FISCAL REFORMSIN PAKISTAN*

ByDr. 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. FEDERALIncome 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,

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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

PROVINCIALTaxes• AIT, Land Revenue, Stamp Duty, Motor Vehicle Tax, Property Tax, Excises• Sales Tax on Services

TAX-TO-GDP RATIO OF PAKISTAN2000-01 To 2009-10

(% of GDP)

Year 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* On petroleum products and natural gasSource: Ministry of Finance, Government of Pakistan.

THE IMBALANCED SECTORAL DISTRIBUTIONOF 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 1.000Source: Ministry of Finance, Fiscal Policy Statement.

WHY THE TAX-TO-GDP RATIODID 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 DIDNOT 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 SurchargesThe 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 EvidenceSales Tax• Enhancement in Rate from 15% to 17%Excise Duty• Introduction of Across-the-Board Special Excise Duty at 1%

PROPOSED REFORMSIntroduction 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 REFORMSProvincial 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-to-GDP ratio by 3½ percentage points by 2012-13.

Thank You.