TERM PAPER

TAX STRUCTURE OF PAKISTAN

Instructor:

Honorable Sir: Lecturer Atif Khan jadoon

Submitted by:

Muhammad Mubashir Khan

Roll no: 42

University of the Punjab, Lahore New Campus

Department Of Economics

Post Graduate Diploma in Applied Economics

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Acknowledgement:

I would like to gratitude to respected teacher Mr. Atif Khan Jadoon without whom this research would just be a dream. He is really energetic and kind teacher who always helped and teach me that how to do this work and make me able to conduct a detailed research which has also increased my knowledge. Due to his extensive guidance and enlightening meetings, training and help I became able to conduct this research and produce this document. He teaches us in detail on each and every point with his comprehensive valuable knowledge.

I also thank all those people who helped me in any way during doing my term paper.

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TABLE OF CONTENT: Page No

I. Abstract 3

II. Introduction 3

III. Definition 5

IV. Review of literature 8

V. History of taxes 10

VI. Broad features of the taxation structure of the Pakistan 13

VII. Types of taxes 16

VIII. Positive and negative aspects of direct and indirect taxes 19

IX. Maxims of taxes 21

X. Agreements for avoidance of double taxation 22

XI. Views on taxes: is it fair or unfair? 25

XII. Conclusion 29

XIII. References 30

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Abstract:

This paper studies the tax structure of Pakistan. This study shows a brief introduction about tax system of Pakistan, introduction include the definition of tax and a table of fiscal indicators of consolidated federal and provincial governments (as percent of GDP). Later it shows the literature review about the tax system and their effect on GDP of the country this is different from countries with advanced taxation systems mainly relying on allowances followed by tax rate and exemptions. Then it include a brief history of tax system of Pakistan, broad features of the taxation structure of the Pakistan in which it include a table of federal tax collections over different years in Pakistan, this study also include a survey on people perception of taxes in Pakistan.

Introduction:

Pakistan is the sixteen largest country of the world with a population of approximately 184.35 million despite its large human resources, Pakistan is an underdeveloped country with GDP per capita of $1,256.8 in 2011-12*.Collection of taxes is an important aspect of Government policies on economy.

Since ancient times, government has been collecting revenues from their population in different forms. It was necessary in order to meet the different expenditures which the government had to incur. The nature and the extent of expenditures incurred by the governments have under gone a lot of changes in the modern world. New sources of collecting the necessary amounts have also been found. Now a state has to spend a lot of money on its defense requirements. Developments expenditures and expenditures on general public services (schools, hospitals, etc.) have also been increased manifold. New sources of receiving the necessary amounts have also emerged. For example now a country can receive some resources from another country, or an international organization either as loans or as aids. However, collecting the amounts from its own population still remains as a major and popular source. A government tries to generate internal revenue from different sources. The stability of any state and its economic structure is strongly correlated with the shape and framework of its taxation system.

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In our country also, like all other countries of the world, the government receive different types of taxes in order to finance its day to day expenses, defense requirements and development projects. These taxes include Customs and Exercise duties, Income tax, Sales tax, etc. The government has recently introduced the zakat and Usher system, the income from which is spent only according to the Quranic injunctions.

The federal board of revenue is the highest administrative authority of the federal government for the purpose of tax collection in the country. It controls the whole working of tax machinery and matters regarding employees of tax department in the country. The Federal Government appoints the members and the chairman of the Federal Board of Revenue.

The Income tax and the Sale tax are administered by the board through Chief Commissioners Inland Revenue, Assistant Commissioners Inland Revenue, and Officers of Inland Revenue and Inspectors Inland Revenue. The Deputy Commissioners Inland Revenue is responsible for ascertaining the amounts due from the taxpayers in the areas assigned to them.

Responsibility for administering the customs and Exercise duties has been assigned by the Board to the collectors of Customs and Central Exercise. The Assistant Collectors and Superintendents assist Collectors. There are separate administrative organizations for land customs and sea customs.

Taxes are broadly classified into two categories viz. direct taxes and indirect taxes. Whether these are collected by the Federal Government or the Provincial Government, the division broadly remains the same. These are both income based and / or asset ownership based, depending upon the nature and type of the levy. Direct taxes are those where the incidence is borne by the person from whom the tax is collected whereas, in the case of indirect taxes, the person from whom the tax is collected acts only as an agent/intermediary and the incidence of tax is borne by another person (from whom the tax is eventually collected by the agent in the due course and deposited in the government treasury). Few examples of direct taxes, collected by the Federal Government, are Income Tax, Wealth Tax, and Capital Value Tax. Urban Immoveable Property Tax Professional Tax and Motor Vehicle Tax etc. are types of direct taxes collected by the respective Provincial Governments.

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Definition:

The tax revenue is the most important source of public revenue. A tax is a compulsory payment levied by the government on individuals or companies to meet the expenditure which is required for public welfare.

(By Adam Smith)

"A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the taxpayer in return, and not imposed as penalty for any legal offence."

(According to Hugh Dalton)

Pakistan’s tax system has undergone profound changes since the nineties, butDespite these changes tax revenue in relation to GDP has remained remarkably stable over the last two decades. Federal tax revenue as a percent of GDP during the last two decades averaged around 13 percent never falling below 10 percent of GDP (International Monetary Fund, 2001). The overall revenues still appear to be dominated by revenues collected by the federal government and these mainly comprise direct taxes (Income and corporation tax) and indirect taxes (custom duties, sales tax and excise duties).

The purpose of this chapter is to analyze the structure of the country’s federalTaxation in conjunction with the reform process, also called the first generationOf tax reforms, that took place during the 90s in Pakistan. The main focus ofThis reform process was to impose direct taxes as well as replace tradeRevenues with GST/VAT revenues. This process approximately ended in 2001.And shortly after, Pakistan initiated the second generation of tax reformsWhich are purely administrative in nature and are not the focus of this study?

There is a table which shows the fiscal indicators of consolidated federal and provincial governments (as percent of GDP) over different years. In 2006 the real GDP growth is maximum which 6.6% and in this year total revenue of the government is 14.9%, in which tax revenue is 10.2% and non-tax revenue is 4.7%.

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Fiscal Indicators of Consolidated Federal and Provincial Governments (as Percent of GDP)

yearsGDP real Growth

Over all Fiscal Deficit

Expenditures RevenuesTotal Current Dev. Total

Rev.Tax Non-

Tax /1

1997-98 3.5 7.7 23.7 19.8 3.9 16 13.2 2.81998-99 4.2 6.1 22.0 18.6 3.3 15.9 13.3 2.71999-00 3.9 5.4 18.8 16.4 2.5 13.4 10.6 2.82000-01 1.8 4.3 17.4 15.3 2.1 13.1 10.5 2.62001-02 3.1 4.3 18.3 15.7 2.8 14.0 10.7 3.32002-03 4.7 3.7 18.5 16.2 2.2 14.8 11.4 3.42003-04 4.5 2.4 16.7 13.5 3.1 14.3 11.0 3.32004-05 5.5 3.3 17.2 13.3 3.9 13.8 10.1 3.72005-06 6.1 4.3 18.5 13.6 4.8 14.2 10.6 3.62006-07 6.6 4.2 19.1 14.9 4.2 14.9 10.2 4.72007-08 5.0 7.3 21.4 17.4 4.2 14.1 9.9 4.22008-09 0.4 5.2 19.2 15.5 3.6 14.0 9.1 4.92009-10 2.6 6.2 20.2 16.7 3.5 14.0 10.1 3.9

2010-11 3.7 6.5 18.9 15.9 2.8 12.4 9.3 3.0

2011-12 4.4 6.8 19.6 15.5 3.6 12.8 10.3 2.4

2012-13 3.6* 4.7 19.0 14.6 4.4 14.3 11.1 3.2*: Real GDP estimated for 2012-2013

Source: Economic Survey of Pakistan (various years).

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1998199920002001200220032004200520062007200820092010201120120

2

4

6

8

10

12

14

16

18

Column22.813.2

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Literature review:

Several empirical studies have been undertaken to assess tax performance across different countries. Most of the studies have used tax share in GNP/GDP or tax ratio as the dependent variable with different combinations of explanatory variables.

Ahmad and Mohammad (2010) examined the determinants of tax buoyancy of 25 developing countries by using the cross section data for the year 1998 to 2008 and pooled least square method for result analysis. For agriculture sector it showed insignificant effect and for services sector it showed positive and significant effect instead of past insignificant result of many researches. Monetization and budget deficit showed positive influence while growth in grants showed negative impact on tax buoyancy.

Fauzia (2001) examines the elasticity and buoyancy of major taxes in Pakistan over the period 1981-2001 by using the Chain Indexing Technique. She used the least square method for measuring the elasticity. Result reveals that estimates of elasticity and buoyancy are higher for direct taxes. However, customs and excise duties appear to be relatively rigid, due to which the overall tax elasticity is also low. Further, the estimates of buoyancy are higher than their corresponding elasticity’s for all the taxes, confirming thereof that most of the growth in revenues has been achieved due to enhanced tax rates and broadened tax bases instead of automatic growth.

VAQAR and Cathal (2006) studied Redistributive effect of personal income taxation in Pakistan in (2002-2005). They took the data of these years (2002-2005). They decomposed the overall tax system in order to evaluate the contribution of rate, allowances, deductions, exemptions and credits. They used the regression model to compute the income to be taxed. The results show that the overall personal income tax structure seems progressive for system and redistributive. Income Tax Ordinance resulted in greater redistribution. The redistributive effect increases as we move from 2002 to 2005 tax assessment. Deductions for salaried tax payers contribute the most towards progressivity. This is different from countries with advanced taxation systems relying mainly on allowances followed by tax rate and exemptions. Given the increasing pre-tax

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income gap, reforms in taxation cannot be entirely relied upon for a reduction in inequality in the society.

Akbar and Ahmed (1997) examined the elasticity and buoyancy of various taxes and expenditures of Federal Government during the period 1973-1990 by using the Presto methodology (1962). They found that the overall elasticity and buoyancy of taxes were low because of the low elasticity and buoyancy of customs duty and excise duty. The elasticity and buoyancy were found to be relatively higher for sales tax followed by income taxes.

Gillani (1986) estimated the elasticity and buoyancy of Pakistan’s federal tax system for the years 1971-72 to 1982-83 by using the Divisia Index Method (DIM) and the Proportional Adjustment Method (PAM) and found different results. Her study showed that, with a few exceptions, almost all the growth in various taxes stemmed from endogenous factors and was not due to the discretionary changes.

Jetton (1978) studied the direct and indirect taxes of Pakistan and found direct and indirect taxes of Pakistan very inelastic over the period 1960-61 to 1975-76. Among indirect taxes, customs duties appeared to be more elastic, followed by import duties, excise duties and sales taxes respectively. The main reason for the low elasticity was found to be the low tax-to-base elasticity’s.

Tierra (2002) examined the tax system and tax structure of Uganda to investigate the factors effecting tax revenue in the country. He used the time series data of the period 1970 to 2000 and estimated a model. His results showed that agriculture ratio, population density and tax evasion affect all type of taxes. GDP per capita showed the surprising negative sign. Tax evasion and openness (as measured by import ratio) showed the significant negative impact. Aid variable showed positive sign since aid in Uganda always supported imports especially raw material so not surprisingly.

Ahsan and Waqar (2005) examined the tax share in GDP for developed and developing countries for 1979-2002 and found the negative and significant relation of agriculture share, GDP per capita, and population growth to the tax ratio while trade share in GDP has positive and significant relation but corruption has negative and insignificant relation.

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History of tax structure in Pakistan:

In Undivided India (now consisting of Pakistan, Bangladesh and India) income tax was introduced for the first time in the year 1860, and exactly the same pattern was followed that was prevailing in those days in the United Kingdom. This Act came into force on 31 July 1860 and continued for only 5 year up to 1 August 1865 when it was completely withdrawn. A major characteristic of this act was the agriculture income from land, above the rental value of Rs.600 per annum, was taxable.

After Independence from British rule on 14 August 1947, the Pakistan Government adopted the income tax Act, 1922, as amended up to the date. The provisions of the act were extended to the whole Pakistan except the special areas.

Taxation Inquiry Committee was setup in June 1958.On this committee besides officials, reprehensive of trade & commerce were also taken as members. The said committee submitted its report to C. B .R after long deliberation .In 1959, supper Tax was abolished on income of all people except registered firm and companies. The rates of each slab were expressed as percentage of income. In1960, the financial year was changed to commerce on 1 July and end 30 June. In 1965 “Self-Assessment Scheme” was introduced.

The income tax Act, 1922 continued for 57 years till 1979.During this period, a lot of amendment were made in original Act. Between 1922 and 1979, as many as 71 amendment acts were passed by the legislature. The purpose of most these changes is check evasion of tax. Act was not kept in mind. The result was that keeping these difficulties in view the govt. introduced a new income tax law namely “income tax ordinance 1979.The ordinance replaced the income tax act 1992 and was enforced as from 1st July 1979.

The self-assessment scheme was further broad-based in this ordinance. However the job of improving the law continued after the promulgation of this ordinance also. In 1985 the government set up National Tax Reforms commission to suggest always and means to improve existing tax structure in the country. As result all these efforts the Income Tax Ordinance 2001 is in force in Pakistan.

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Sales tax:Generally speaking Sales tax is a tax levied on the sale of goods and services. It has been explicitly defined in the Sales Tax Ordinance under section 2 subsection(29A) as (a) the tax, additional tax, or default surcharge levied under this Act; (b) a fine, penalty or fee imposed or charged under this Act; and (c) any other sum payable under the provisions of this Act or the rules made there under. TheOrdinance also provides proper format for the levy of Sales Tax. The Sales tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. In Pakistan the contribution of Sales Tax in the revenue collection is………… Most sales taxes are collected from the buyer by the seller, who remits the tax to a government agency. Sales taxes are commonly charged on sales of goods, but many sales taxes are also charged on sales of services. Ideally, a sales tax would have a high compliance rate that could be difficult to avoid, and be simple to calculate and collect.As the evolution of the recent Sales Tax scenario goes in which it has been extracted from the Customs group and given to be the part of the Inland RevenueService; the Sales Tax was primarily a provincial subject under the Indian Act of1935. Sales Tax was centralized in the year 1948 through the law of the Pakistan General Sales Tax Act 1948. Later the Sales Tax Act of 1951 was adopted. It was one staged tax. 1990 Ordinance of the Sales Tax further incorporated many changes. Today the Sales Tax stands at the point where it collects maximum revenue.Federal excise duty:Federal excise duty is a tax that is levied on production or consumption of goods in a country. An excise is considered as an indirect tax. The producer or seller who pays the tax to the government is expected to try to recover the tax by raising the price paid by the buyer. This tax is for immediate payment, applied to the production or consumption of certain products. The excise laws goes back to the year 1934 when a compendium was drafted which agglomerated more than ten separate excise acts which had grown up piecemeal over many years. Another useful effort was made in the year 1944 when a consolidated and single enactment saw the light of the day and which still holds the field in the excise laws to be called as the Central Excise Act, 1944.History of CBR:

The Central Board of Revenue was created on April 01, 1924 through the Central Board of Revenue Act, 1924. In 1944, a full-fledged Revenue Division was created under the Ministry of Finance. After independence, this arrangement continued up to 31st August, 1960 when on the recommendations of the Administrative Re-

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organization Committee, CBR was made an attached department of the Ministry of Finance. In 1974, further changes were made to streamline the organization and its functions. Consequently, the post of Chairman CBR was created with the status of ex-officio Additional Secretary and Secretary Finance was relieved of his duties as ex-officio Chairman of the Board. In order to remove impediments in the exercise of administrative powers of a Secretary to the Government and effective formulation and implementation of fiscal policy measures, it was decided to restore the status of the CBR as a Division under the Ministry of Finance. Thus, Revenue Division was re-created on October 22, 1991. This experiment continued for a short period. In January, 1995, Revenue Division was abolished and CBR reverted back to the pre-1991position. However, from December 01, 1998, Revenue Division was once gainer-created and it continues to exist as such.

History of FBR:

On July 15 2006, the government has decided to convert the Central Board of Revenue (CBR) into an independent entity as 'Federal Board of Revenue' (FBR), enhancing its financial and operational autonomy for smooth functioning, with additional powers to take decisions on taxation/reforms related matters, and to authorize it to demand taxpayer's related information from any department/bank/financial institution/housing society to maintain a 'national database'.

The CBR has drafted 'Federal Board of Revenue (FBR) Act, 2006' which would repeal the 'Central Board of Revenue (CBR) Act, 1924'. The FBR would have provisions to override any other government law. The 'FBR Act' would set up an 'Advisory Board' comprising Minister of Finance or Advisor to Prime Minister on Finance and Revenue; Chairman CBR and three other members from the public/private sector. The 'Advisory Board' would be a supervisory body to monitor the functioning of 'FBR' and independently make annual budget allocations.

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Broad features of the taxation structure of the Pakistan:

Taxation generally known as a way to raise government revenue is an effective instrument for regulating income flows and income distribution, generating savings and directing investment. In a developing country like Pakistan, the role of taxation in public finance is of great importance. Efforts are being made to improve the taxation structure. Substantial improvements were undertaken in the income tax structure during 1979-80. An outline of the taxation structure of Pakistan under the constitution is given below.

Federal taxes:

Under the constitution of the Islamic republic of Pakistan promulgated on the 14th

of august, 1973, the federal government has to power the legislate for the following taxes and duties:

o Duties of the customs including export duties.o Duties of excise including duties on salt, but excluding duties on alcoholic

liquor, opium or other narcotics.o Taxes on incomes and corporations.o Estate duty in respect of property.o Duties in respect of succession to property.o Taxes on capital value assets, not including taxes on capital gains on

immovable property.o Taxes on purchase and sales.o Taxes and duties on the production capacity plant, machinery, undertaking

establishment or installation.o Terminal taxes on goods or passengers carried by railways, air and sea and

taxes on their fares and freights.o Taxes on mineral oil, natural gas and minerals used in generation of nuclear

energyo Fees in respect of any of the matter enumerated in the Fourth Schedule,

but not including fees taken in any court.

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Federal Tax Collections

Period Direct taxes Indirect taxes

Total Total Tax CollectionSales Excise Customs

1996-971997-981998-991999-002000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-11

85,060103,182110,207112,950124,585142,505151,898165,079183,372224,988333,737387,487440,271528,649602,451

55,66853,94272,105116,711153,565166,561195,139219,167238,537294,798309,396376,930452,294517,302633,357

55,26562,01160,90555,78449,08047,18644,75445,55253,10455,27271,80492,185116,055121,182137,353

86,09474,49665,29261,65965,04747,81868,83691,045115,374138,384132,299150,579148,382161,489184,853

197,027190,449198,302234,154267,692261,565308,729355,764407,015488,454513,499619,694716,731799,973955,563

282,087293,631308,509347,104392,277404,070460,627520,843590,387713,442847,2361,007,1811,157,0021,328,6221,558,014

*Source: Federal Board of Revenue

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Provincial taxes:

The provincial governments are entitled to legislate in any field not reserved for the Federal Government. The main sources of revenue for the provincial governments in the field of taxation are:

o Water rate o Tax on trade, professions, callings and employmento Duty on items not included in the federal excise o Stamp dutyo Electricity dutyo Entertainment dutyo Taxes on motor vehicles o Tolls on roads and bridgeso Urban immovable property taxo Betterment taxo Capital gains taxo Taxes on cinemas and hotelso Arms license feeo Cotton fee o Court fee

The provincial governments are not authorized to collect taxes in the cantonment areas; however the cantonment broads pass on a certain percentage of the tax to provincial government.

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Types of taxes:

Direct and Indirect Taxes:

There are lots of ways in which taxes can be categorized. Who collects the tax? The Inland Revenue or Customs and Excise (there are some taxes that neither of these bodies collect)? What is being taxed? Income, capital or expenditure (again, there are some taxes that do not fit into any of these three categories)? Most textbooks and economists like to start by categorizing taxes into direct and indirect taxes.A direct tax is one that is paid directly by the individual worker or firm. Income tax is the best example, usually being paid directly through PAYE. Firms pay corporation tax on their profits, which is a bit like an income tax for business? Others include Capital Gains tax, Inheritance tax, Stamp duty (paid when buying a house) and Petroleum tax (paid on North Sea Oil revenues).Technically, National Insurance contributions are a direct tax, but the Inland Revenue as with all the other direct taxes does not collect them. Officially, they are called 'Social Security receipts', probably because they are payments towards the state pension and other benefits that one might require in times of need.An indirect tax is one that is only paid indirectly through a third party. Consumers pay Value Added Tax (VAT), for example, but only if they actually buy the good or service in question. The retailer officially pays the tax, although it is likely that the price is raised to reflect the tax, so, effectively, the consumer ends up paying. Others include tobacco and alcohol duties, fuel duties (on petrol) and betting duties.Direct taxes primarily comprise income tax, along with 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:

Salaries Interest on securities; Income from property; Income from business or professions Capital gains; and Income from other sources.

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This is the table which shows the revenue from taxes and other sources in the financial year 2011-2012. Revenues from direct taxes is 779100, revenues from indirect taxes is 1,345,475. Revenues of the Government

CLASSIFICATION AMOUNT(Rs in Millions)

TAX REVENUESDirect taxesIndirect TaxesNON-TAX REVENUEIncome from Property and EnterpriseReceipts from Civil Administration and OtherFunctionsMiscellaneous ReceiptsGross Revenue ReceiptsLess Provincial ShareNet Revenue Receipts

2,124,575779,1001,345,475711,987108,637

385,215218,1362,836,5621,221,0221,615,540

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This is chart which shows the contribution of direct taxes and indirect taxes in Government revenues. So, we can analysis the contribution of both, the share of indirect taxes is greater as compared to direct taxes. Direct taxes only contribute 5% in the government revenues

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Direct taxes5%

Indirect taxes95%

TAX REVENUES(2011-2012)

Positive and negative aspect of direct and indirect taxes:

Positive aspect of direct taxes:

o Flexibility o Elastico Economicalo Fairer then indirect taxeso Give confidence and self-esteem to the payero Reduce income inequalities

Negative aspect of direct taxes:

o Painful for tax payero Direct taxes are arbitraryo Induce evasion

Positive aspect of indirect taxes:

o Evasion is almost impossibleo Indirect taxes are equitable only when imposed on luxury items

Negative aspect of indirect taxes:

o Regressive in nature o No self-esteem and confidenceo Inflation

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Progressive and proportional taxes:

These terms are important when assessing whether a tax is fair or unfair. They are important concepts to understand as they relate to whether or not a tax is redistributive or not.

Progressive taxes:A progressive tax is one where, as one's income rises, one pays more tax as a percentage of one's income. The percentage part is important. Obviously higher income earners pay more tax than those on low incomes, but are it more as a percentage of their income?

Proportional taxes:A proportional tax is one where, as one's income rises, one pays more tax, but the amount that is paid as percentage of one's income remains unchanged.

Regressive and digressive taxes:

Regressive taxes:A regressive tax is one where, as one's income rises, the amount that is paid as a percentage of one's income falls. Notice, though, that a higher earner may be paying more of the tax in absolute terms, but as a percentage of their income, the amount is falling. These taxes are, obviously, considered to be unfair as they redistribute money from the poor to the rich (in relative terms).

Digressive tax:A regressive tax on the other hand is one which least effects the higher income groups. This may be progressive tax with the rate of progression declining with increase in income.

Specific and ad-valorem taxes:A specific tax is expressed us as a fixed sum per unit of a commodity.An ad-valorem tax is the one which is expressed as fixed percentage of the value of the commodity. GST in Pakistan is an example of ad-valorem.

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Maxims of taxes:

There are some important principles which must be taken into consideration while formulating a taxation policy. In the following we have discussed nine principles. First four of these principles by Adam Smith and the remaining five were added by different later day economists. We shall call these principles maxims of taxation as did Adam Smith.Equality: First of these maxims is the maxim of equality according to this maxim the burden of tax should fall equally on the people according to their ability to pay tax. In the words of Adam Smith.“The subject of every state ought to contribute towards the support of the government as nearly as possible, in proportion to revenue which they respectively enjoy under the protection of the state”.This maxim emphasizes the importance of equality in the collection of taxes.

Certainty: The second maxims of taxation are that of certainty. It means that the taxpayerShould be certain about the amount payable and about the time and the place of payment.“The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to contributor and to every other person”. (Adam Smith).The authorities must make all possible efforts to ensure that this maxim is followed. The tax collector can make the tax-payer grievous by charging offensive rate of tax. This brings certainty in the taxation system. The certainty in the words of Adam Smith.This maxim is considered as an important maxim. It is said that every effort become fruitless if certainty is not observed. A tax system must be despotic. The collection of the tax and must also provide the tax-payers proper information. The stat and the tax-payer both should practice the maxim of certainty while imposing and paying the taxes.

Convenience: Even when the people believe that the taxes being levied upon them are just and equitable, they are always considered as a burden at the time of payment. Thus,

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the taxes must be made convenient and easy so that the loss borne by the tax-payer is minimum. Adam Smith states this maxim as

“Every tax ought to be levied at the time, or in manner, in which it is most likely to be convenient for the contributor to pay it”.

Economy:

A tax which cost more to collect than it rises in revenue is a sheer wastage of effort on the part of government. Adam Smith stated the maxim of economy in collection as

“Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasure of the state.”

Impartiality:

This maxim is satisfied only by the direct taxes. Indirect taxes do not satisfy this maxim unless the scale of preference for goods and services of all the tax-payers becomes the same which is impossible. Complete impartiality is obtained when progressive direct taxes are fairly design according to changing needs of the economy. Impartiality means that the two men earning the same income have to pay the same amount of tax. In other words, the incidence of tax must be equal for each of them.

Harmlessness:

The taxation system must be framed in such a way that it provides incentive to the people of the country to invest and work hard for their own prosperity and wellbeing as well as for wellbeing of the whole nation. Taxes must not be charged heavily that production and investment become unattractive and profitless. In such circumstances people might immigrate to other countries in search of good return on their investment.

Elasticity:

This principle calls for such a system of taxation which automatically generates more revenue as incomes increase. This feature of elasticity is the essence of a progressive tax system. But even a proportional tax can be elastic if the consumption of the commodity on which it is imposed increases with increase in 23 | P a g e

income. However, a progressive tax is consider in more elastic provided that it does not courage evasion.over all elasticity of the system can be calculated as:

∈T= propo rtionate change∈tax Revenuepropotionate change∈national income

Flexibility:

Tax structure should be designed that it has some degree of flexibility. I.e. its rates should easily be adjustable so that in case of this section t urgent need to raise funds government does not have to introduce new taxes.

Diversity:

As we said the starts of this section that governments normally impose many taxes in order to ensure maximum revenue and distribute the burden of tax. This action confirm to the maxim of diversity which calls for broadening the base of tax system. The principle of diversity also implies that the rate of tax should be low and if government s need to generate more revenue it should broaden the base of taxes and not increase the tax rates. 

Agreements for avoidance of double taxation:

The aforesaid universally applicable principle of taxing the resident (on world income) and non-residents (for income accruing in the territory of a state) by any state gives rise to a possibility of double taxation in the case of ‘residents’ i.e. once in the other state where the income is earned (under the principle of territorial jurisdiction) and once in Pakistan (under the principle of residency). In order to eliminate the incidence of possible double taxation, the law allows a credit for taxes paid abroad. Besides, there are Agreements for Avoidance of Double Taxation, which the states sign to limit their rights to tax the income. These Agreements, generally known as double tax treaties, are a complete code in itself and have an overriding status vis-à-vis the local laws. Pakistan has signed double tax treaties with over 50 states. From a practical perspective, an understanding of the philosophy and rationale of these treaties is essential.

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The Government of Pakistan has so far signed agreements to avoid double taxation with 49 countries including almost all the developed countries of the world and such agreements are being signed with other countries as well. 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 major countries with which Pakistan has tax treaties is given below:

1. Australia2. Hungary3. Qatar4. Austria5. Indonesia6. Russian Federation7. Argentina8. Iceland9. Saudi Arabia10.Bahrain11.Iran12.Singapore13.Brazil14.Ireland15.Slovakia16.Belgium17.Italy18.South Africa19. Brunei20. Japan21.South Korea22.Canada23.Kuwait24.Spain25.Chile

26.Luxembourg27.Sweden28.China29.Malaysia30.Switzerland31.Czech Republic32.Mexico33.Thailand34.Denmark35. Netherlands36.Turkey37.Finland38.New Zealand39.U.A.E.40.France41.Norway42.United Kingdom43.Germany44.Oman45.USA46.Greece47.Poland48.Hong Kong49.Portugal

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Views on taxes: is it fair or unfair?

Is It Fair Or Unfair To Impose Tax?

Question: Some people think that the taxes that the Government collects from us are fair. Others consider them to be unfair. What do you think?

Fair32%

Unfair67%

No response1%

2010

*Source: Gallup & Gilani / National Surveys, 2010

Most of the people think that the composition of the taxes is not fair because the government revenue is based on indirect taxes. The major part of indirect taxes is sale tax which is impose on even necessities of life directly related to poor and middle class peoples and he pays for it.

Comparative data

2002

2003 2005 2006 2007 2009 2010

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Fair 45% 42% 64% 37% 38% 27% 32%Unfair 54% 56% 34% 63% 60% 72% 67%Don’t Know/ No Response 1% 2% 2% - 1% 1% 1%

*Source: Gallup & Gilani / National Surveys, 2002, 2003, 2005 2006, 2007, 2009 and 2010

WHO BENEFITS FROM THE TAXES?

WHO IS THE BENEFICIARY OF TAX REVENUE?

Question: Whenever Government imposes a new tax then who benefits from the money obtained from this tax?

whole society18%

some people55%

No one17%

Others1%

Don't Know9%

2004

*Source: Gallup & Gilani / National Surveys, 2004

Government uses the tax revenue in their different types of expenditures (current, development). Most of the part of government revenues used in current expenditures and some is used on development expenditures.

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VIEWS ON REFORMED GENERAL SALES TAX (R.G.S.T) ?

Do people favor or oppose it?

Question: Do you favor or oppose R.G.S.T (tax)?*

Favor5%

oppose83%

Neither favor/nor oppose12%

2010

*Source: Gallup & Gilani / National Surveys, 2010

People obviously oppose it because it imposed even necessities of life which is directly related to poor people.

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VIEWS ON REFORMED GENERAL SALES TAX (R.G.S.T)

Will it affect poor people or not?

Question: Some people say that R.G.S.T will not affect a common man i.e. it

won’t affect people with low income whereas others say that it will also affect

low income group. What is your opinion?*

low income group will be effected will be

76%

low income group will not be ef-fected will be

16%

No response8%

2010

*Source: Gallup & Gilani / National Surveys, 2010

Conclusion:

Pakistan like other developing economies has a narrow tax base with high enforcement costs, making personal income taxation an unlikely cornerstone of a 29 | P a g e

comprehensive inequality reduction agenda. Progressive tax is better than the proportional taxes. Progressive are those taxes whose rate increases with increase in value of commodity, asset or income on which it is imposed. But the proportional tax is charged as a fixed % of income, consumption, value of the asset or whatever may be the case. In this type of taxes mostly the low level income group people are effected which is not fair. Government should adopt the better method to imposed taxes on nation.

References:

Income tax: Principles & practice (2011-2012)

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By Muhammad Muazzam Mughal.

Monetary theory and public policy (1996)

By Aamir Rafique Hashmi

Federal board of revenue

State bank of Pakistan

Annual budget 2013-2014

Ministry of finance

Economic survey of different years

Dawn news

www.gallup.com.pk

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