Twenty Five Years of Tax Reforms in Pakistan - Law - Lecture Slides, Slides of Law

Download Twenty Five Years of Tax Reforms in Pakistan - Law - Lecture Slides and more Slides Law in PDF only on Docsity! 1 Twenty Five Years of Tax Reforms in Pakistan Docsity.com Five Key Questions – Was there any pressure for tax reforms? – What was the process of tax reforms? – What Happened? How was the structure of tax system changed? – What impact did the reform have on the goals of revenue adequacy, economic efficiency, equity, and capacity to effectively administer the new tax laws? and – What general lessons can be distilled from country’s tax reform experience. [Tax reforms in Developing Countries by Prof Wayne Thirsk (1997)] 2 Docsity.com Inadequate Resource Mobilization Some of the Reasons • Modest Tax Effort – Stagnant and low Tax/GDP Ratio – developed economies have tax/GDP ratios in the range of 30% to 40%, developing economies in the range of 15% to 25%, and less developed economies below 15%; • The Performance of sub-national governments is less than satisfactory; • Fuel surcharges as a source of revenue – big question mark; • Complexity of Tax Laws, Rules and Procedures makes it difficult for the taxpayers to exactly know their tax obligations; • Domination of international trade and production related taxes curbing investment and economic activity – reducing the multiplier and accelerator effects; (continued) 5 Docsity.com Inadequate Resource Mobilization Some of the Reasons • Reliance on Indirect Taxes leading to regressive tax system and excess burden on final consumers; • Narrow tax base due to exemptions and concessions; • High tax rates and other distortions enticing tax evasion and tax avoidance; • Primitive and antiquated tax administration – persisting with manual record keeping with limited IT support ; • No scientific approach to handle tax matters – until recently virtually no research on critical areas such as tax incidence, enterprise taxation, tax-gap on sectoral basis etc.; and • No respect for the taxpayers. 6 Docsity.com Tax Policy & Administration (Prior to Reforms) o Major emphasis of tax policy during 1970s and most of 1980s was on increasing tax rates; o Tax was levied on ‘easy to tax’ areas – for example at production stage (excise) and at import stage (customs); o High protective barriers through tariff and para-tariffs (infant industry argument); o Seriously Regressive Sales Tax Structure; o Extremely high corporate rates – discrimination between different types of corporations. o Complexity of Laws & Procedures and arbitrariness in their application; Manual record keeping; Complete assessment and examination; Cylindrical tax administration setup. 7 Docsity.com What did they Say? • Report by the Resource Mobilization and Tax Reforms Commission (1994); – ‘The rates of taxes too high, withholding tax rates need rationalization, too many pending appeals and huge burden of litigation, orders are harsh and arbitrary, lack of transparency, no incentive for record keeping, tax education program not working, no research and policy planning, too many exemptions and narrow sales tax base’ 10 Docsity.com What did they Say? • Report on Income Tax Reforms (2001); – Purpose: To revise income tax law and move the system in the direction of uniformity of tax treatment, reducing dependence on withholding taxes, reviewing the appellate hierarchy and consolidating, simplifying and redrafting the statue. – Corner stones of new policy: universal self- assessment, no immunity from audit, efficient audit arrangement, and documentation. – Wide-ranging recommendations on rate structure, threshold, K-Gains tax, WHT, VC under self-assessment, minimizing tax exemptions, grievance redressal system, and compulsory record keeping. 11 Docsity.com What did they Say? • Task Force on Tax Administration (2001);The report has five volumes and covers finer details of the system to offer new insight for undertaking comprehensive reforms. Briefly the report recommended that: – The Organizational Structure of CBR and its field offices need fundamental changes, especially it encouraged creating separate slots for Member (Audit) and Member (Legal) within CBR, – There should be an improvement in the design of human resource management system, revision is desired in recruitment, training, compensation, evaluation and promotion system and salaries to aligned with market rates – There should be maximum autonomy to the tax administration, – Internal Audit Divisions be setup at Collectorates, – Regional Collectors be established, and – Taxpayers Assistance Units be setup to streamline the contact between taxpayers and tax officials. – The annual revenue targets should be realistic, – The report also required automation of the system to ensure quick data retrieval and use. 12 Docsity.com Tax Policy Reforms related to tax rates and basic threshold level – Transition from ST to GST • Zero-rating concept and Multiple Rate Structure – Decision to Rationalize and Reduce Tariff • Bound and Applied Tariff Structure -- consistency with WTO • Resolving Issue of Tariff Peaks and Escalation – Decision to reduce reliance on Excise Duties • Nevertheless, GST on Services in FED Mode – Change the composition of Direct Taxes – rate reduction and broadening of base • Change in Advance Tax Regime – Too quick and too much – fairly high cost (incomplete tax substitutibility) 15 Docsity.com CHANGES IN INCOME TAX REGIME • Tax-free Basic Threshold increased from – Rs. 40,000 – Rs. 50,000 in 1996-97 – Rs. 50,000 – Rs. 60,000 in 2001-02 – Rs. 60,000 – Rs. 80,000 in 2002-03 – Rs. 80,000 – Rs. 100,000 in 2003-04 – For salaried persons, it was further raised to Rs. 150,000 in 2006-07. – PCY in 99-00 Rs. 27,471, increased to Rs. 66,548 in 07-08 • Introduction of small company concept with low rate of 20% in FY 2005-06 • Special tax rates for salary and non salary taxpayers since 2006-07. 16 Docsity.com DOWNWARD REVISION IN CORPORATE RATE STRUCTURE (BANKING, PUBLIC AND PRIVATE COMPANIES) 17 Assessment Year Banking Company (%) Public Company (%) Private Company (%) 1992-93 66 44 55 2002-03 50 35 45 2003-04 47 35 43 2004-05 44 35 41 2005-06 41 35 39 2006-07 38 35 37 2007-08 35 35 35 Docsity.com Tariff Rationalization: Gradual Drifting Down of Tariff Rates to Lower Slabs CD Rates 1995-96 2000-01 2001-02 2003- 04 2004- 05 2005- 06 2006- 07 5 - - 10.0 18.1 24.4 38.6 38.9 10 3.3 26.0 31.8 27.0 23.1 13.7 12.8 15 6.8 7.7 - - - 3.0 5.9 20 2.5 - 16.9 14.1 14.5 12.9 13.4 25 10.7 40.9 - 12.9 34.0 24.3 20.8 30 0.3 0.0 38.7 24.3 - - - Sub Total 23.5 74.6 97.4 90.0 95.9 92.5 91.7 Others 76.5 25.4 2.6 10.0 4.1 7.5 8.3 Total 100 100 100 100 100 100 100 20 Docsity.com Reforms Related to Tax Administration & Procedures • In an effort to improve efficiency of workforce, the reforms in the area of tax administration took the following shape: – Transformation of FBR and Field Offices on Functional Lines and Reorganization field offices into two streams dealing with internal and international trade taxes – Simplification of Laws, Procedures, and Return Forms – Implementation of Self-assessment Scheme – Alternate Dispute Resolution System and Reduction in the Litigation Burden – Automation of Business Processes – HR Initiatives 21 Docsity.com OUTCOME OF REFORMS 22 Docsity.com Tax Structure of Pakistan: Significant Change in the Tax Mix during 1990-91 & 2006-07; not only between direct and indirect taxes but also within indirect taxes 1990-91 DT, 18.0FED, 20.9 CD, 45.7 GST, 15.4 2006-07 DT, 39.3 CD, 15.6 GST, 36.5 FED, 8.5 25 Docsity.com Recent Performance of FBR 0 200 400 600 800 1000 1200 19 90 -9 1 19 91 -9 2 19 92 -9 3 19 93 -9 4 19 94 -9 5 19 95 -9 6 19 96 -9 7 19 97 -9 8 19 98 -9 9 19 99 -0 0 20 00 -0 1 20 01 -0 2 20 02 -0 3 20 03 -0 4 20 04 -0 5 20 05 -0 6 20 06 -0 7 20 07 -0 8 BE RE C 26 Legend => BE: Budget Estimate; RE: Revised Estimate; C: Collection Docsity.com Recent Evaluation • The efficiency costs of tax system to the economy continue to be high – METRs vary drastically between sectors; • Frequent changes in tax legislation have made the overall tax structure incoherent and tax base narrow – tax reforms piecemeal disconnected no mechanism of ex ante evaluation of tax policy changes; • Significant horizontal inequities – similar income receives dissimilar tax treatment, issue further complicated by shoddy enforcement – compliant taxpayers bear the maximum burden, non-compliant taxpayers go scot-free; • Tax system remains overly complex due to preferential treatment, exemptions, and ad hoc changes in tax structure; • Tax administration remains weak – tax reliance on easy to tax handles rather than innovative thinking and application. 27 Docsity.com Narrow Tax Base: Sectoral Contribution in terms of Net Indirect Taxes • Nearly 80% of all indirect (net) taxes originate from only eighteen commodities and close to 70% from ten commodities; • About 50% of all indirect taxes during FY 07-08 generated by five commodities, namely POL, Telecom, Automobiles, Edible Oil, and Cigarettes and Tobacco; • POL including LPG has the highest contribution – nearly a quarter of all tax receipts; • The Telecom sector is the send largest contributor with close to 8% share in indirect taxes; • Cement industry paid 1.9% of indirect taxes; • The contribution of Sugar industry during Current fiscal year was only 1.7%; and • The share of Textile Sector was close to is 1% in gross terms but negative in net terms. 30 Docsity.com Narrow Tax Base: Sectoral Contribution in terms of Direct Taxes • The direct tax contribution of major sectors is also fairly skewed; • On the whole, Oil & Gas, Banks, and Telecom are the leading contributors to direct tax collection; • The share of oil and gas sector till February 2008 was close to 19%, followed by financial sector contribution of 16.2% and telecom 7.2%; • Within Manufacturing Sector, the contribution of leading sectors is as follows: – Fertilizer 1.8%; Misc. Manufacturing 1.7%; Textile 1.5%, Cooking Oil and Ghee 1%; Pharmaceuticals 1% etc; – The contribution of sugar and cement industries is 0.1% each! • Within services sector, after banks, commerce and trade, construction, and transportation sub-sectors have contributed towards direct taxes. All other services have negligible contribution. 31 Docsity.com Level of Compliance Income & Corporate Tax • Overall Position • NTN Holders: 2.75 million • NADRA Verified NTN Cases: 2.16 million • Returns Processed: 1.75 million • Share of Processed to Verified Cases: 81% • Corporate Position 2006 2007 • Verified NTN Cases: 32,742 37,189 • Returns Filed and Processed: 14,006 16,444 • Compliance: 42.8% 44.2% 32 Docsity.com What Needs to be Done? • The Tax/GDP ratio has to improve by at least 5 percentage points within next ten years to be among competing countries; Specifically, the overall Tax/GDP ratio has to increase from 10% to 15%, and Total Revenue to GDP ratio from 14% to 19%. 35 Docsity.com GAP Between Status Quo and Alternative Scenarios Tax/GDP Ratio under Alternative Scenarios 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 2005- 06 2006- 07 2007- 08 2008- 09 2009- 10 2010- 11 2011- 12 2012- 13 2013- 14 2014- 15 2015- 16 2016- 17 Tax/ GDP Ratio under AS Tax/GDP under SQ 36 Docsity.com Policy Prescription for 5% Increase! • Within the taxation system, the weaknesses in the two future taxes, namely income and corporate and GST, especially low level of compliance and narrowness of base, will have to be addressed through tax-gap analyses and microsimulation models; • Tax Policy reforms to emerge from further research on enterprise taxation and tax incidence; • (continued) 37 Docsity.com