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Tax Administration Reforms for Enhanced Capacity and Capability

This report highlights the need for tax administration reforms to address issues such as low tax effort, regressive taxation, complexity of tax laws, and inadequate HR skills. It proposes strategies for increasing revenue, widening taxpayers' base, simplifying tax laws, and developing a taxpayer-friendly environment.

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Tax Administration Reforms for Enhanced Capacity and Capability

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  1. TAX ADMINISTRATIONCAPACITY AND CAPABILITYTAX BAR ASSOCIATION KARACHIKHAWAJA TANVEER AHMEDMember (Tax Policy & Reforms)March 18, 2006

  2. NEED FOR REFORMS • Overall Fiscal Effort low – stagnant Tax / GDP Ratio (Details to be followed) • Heavy Reliance on Indirect Taxes leading to Regressive Taxation System • Protectionism through high tariffs leading to inefficiencies and anti-export bias • Taxation on Production and Trade Activities rather than consumption and income • Wide-ranging exemptions and concessions

  3. NEED FOR REFORMS Cont’d • Primitive and antiquated tax administration (Cylindrical instead of Functional) • Complexity of tax laws and arbitrariness in their application • Persistence within manual record keeping and limited IT support • Lack of transparency; and inadequate HR Skills and / Capabilities

  4. NEED FOR REFORMS [Extract from Report of the Task Force on Reform of Tax Administration, April 2001] • Legal and administrative changes are frequent and adhoc. • Major tax policy changes are not accompanied by adequate changes in administrative framework. • Relationship between the taxpayer and tax collector is largely adversial. • Organization, business processes, systems, facilities and budget have not kept pace with the growing demands on tax administration. • Management of human resources is severely deficient. • Thus there was a Need for major changes in the taxation system through tax policy and administrative reforms

  5. LOW TAX EFFORT – TAX POLICY ISSUES • Revenue adequacy; Tax / GDP ratio - By international comparisons the ratio is low • More relevant: According to Pakistan’s spending levels and the ongoing federal deficit, the ratio is too low

  6. Tax – GDP Ratios:Overall & Federal & Provincial Comparison

  7. Tax – GDP Ratios:CBR Revenue

  8. REASONS FOR LOW TAX – GDP RATIO • The causes are multiple and often interconnected • Low buoyancy of some particular taxes (e.g. excises plus effects of tariff / trade reform) • Sizable underground economy (it has been estimated at 35-40% of GDP) • Considerable tax evasion (it has been estimated at 7% of GDP) • Narrow tax bases of major taxes (income and GST) • Low tax effort of sub-national governments, soft budget constraint / convenient dependency on transfers / revenue sharing arrangements • Over the long run, tax revenue buoyancy has been low (at 0.93 for tax revenues at 0.47 for total revenues) hence a declining Tax /GDP ratio.

  9. REASONS FOR LOW TAX-GDP RATIO • Mismatch Between Sectoral Shares in Tax and GDP Composition • Share of Agriculture in GDP-MP 22% and in Taxes 1.2% • Share of Manufacturing in GDP-MP 17.1% and in Taxes 62.2% • Share of Services Sector in GDP-MP over 50% and its share in Taxes is 27.3% (continued)

  10. REASONS FOR LOW TAX-GDP RATIO • Within services sector • Share of Transport, Storage & Communication in GDP 13.8% and in Taxes 4.5% ; • Share of Finance and insurance in GDP 3.2% and in Taxes 3.9%; • Share of Construction in GDP 2.2% and in Taxes 2.9%; • Share of Wholesale & Retail Trade in GDP 16.9% and in Taxes 2.8%; • Thus, Low contribution of agriculture and leading service sectors highlights the need to diversify to the un-tapped areas/ sectors

  11. OBJECTIVES OF TAX REFORMS • To increase revenue • To widen taxpayers base • To simplify tax laws and evolve effective dispute resolution mechanism • To provide end to end automation of work processes • Taxpayer friendly environment • To develop an honest and efficient tax administration

  12. STRATEGY FOR REFORM • New Organizational Structure • Combating Corruption • Financial & Administrative Issues • Universal Self Assessment • IT Management Function • HRM - Evaluation of strengths & weaknesses

  13. NEW ORGANIZATIONAL STRUCTURE • Re-organization of CBR on functional lines • Five new Members from Private Sector • Complete overhaul of Income Tax operations • Strengthening of GST, Excise and Customs • Re-engineering of all Business Processes

  14. COMBATING CORRUPTION • Re-Design of Jobs to Minimize Possibilities of Corruption • Extensive Use of Technology to Reduce Corruption • Public Commitment for Striking Against Corruption • Special Code of Conduct for Employees • Training to Emphasize Integrity Issues • Severe & Timely Penalties • Clear Guidelines Regarding Handling of Complaints of Corruption

  15. FINANCIAL & ADMINISTRATIVE ISSUES • CBR to remain a Division of the Government • Enhanced Autonomy to formulate expenditure and resource Budget • Formulate own recruitment and staffing structure • Protect itself against external intrusion • Committee of the Cabinet to approve Budget and Policies

  16. UNIVERSAL SELF ASSESSMENT • Introduction of Universal Self Assessment System • Selectivity and Risk Assessment for Audit and Taxpayers to be provided reasons • Contact between officials and Taxpayers to be minimized. • Large scale taxpayers education

  17. INFORMATION MANAGEMENT FUNCTION • Achieve developed countries level of taxpayer convenience and voluntary compliance by • Making significant investment in IT • Establishing Information System Plan (ISP) • CBR’s nationwide IT structure

  18. HRM - EVALUATION OF STRENGTHS & WEAKNESSES • Human Resource Audit • Decision processes review • Future competencies & training needs • Compensation package • Workforce Planning and sequencing

  19. SPECIFIC TAX POLICY MEASURES IN THE DIRECT TAX REGIME • Revision in Individual and Company Rates in Budget 2002-03 • Introduction of Self Assessment • Streamlining the WHT Structure, less dependence on presumptive tax regime • Withdrawal of Exemptions

  20. SPECIFIC TAX POLICY MEASURES IN SALES TAX • 4 rates of 15%, 18%, 20% and 23% substituted with single uniform rate of 15% • Threshold of turnover raised from Rs.0.5 million to Rs.5.0 million • Aberrations like turnover scheme and Enlisting Scheme abolished • Refund regime automated and five major sectors zero rated

  21. SPECIFIC TAX POLICY MEASURES IN CUSTOMS • Highest tariff brought down from 80% in 1993-94 to 25% in 2002-03 • Multiple slabs reduced to 4, i.e. 5%, 10%, 20% and 25% • Tariff protection to locally produced goods • Automated business process legally covered through changes in customs laws and procedures

  22. TAX ADMINISTRATION REFORMSFollowing Table shows that the number of applications for the ADRC are growing – 15.1.2006

  23. OUTCOME OF REFORM MEASURES:IN TERMS OF CHANGE IN TAX MIX

  24. OUTCOMEOF REFORMS IN REVENUE COLLECTION

  25. PROJECTS IN 2006-2007 • 12 RTOs to start functioning in 2006 • LTU at Islamabad • Roll out of CARE Plan to other Customs stations by December 2006 • Taxpayers Facilitation Centres • Business Process Re-engineering of Sales Tax and Income Tax Operations • End to end automation

  26. FUTURE STRATEGY • Continue to create enabling environment for various stakeholders. The idea is to • Promote Economic Activity • Encourage Investment • Spread out commercial activities • Expand exports • Create incentive driven taxation structure with adequate safe-guards to deal with delinquent taxpayers • Promote efficiency, equity and transparency

  27. FUTURE STRATEGY Cont’d • Further simplification of Rules and Procedures; • Continuous Reduction and Rationalization of Tax and Tariff Structure; • Strengthening the HRM and Audit functions; • Co-location and Integration of Taxes • End-to-end Automation of work processes to minimize taxpayer – tax collector interface; and • Emphasis on taxpayers’ education and facilitation and wider dissemination of CBR efforts THANK YOU

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