Below mentioned two articles about "taxing in pakistan" are realy good to understand taxing in pakistan. These are published today "21 may 2006" in Dawn.
1.Taxing times

"By Afshan Subohi"
No one has ever heard of tax without tears. But when the burden is unevenly distributed, the woes of those who have to bear the brunt is understandable. In Pakistan just 1.3 million in a population of 150 million fall into the income tax net. The powerful feudals who sit in the government pay only a rupee for a thousand earned from farm income. So who is the most taxed? One, the well-documented corporate sector that has to forgo 57 per cent of gross income earned. Two, the salaried class that finds slabs raised and tax deducted at source. Finally, consider that as much as 85 per cent of the revenue is generated through indirect taxes that are universally believed to be regressive in nature. Stocks have dipped and the industrial wheel is grinding slowly, for everyone watches nervously as ahead are the:

In this pre-budget special report, the Dawn team has tried to demystify the taxation structure and put it in proper perspective. An attempt has been made to identify the loopholes and inconsistencies and reason out the high level of reluctance in society to fulfil the crucial national obligation.

KARACHI: The Finance Bill for the fiscal 2007 will be announced on June 5. Most people will yawn halfway through the long discourse by the minister, who will read out the real and imaginary ‘accomplishments’ of the government during the previous year. Of interest will be just be the last part of the budget that will spell out who is going to pay up how much more in taxation.

Even without having the faintest idea of whether the documents are ready, it is quite easy to tell that it would be all the same again. Agricultural income, to which landowners club together income from other sources, will remain out of the tax net. For all the rhetorics about documentation, the hidden income of services sector and apparently appearing to be small business shops that make millions in income will not be touched and most of the 30,000 unlisted private limited companies and partnership firms will be able to dodge the taxman.

The onus for increasing revenue for the government, which it will need to fill the gaping hole in the form of fiscal deficit, will fall on the corporate sector and the salaried class. But more than them, the common man on the street will have to bear the brunt under indirect taxes. But who cares for the common citizen?

President Musharraf says he does. He has declared he is determined to cut prices of kitchen items by 50 per cent. A noble wish, specially when, according to the government’s own figures, per capita income is around $800 or $2.2 a day. That is barely above the internationally accepted ‘poverty line’ of $2 a day. For the family of five that minimum converts to Rs18,000 a month. That calculation of per capita, like most other figures dished out by the government will remain a mystery. What to talk of rural Pakistan, even in large cities less than a quarter of the population can be earning an income of that kind. The galloping inflation at 10pc further erodes the purchasing power of the people and leaves them on the edge. Much time and energy of the majority are spent on making the ends meet.

The president’s statement can be a part of traditional pre-election rhetoric. Even if we believe he means business, the question then is how will the government go about cutting prices of essentials by half? Should we expect an ordinance directing that prices of all inventories of everyday use be slashed by 50 per cent? Who will bear the burden of such a move (retailers, suppliers, wholesalers, transporters, producers or the government)?

In a market economy this is not doable. But there is another way. Relief can be provided to distressed by reducing taxes (particularly indirect taxes) being borne by them. This will offer them an economic space without upsetting the apple cart.

Let the government take a revolutionary step to exempt from tax the income of people living on or below the poverty line. This will mean that families drawing monthly income of Rs18,000 or an annual income of Rs216,000 should be exempted.

As this will leave a bigger hole in the deficit, it can be filled by increasing the component of direct tax on higher income groups, plugging loopholes in taxation regime, making filing of returns simple, broadening the tax net and improving the service delivery. Improvement in the government’s own image as a people-friendly institution is necessary for commanding the moral authority to ask people for tax compliance. As long as people provide for their own security, dig wells or buy water, depend on private generators for uninterrupted power supply, the case for tax compliance will remain weak.

According to an intelligent estimate, salaried people earning less than or equivalent to Grade 17 civil servant pay two months’ salaries in taxes in a year. (This includes both income and all other indirect taxes on consumer items as well as levies that are charged with utility bills). This means that one sixth of earnings of salaried class is reclaimed by the government to support itself. Out of two months’ salary paid in taxes, a little less than a month’s salary is deducted at source as direct tax (income tax) while the balance is eaten up by indirect taxes (central excise duty, sales tax custom duties and government levies in petrol and bills of utilities).

Even non-salaried poor are not free riders and pay higher proportion of their income in taxes than do the elite in Pakistan. These people tend to consume all they earn. There is a tax on almost anything and everything they purchase. From matchboxes to edibles to soaps to utility bills to fares of transport, all contain a component of indirect taxes.

Incidentally, the country’s tax regime is such that tax incidence actually reduces as one moves up the social ladder. The more you earn the less you pay as proportion of your income. In an economy where income disparity is on the rise, this is hardly a desirable situation.

How the elite in Pakistan dodge the taxman with the help of tax consultants is a fine art in itself. Complexities in taxation regime and thousands of amendments introduced is mind-boggling. This, however, does ensure extra scope and additional income for tax practitioners in the country. Tax avoidance, however, is not limited to Pakistan. It is an international practice. It is prevalent even in most advanced societies of the world. The tax season is colder than coldest winters in the West.

Then there are tax evaders who abhor documentation and resist any attempt by the government to this end. It is not just the socially undesirable elements that fall in this category, tax evaders include self-employed citizens from small shop owners to reputed doctors, lawyers, traders, teachers, engineers and consultants of all shades and variety. They declare much less than what they earn and there is no way to know their actual income as it is not documented.

In Pakistan, agricultural income is out of the tax net. Every time the issue is brought up in the parliament or media, the subject is brushed aside as a provincial subject. The income tax exemption on agriculture tempt people in the top 20 per cent income bracket to buy agricultural land, set up factories and club income from all sources together and show it as the exempted farm income.

In contrast to agriculture, the corporate Pakistan is taxed at such a high rate that its expansion capacity is impaired and competitive edge is blunted. According to a World Bank Group ‘Doing Business’ that ranks economies according to their business friendliness on the basis of some standard indicators, Pakistan is ranked 133rd on a scale of 155 countries, reviewed on the basis of data provided by those countries. According to the report on Pakistan the tax payable by the corporate Pakistan is high at 57 per cent of the gross profit. In India it is 43.2pc and in US it is 21.5pc.

No wonder that businessmen are shy of putting up factories. There are many factors but the high corporate tax rate must also be a component of higher cost of production in Pakistan. Besides, if tax burden is evenly spread, it is likely to cause slightly less hurt and be paid without shedding much tears.

2.One per cent of population pays income tax




By Parvaiz Ishfaq Rana

KARACHI: Successive governments have failed to broaden the tax net as they lacked political will to take measures which could bring all categories of taxable income into the ambit of tax laws. As a result of this, tax rates could not be rationalised and the burden of the country with 150 million people is on the shoulders of 1.3 million taxpayers.

As long as the number of taxpayers remains low the tax-to-GDP ration will also keep at a dismal level and no government will be in a position to provide matching infrastructure and utilities required by the private sector in the fast process of industrialisation and high economic growth. This will ultimately retard the economic growth of the country and aggravate the unemployment situation.

It is a proven theory that the bigger the tax base the lesser the rates, but in our country the number of taxpayers (those who file returns) has remained extremely low. But a question arises as to why the figure still remains a little over one million despite the fact that there has been a conspicuous growth and prosperity in particular segments of the society.

The urban society has grown at a fast pace where most modern facilities are available and people no more live a simple life as they use modern electronic gadgets such as split airconditioners, household equipment, TV sets, power generators, cars, cellphones etc. In short, a larger segment of the society is presently having a higher living standard than what it had been two or three decades ago.

Similarly, it is an admitted fact that agriculture is by far the largest sector of the economy, with a share of a quarter of the gross domestic product (GDP). Farm tax has failed to contribute to the annual nominal tax targets of Rs10 billion. It is a major hurdle in widening the tax net and in ensuring equity, as almost the entire income tax collection is shared by trade, industry and salaried class.

Nevertheless, tax consultants are of the view that tax base could be broadened without much hassle if there is commitment to do so on the part of the government. All Pakistan Tax Bar Association (APTBA) President Younus Rizwani Sheikh told Dawn that if legislation was passed to make the National Tax Number (NTN) certificate mandatory for different documents the number of NTN holders would multiply within a short period and this would ultimately increase the number of taxpayers in the country.

He suggested that presently property deals worth billions of rupees were conducted with no questions asked and the least the government could do was to make it mandatory upon buyers and sellers to have NTN for the execution of these documents.

Similarly, he said, trading in shares worth millions of rupees and transfer of vehicles took place every day but all these transactions were carried out without having NTN. If the NTN requirement was made mandatory it would help to not only document the economy but also enhance the number of taxpayers in the shortest possible time.

Mr Sheikh pointed out that presently bank documents, such as credit, debit and ATM cards, as well as travel documents were processed and accepted without the NTN and if the government made its requirement mandatory there would be sharp rise in the number of taxpayers.

The APTBA chief said it was shocking when one learnt that such amendments were made to the tax law wherein certain categories of taxpayers were excluded from mandatory filing of tax returns. Citing an example, he said Clause 14(1)(b) was substituted vide Finance Act 2005 and the following categories were excluded from mandatory filing of returns: owners of motor vehicles, telephone and mobile phone subscribers, those who undertook foreign travel other than Haj, Umrah or Ziarat and members of clubs.

There is a greater need to distinguish between taxpayers and non-taxpayers and in the past there were certain tax concessions favouring taxpayers.

The APTBA chief said that under Capital Value Tax (CVT) taxpayers were charged less tax on purchase of motor vehicles whereas non-taxpayers were asked to pay a higher tax.

However, through an amendment to Finance Act 1997, both the taxpayers and non-taxpayers were brought at par by fixing the same tax rate on purchase of motor vehicles. This gave strength to the general notion that those who evaded tax did well, those who stayed out of the tax net did better and those who paid tax were ‘fools’.

President of the Income Tax Bar Association, Karachi, Ali A. Rahim, raised a question that when there was a confirmed and authentic number of commercial users of electricity and gas in the country then why they continued to stay out of the ambit of tax net.

He said that according to Wapda and the KESC there were around 6.4 million electric power users in the commercial sector and around 3.6 million gas users. However, the official figures showed that only 1.2 million were taxpayers or NTN holders in the country. Now who was to be blamed for such a situation where even documented economy was not being brought under the tax net?

Mr Rahim said that on the other hand there was a huge undocumented sector of the economy, particularly relating to the commercial sector. A sizeable portion of public funds was siphoned off through corruption, fraud and embezzlement. The unaccounted funds found their way into such activities and transactions inside and outside the country which were not being taxed due to lack of information and an effective mechanism of tracing the incomes and expenditures.

Citing an example, he said that in Karachi Saddar area alone the estimated number of shopkeepers was around 40,000 but one wondered that how many of them were taxpayers or even holders of NTN. Furthermore, he said, there were a large number of plazas and shopping malls in the country with even more coming up but one wondered where the tax collectors were?

This is the main reason for the inelasticity of tax collection as it does not increase proportionately to the growth of the GDP, which for the FY05 was 8.4 per cent while the tax-to-GDP ratio showed negative growth.

Since there is a major flaw in the tax policy and no government has the political will and strength to correct the situation by reducing the ratio of indirect taxes and increasing direct taxes for revenue collection, under the present system the burden of taxes is not shared proportionately.

This means that a person living in a far-flung area and earning less than a dollar per day, which makes him to be living below poverty level as per World Bank rating, becomes a taxpayer when he uses anything on which there is an indirect tax.

Consequently, there is an urgent need to re-structure taxes, remove distortions and ensure that due taxes are collected from all segments of the society and incomes. Only then can the tax rates be rationalised. If the present taxation system continues, it will make the poor become poorer and the rich even richer.

Who pays how much tax?

For reasons best known to the country’s ruling elite, the names and sums of money paid by taxpayers have forever remained a well guarded secret. It should not be so. In the era of transparency and full disclosure, the public would want to know how much money in taxes is contributed particularly by those who hold high public offices; politicians; powerful feudals and agriculturists; business tycoons and deep pocket corporate bosses. An easily accessible web-site should show the numbers, which would enable citizens to judge if there is a co-relation between the income that people disclose and their lavish life style.