FISCAL REFORMS IN PAKISTAN *

1. FISCAL REFORMSIN PAKISTAN* By Dr. Hafiz A. Pasha** * Prepared for the Workshop on South Asia Tax Systems, 8-9 August 2010, Singapore. ** Dr. Pasha is Chairman of the Revenue Advisory Council of the Federal Board of Revenue (FBR).

2. SOME SALIENT FEATURES OF PAKISTAN’S TAX SYSTEM • FEDERAL Income Tax • Heavy Reliance (53%) on Withholding/Presumptive Taxes • Progressive Personal Income Tax (max rate: 20-25%) • Corporate Income Tax (35% rate) • Universal Self-Assessment Scheme • Advance Tax Regime General Sales Tax • On Goods only • VAT features • Zero Rating, also of domestic sales of exporters • Standard Rate of 17% • Exemptions to basic food items, agricultural inputs, medicines, newsprint.

3. SOME SALIENT FEATURES OF PAKISTAN’S TAX SYSTEM Custom Duty • Cascaded Tariff Structure (max rate: 25%; six slabs) • Tariff Peaks in Automobiles and other luxury goods • Share of Dutiable Imports (51%) Excise Duties • on few industries like cigarettes, beverages and cement • on Services in VAT mode • 1% Excise Duty across-the-board on manufacturing and imports PROVINCIAL Taxes • AIT, Land Revenue, Stamp Duty, Motor Vehicle Tax, Property Tax, Excises • Sales Tax on Services

4. TAX-TO-GDP RATIO OF PAKISTAN2000-01 To 2009-10

5. THE IMBALANCED SECTORAL DISTRIBUTIONOF THE TAX BURDEN2004-05

6. WHY THE TAX-TO-GDP RATIODID NOT RISE DURING THE PERIODOF FAST GROWTH, 2003-04 To 2006-07? • Tax-to-GDP ratio remained, more or less, constant at 11% of GDP • Due to Large Tax Exemptions ~ on Capital Gains on Shares and Properties ~ Withdrawal of Wealth Tax ~ Withdrawal of Excise Duties on Consumer Durables • Due to Reduction in Tax Rates ~ Maximum Tariffs on Imports down from 35% to 25% ~ Corporate and Personal Income Tax rates brought down

7. WHY THE TAX-TO-GDP RATIO DIDNOT RISE? (Contd.) • Due to Slackening of Fiscal Effort ~ Self-Assessment Scheme without Audits in Income Tax and Sales Tax ~ Number of Income Tax returns filed at only 2.2 million (one per 75 persons) ~ Provincial governments continue to slacken fiscal effort due to high dependence on transfers • Due to high variability in revenue from Surcharges The Government essentially followed supply-side economics to stimulate growth. Growth did rise but not enough to raise the tax-to-GDP ratio.

8. RECENT REFORMS (2008-09 ONWARDS) Carbon Tax • Introduction of Fixed Levy on Petroleum Products as ‘Carbon Tax’ with large revenue yield of over Rs 110 billion ($1.3 billion) Direct Taxes • Taxation of (Short Term) Capital Gains on Shares • Extension of the Withholding Tax Net (Bank Cash Withdrawals, Air Travel) • Introduction of Minimum Tax on Turnover (of 1%) • Random Ballot for Audit with Outsourcing to private Accounting Firms • Detection of New Tax Payers through Collateral Evidence Sales Tax • Enhancement in Rate from 15% to 17% Excise Duty • Introduction of Across-the-Board Special Excise Duty at 1%

9. PROPOSED REFORMSIntroduction of Comprehensive VAT (or reformed GST) • Objective is to broaden tax base and reduce tax rate (17% 15%) • Elimination of exemptions on goods, except basic foodstuffs and life-saving drugs, could generate ¼% of GDP • Enhanced coverage of services (excluding education and health) could increase tax revenues in the medium term by 1½ % of GDP • Reduction in tax burden on industry • Introduction delayed till 1st October 2010 due to ~ issue of collection by provinces of the sales tax on services ~ lobbies (especially the trading community)

10. PROPOSED REFORMSProvincial Taxes Areas of focus: ~ Capital Gains Tax on Property ~ Urban Immovable Property Tax ~ Agricultural Income Tax • The target in the on-going IMF Program is to raise the tax-to-GDP ratio by 3½ percentage points by 2012-13. Thank You.