Taxation System Federal taxes in Pakistan like most of the taxation systems in the world are classified into

two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below: Direct Taxes Direct taxes primarily comprise income tax, alongwith 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: 1.Salaries 2.Interestonsecurities; 3.Income from property; 4.Income from business or professions 5.Capital gains; and 6. Income from other sources. Personal Tax All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates randing from 10 to 35 per cent. Tax on Companies All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and exemptions related to industry, location, exports, etc. Inter-Corporate Dividend Tax Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inetrcorporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all noncompany shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income. Treatment of Dividend Income Dividend income received as below enjoys tax exemption, provided it does not exceed Rs. 10,000/-. 1. Dividend received by non-resident from the state enterprises Mutual Fund set by the Investment Corporation of Pakistan.

2. Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue.

Unilateral Relief A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower. Agreement for avoidance of double taxation The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countries including almost all the developed countries of the world. These agreements lay down the ceilings on tax rates applicable to different types of income arising in Pakistan. They also lay down some basic principles of taxation which cannot be modified unilaterally. The list of countries with which Pakistan has concluded tax treaties is given below: Austria China Finland Indonesia Japan Malta Poland Sri Lanka Turkey U.S.A Customs Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on Belgium Denmark Germany Iran South Korea Mauritius Romania Sweden Tunisia Bangladesh Egypt Greece Ireland Lebanon Saudi Arabia Switzerland Turkmenistan Kazakistan Canada France India Italy Libya Singapore Thailand U.K. U.A.E.

luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lower than those on consumer goods. Central Excise Central Excise duties are leviable on a limited number of goods produced or manufactured, and services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or retail price. Some items are, however, chargeable to duty on the basis of weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding system which is being used all over the world. All exports are exempted from Central Excise Duty.

Sales Tax Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on: all goods imported into Pakistan, payable by the importers; all supplies made in Pakistan by a registered person in the course of furtherance of any business carried on by him; there ia an in-built system of input tax adjustment and a registered person can make adjustment of tax paid at earlier stages against the tax payable by him on his supplies. Thus the tax paid at any stage does not exceed 15% of the total sales price of the supplies;

Tax Jurisdiction 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 onground 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 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 ofcommercial 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. Wealth Tax 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. Schedular Tax 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 not exceed Rs. 100,000

10%

Where the total income exceeds Rs.100,000 but does not exceed Rs. 200,000

Rs. 10,000 plus 20% of the amount exceeding Rs.100,000

Where the total income exceeds Rs. 200,000 but does not exceed Rs. 300,000

Rs. 30,000 plus 30% of the amount exceeding Rs. 200,000

Where the total income exceeds Rs. 300,000

Rs. 60,000 plus 35% of the

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%. Non Residents 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 1994-95 1995-96 1996-97 1997-98

64 62 60 58 55

42 39 36 33 30

52 49 46 43 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. Personnel Training 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 IT30 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. Bibliography for: "Taxation system of Pakistan: structure and trends" Ahmed Khan "Taxation system of Pakistan: structure and trends". Economic Review.

Taxation Structure Task

by Mohammed Ashraf | Published on 5/3/2005 The Central Board of Revenue (CBR) has made a Task Force on improving taxation structure. The prime goal seems to broaden the tax base apart from increased revenue collection, educated taxpayer, improved tax-GDP ratio, improved tax system and decreased size of parallel economy. This article is an endeavour to have a birds eye view over the existing tax culture of Pakistan in the light of tax structure including impediments in broadening the tax base and suggestions for improvement. Tax Culture In terms of taxation, the Pakistani society can be categorized as the ignorant, the tax literate and the corrupt. I used to think of killing the tax advisor of my company, who used to keep quoting my company owner each of my mistakes, the most famous case law ignorance of law is no excuse and that case law shambles my job. When Allah [SWT] gave me some knowledge about taxation and at one instance, I quoted the same case law to my father I got a slap in return for making him afraid like the taxman. During the practice period of decade and half, I found a lot of people coming with the problem of taxation after being caught on the occurrence of an event and the simplest answer after sympathising with them is the above mentioned case law. After listening to that case law, they normally looks at me as something evil or a brother of taxman but thats the truth. I though hard about such attitude of the people and found some reasons. I think the reasons of such ignorant attitude are harsh attitudes of taxmen, low literacy rate, lack of tax education, lack of intention to pay tax, afraid of coming into tax net,

uncompetitive corporate tax rates, mishandled personal tax structure and the utilization of tax money. The tax literate societyis the most horrified portion of our society. The core reason is that the law has equated tax planning with the terms 'avoidance' and, by extension, evasion; however, I agree that there are some forms of tax avoidance as "improper and immoral". CBR needs to be well-advised to remember the crucial difference between tax avoidance and tax evasion. Tax avoidance involves using the tax rules to one's own legitimate advantage. By contrast, tax evasion is the illegal reduction of one's tax liability, for example by understating income or over-claiming expenses. CBR people believe that accountants would have much to answer for if they failed to ensure that clients did not pay more tax than necessary being the culprit of nourishing the tax literate society. CBR may surely agree over the fact that as professional advisers, accountants should advise clients to claim available depreciation and initial allowances in order to maximise in-year loss relief, to bring forward unadjusted depreciation or initial expenditure for optimisation and, where appropriate, to incorporate to take advantage of lower rates of Taxes and exemptions available? This is entirely consistent with the function of the tax system to provide incentives to businesses; the reality is that the vast majority of accountants do their tax planning in a transparent, legitimate fashion and have little appetite or time to devise complex tax avoidance schemes. CBR is not correct to suggest that we are operating in an environment rich in tax-avoidance, where legislation is filled with "loopholes and errors". If anything, the problem lies in the fact that the law is so intricate that it leads directly to the situation where the average taxpayer frequently over-pays or under-pays tax and misses deadlines for filing and for making elections for specific reliefs. The sheer complexity of the tax system actually helps the CBR to pocket untold hundreds of millions in tax receipts, interest payments and penalties. In the complex world of tax, the overwhelming majority of businesses are trying to operate fully within the law. Few have bad intentions - all they want to do is get their tax calculations correct, pay the right amount of tax on time and get on with running their businesses. The problem is that CBR seems to see tax avoidance everywhere and each business has to waste a huge amount of time defending itself in the face of often commercially ignorant CBR probes. It should also be borne in mind that, in the current challenging economic environment, businesses do not even get the chance to utilise all their tax depreciation allowances, because they have insufficient profits. They do not manage to offset all their group or single entity losses and they certainly cannot imagine entering into any arrangements or schemes to reduce their tax liabilities. It is not even a case of people who live in glass houses throwing stones. It is more the case that these people do not recognise that they live in a glass house. The danger in the Government's fight against fraud and its aim to ensure that everyone pays their "fair share"

of tax, is that the crackdown will fail to hit the correct targets. There is no question that tax evasion is wrong - apart from being illegal - and that the Government should focus its efforts on its prevention. Any part of the additional CBR funding which clamps down on such behaviour is money well spent. I support any measures which prevent or combat fraud, but I am, however, concerned that tax inspectors looking for soft targets may concentrate on small businesses and individuals, rather than tackling serious and deliberate fraud. Furthermore, if the authorities try to erode the ability of firms to plan their tax affairs effectively under the law, this will be to the serious detriment of businesses and the economy and, ultimately, against the interests of Pakistan. However, tax literate society has remembered the following. Maktab-e-tax ka dastoor nirala daikha Usko appealoo sai chutti na mili jis nai sabaq yaad kiya [School of tax has a unique rule. One who learns the lesson used not to get the leave from the appeals] Corruption has pervaded all sectors of our society. But in today's business environment, the implications of corruption at a local level reach far beyond national boundaries. Corruption has become a major concern. The impact of corruption on our society cannot be overstated. It increases the risks and costs of business, damages investor confidence, hampers economic development, and reduces country credit ratings. It brings the integrity of professions and of business into question. It deprives government and regulators of credibility and weakens the forces of law and order. In such a scenario, public morale inevitably suffers and social hardship can be the inevitable result. Everyone has a moral duty to fight corruption. But no one can wage this battle alone. Governments must commit themselves to taking the first step in introducing a solid legislative and regulatory framework proscribing corrupt acts, dealing firmly with all who commit them, and protecting those who "blow the whistle" from the dangers of retaliatory action. What is corruption? Bribery, fraud, illegal payments, money laundering, and smuggling - all these come to mind as obvious examples. But corruption does not always involve money: it can present itself in the guise of special favours or influence. In today's complex and rapidly changing environment, the potential variations of corruption are as many as there are criminal minds to devise them. An all-purpose rulebook is inconceivable: the fight against corruption must take the broadest possible approach if it is to have real impact. As far as CBR is concerned, it failed to take advantage of a most famous case law of post second world war in relation to crime and corruption. During the Second World War a wine seller sold the wines to the enemy forces. At the end, a case of treason has been filed against the wine seller for selling the wine. The evidence was concrete and the judge was about to penalize the culprit, suddenly, the Inland Revenue filed a claim that the profits of the wine seller needs to be calculated in order to collect the tax. The core reason is that

income tax needs to be paid even over the illegal business profits but such payments do not legalize the business. CBR has tilled now failed to work over this area. SUGGESTION FOR IMPROVEMENT As stated earlier, I think the reasons of non-payment of taxes and ignorant attitude are harsh attitude of taxman, literacy rate and lack of tax education, no intention to pay tax from the earnings, afraid of coming into tax net, loopholes tax legislation, competitive corporate tax rate under global tax competition, personal income tax structure and utilization of tax money. CBR is now improving in the area of harsh attitude of taxman only in relation to Income Tax owing to the scheme of Income Tax Ordinance, 2001. However, CBR is now moving towards Sales Tax and the most important step in this regard is the suspension of Sales Tax Audit for six months but this is not a long term solution. Legislators need to improve the basic structure of Sales Tax Act, 1990 to make it taxpayer friendly. Every problem in the Sales Tax Act, 1990 is solved either through a Circular or SRO which complicates the issue. It is suggested that the Sales Tax Act, 1990 need to be revamped right from the scratch bearing the existing Sales Tax Structure, Problems, Organisational Structure of Sales Tax Department, Long/Short term Macro and Micro Economic policies in mind. In furtherance, CBR need to work on Excise Tax and this requires a clear indication from the government either to abolish it and replace it with Sales tax or Continue with Excise Tax. Literacy rate and tax education are mutually exclusive in the case of small cities and towns. The problem is not mutually exclusive in the case of main cities like Karachi, Lahore, Peshawar, Islamabad etc. This situation requires two different strategies. In the small towns and cities, Government needs to increase the literacy rate as this is something beyond the ambit of CBR, however, in major cities CBR needs to increase the tax literacy rate. This does not only involve creation of taxpayer facilitation centre and the advertisement in the newspapers and television but something more than that like TV dramas, training by CBR to taxpayer Compliance expected by CBR, Avoid paying additional taxes, Be Safe and Secure in terms of Inadmissible taxes, The Direct/Indirect Tax Regime etc. TV Drama may include normal taxation problems, common misconceptions of peoples, problems normally faced by the ordinary taxpayers etc. The training will serve two purposes for the tax management purposes. CBR will get first hand information from the taxpayer and their representatives to solve their problem without requiring a middle man. In future, there will be no need to revamp the law after a span of long time as this process will continue to educate the two actors of a process Taxman and Taxpayer. Another most common problem is the lack of intention to pay taxes. This lack of intention is based on the loophole in the taxation laws. This argument is based on the concept that when a law requires a person to get itself registered with the respective tax authority. For instance, there is no requirement in Income Tax Ordinance, 2001 for registration of a person under the law; however, the requirement is for filing of Income Tax Return. The Taxation Structure Task committee needs to look at the most common problem, from CBR

point of view, of ascertaining the point of time of registration. I would suggest basis year rule of UK for improving the tax year concept and VATA 1994 for registration under Sales Tax law on advance stock basis at the time of induction of capital. The most common problem of CBR is that people are afraid of coming into the tax net owing to variety of reasons. People are afraid about their past, this is their prime concern, as they do not know what will be going to happen with them about their past. However, a number of immunity schemes had been introduced for the taxpayers in the past but nothing specially have been planned for bringing the new taxpayers into the tax net. Taxation administrative and legislative loopholes are another grey area and much had been written by the experts over legislative aspects; hence, I am confining this to administrative aspect. Suppose, a person imports some goods and sells the same without altering its basics of the goods, that is, Import trading. Said person files his sales tax return and statement under section 115(4). The Sales tax department match the data with the import data input at the custom stage and get the closing stock figure by reconciling the same with the goods imported automatically. The Income Tax department verifies the statement under section with the custom stage input and sales tax input through an online verification on its integrated computer system on WAN. Such a setup will serve as deterrent to the fraudulent aspects apart from the fact that less botheration for the taxpayers also. I will discuss this idea in greater depth in my next article. Tax utilization is the most critical area which needs some thought with the passage of time. This aspect has two aspects, micro and macro level. From micro aspect, what the benefits existing taxpayers is getting? And what the benefits will a prospective taxpayer may get? These two questions need to be answered in order to increase the tax GDP ratio. From macro aspect, what is the formula and basis of utilization of tax money? Is the Government authorized to use the money for debt servicing of the past loan or it needs to be utilized for the benefits of the citizens These key question are some sort of policy decisions which needs to be taken at the strategic governmental level not at tactical level CBR. Tax structure task committee may submit these queries as part of their recommendation. Governments must recognise that corporation tax rates must be internationally competitive if they want to attract and retain companies and jobs. But cutting tax rates is an ongoing process in order to stay competitive. Pakistans corporation tax rates are much higher than the OECD averages. It is worthwhile here to note that between 1996 and 2003, average corporate tax rates in EU member states fell from 39% to 31.68%, and in OECD countries from 37.5% to 30.79%. This overview of trends in corporate tax rates around the world suggests that how countries are seeking to provide a competitive environment for business. In order to gain the advantage of geo strategic location of Pakistan, committee must suggest a drastic corporate tax rate reduction pre-requisite for seeking the requisite increase in share of international and European corporate headquarters. Middle and low income earners in particular have been hit hard over the past few years by the introduction of the goods and services tax (GST) and by bracket creep, as demonstrated

by a recent OECD report into the taxation on wages. CBR thinks that any new tax credit or deduction from taxable income is a direct loss to the revenue which is just one side of the mirror. This was in part aimed at stimulating the economy by encouraging higher consumer spending. Committee should suggest the induction of medical expense without ceiling and re-introduction of books and children education allowance. To help pay for any reduction in income tax rates for middle and low income earners, the government should firstly examine whether there are inefficiencies in the way it collects tax and monitors compliance. A thorough investigation into how efficient the government really is in collecting tax and identifying tax evaders would no doubt uncover significant additional revenue. Middle and low income earners should be the ones to benefit from any additional tax revenue identified through this process.