnerable sections of society like widows, pensioners and farmers which is unfair. They cannot claim credit for the deducted amount due to lack of education and knowledge of tax filing. Besides, they are least likely to file the claims for tax deduction due to the fear of harassment by the tax authorities. There could also be certain other negative side effects of the present policy of withholding tax. For instance, the size of cash/informal economy may increase while home remittances through banking channels could also be adversely affected to a certain extent. In our view, it would be much better to improve the efficiency of the tax collecting machinery and apprehend the tax evaders and punish them rather than rely on such minor and inequitable measures to increase the tax revenues of government. We know that this route is hard to tread but this is the only way to go forward in a fair manner and with the honesty of purpose.

So in nut shell Current government and all previous governments have remained focused on exploiting poor’s and saving elites to save their skin and corruption. From given chart one can see that lowest 30% of population has been made to pay more taxes on the basis of useable food and other items. Above going that is like keeping vehicles, Bungalows, heavy wealth does not matter as they depend on not on as essential but as discretion. For that the persons should pay high taxes but we see traders, real estate lords, prominent religious and political leaders, bureaucrats of each side are paying negligible tax. Even Parliament members fighting on TVs each day unanimously increase their tax free emoluments. For survival of Pakistan this need to be changed and all responsibles be made accountable.

Let us hope that in new budget due in June 2019 Sales tax be brought to 10%, Withholding tax on banking transactions be abolished and widening of tax net may be made by using NADRA data to raise tax from Feudal, big businessmen, all high officials, Doctors, Engineers, Real estate business owners, media owners. At least Pakistan requires Rs 5-7 trillion through taxes or 15% of tax to GDP ratio.

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