Tax System in Pakistan

Abstract: This paper Studies the basics of Tax Along with Different Types of Taxes and Tax system in Pakistan. Charts related to Taxes (Such as Federal Tax, Provisional Tax) are also given. This paper also tries to cover the facilities given by the government of Pakistan to its people for taxes and the corruption related to this field of Government and at the end, there is a solution and suggestions related to the Tax system of Pakistan. What is TAX: A compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions

Types of tax: Taxes in Pakistan have a large spectrum which include taxes at muncipal level upto Federal Level. The sources of tax revenue in Pakistan are: Federal Taxes Provincial Taxes

Federal taxes: Direct Taxes are those taxes whose incidence is borne by the person from whom the tax is collected. The major direct taxes enforced by the Federal Government are Income Tax, Workers Welfare Fund, Workers Profit Participation Fund and Capital Value Tax.

1. Direct Tax: a. Income tax A income tax is a tax leived on the income of individuals or business. When the tax is levied on the income of companies , it is often called a corporate tax or profit tax. individual income taxes often tax the total income of individual while corporate income taxes often tax net income. b. Worker welfare tax It is charged at 2% on the manufacturers having income of Rs 100,000 and above. Employees Old Age Benefit Scheme is financed through this fund.

c. Capital value tax Capital Value Tax is payable by every individual, association of persons, firm and company, not born on the National Tax Register. Currently CVT is payable with different rates on immovable commercial and non commercial property, residential flats, and purchase of shares of stock exchange.

d. Worker Profits participation fund This tax is paid by the industrial undertaking having more than 10 workers at 5% of their profits for distribution amongst workers. Any leftover amount after distribution amongst the workers is deposited with the government to become part of the WWF

2. Indirect tax: Indirect Taxes are those added to the cost of goods or services and ultimately borne by the consumers. These are General Sales Tax, Federal Excise Duty and Customs Duty a. Custom Duties Customs duties are levied through Customs Act, 1969 on goods imported into Pakistan. It contributes 24.4% in the indirect taxes and 15% in total taxes collected by FBR. The collection of custom duties is important as it also contributes in the base calculation of other taxes like sales tax on imports and withholding tax. Only 15 major commodity groups contributed 78% of the total customs duties during 2007-08. Auto sector is the top contributor of the customs duty. The composition of gross customs duty collection is provided as following: Import Duties Warehouse Surcharge Export Development Surcharge Misc (auctions, recovery of arrears, defense etc) b. Federal Excise Federal Excise Duties are levied on domestic production, imports and services rendered in the country. The major excisable commodities include cigarettes, cement, beverages, natural gas and POL products, whereas excisable services are; Air Travel, Insurance, Non-Fund Services provided ( In FY: 2007-08 the NFS were extended to full coverage of Non-fund Financial Services (NFS), and FED on Air Travel was rationalized.) by banking or non-bank financial companies and Franchise services. The old Central Excises Act, 1944 has been replaced by The Federal Excise Act, 2005, with effect from 1st July, 2005. As part of budgetary measures for the year 2007-08, Special FED at 1% has been levied on goods which are manufactured or are imported in Pakistan.

c. Sales Tax Sales tax is liable on sales of all goods and services produced in the country excluding those goods exempted in the Sales Tax Act, 1990. The rate structure was different for native products and imports. The details of sales tax collection at import stage also point out the higher concentration as fifteen major commodity groups have contributed around 87% of total ST (imports) collection. The major commodity groups include POL Products (27), Edible Oil (15), Plastic (39), Vehicles and Parts (87), Iron and Steel (72), Mechanical Machinery (84), Electrical Machinery (85), Organic Chemicals (29), Paper & Paper Board (48), Oil seeds etc (12), Misc Chemicals Products (38), Rubber (40), Coffee, Tea, and Spices (9), Aluminum Products (76) and Articles of Iron & Steel (73).

Provincial tax:

Tax year in pakistan: Tax year is period of twelve months ending on 30ths june and shall be denoted by the calendar year in which the said date falls .

Taxable income in pakistan: It is total income of a person for a tax year reduce by the total of any deductible allowances, under the ordinance, for the year. A person is entitled to a deductible allowance for the amount of any zakat paid by the person in tax year under the zakat and ushr ordinance, 1980.

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. Corruption: Corruption in the tax administration is a two-way street. There are few reasons for corruption. These are lack of tax culture or tax education is the most important cause of corruption in the private sector. Another reason is high tax rates. Lack of accountability

Difference between GST and RGST(VAT): GST: GST is stands for government sales tax . a state or local level tax on the retail sale of specified property or services. It is a percentage of the cost of product. Generally, purchaser pays the tax but the seller collects it as a government agent RGST: The RGST is actually plain old value added tax with new name. RGST is a taxation system that operates by an addition of 15 percent tax on each and every value addition on taxable production. Conclusion: Systems are made for welfare of people. People and the government should realize this fact. in this doc we go through almost all about pakistans tax system including systems pros and corns. As our definition says Tax is a compulsory contribution to sate. It is governments responsibility to manage their resources to get all possible taxes from people equally and justice is very important in this to avoid corruption.