Even though the concept of taxation was introduced hundreds of years ago, changes in tax laws continue to take place now and then which is why it is essential to keep up with these changes – and further comprehend these. However, before you understand the changes you need to make sure you know the basics of taxation and the way the system in a country works. In this article, we’ll be focusing on the taxation system in Pakistan.
Taxes in simple words are involuntary payments made by individuals or businesses primarily as a source of revenue for the government so that it can be utilized for public activities or services and thus contribute to economic growth and development. Taxes, in general, are divided into two categories: Direct Tax – paid directly to the government, which usually includes taxes on income from property and income from businesses – and Indirect Tax – taxes on goods and services, which eventually go to the government (hence the name indirect tax). In Pakistan, the current taxation system is defined by Income Tax Ordinance 2001 (for direct taxes) and the Sales Tax Act 1990 (for indirect taxes) and administrated Federal Board of Revenue (FBR). The Ordinance is a central statute and is, therefore, applicable to the whole of Pakistan. Besides that, there are generally two Tax Years: Normal Tax Year and Special Tax Year. A Normal Tax Year is a period of twelve months starting from 1st July and ending on 30th June (of the following year) whereas a Special Tax Year is a period of twelve months ending on any date other than 30th June. Regardless of the kind of Tax Year, by the end of the Tax Year, a tax return (a form that includes information such as the income of an individual and taxes to be paid by the individual) is to be filled out.
According to the data collected, after the FBR analyzed city-wise income tax collection of the Year 2018, the contributions to the income tax varied significantly from province to province. The following are the percentages of contributions by each province: Sindh = 44.91%, Punjab = 34%, FCT (Federal Capital Territory) = 15%, Khyber Pakhtunkhwa = 3.54%, Balochistan = 1.67%, and Gilgit Baltistan = 0.12%. Sindh remained the highest contributor to the income tax in total income tax collection with Karachi being the prime city contributing around Rs. 572,594,396,386 (for the tax year 2018). Other than Karachi, some major contributions included Rs. 204,148,673,059 from Islamabad, Rs. 200,717,435,894 from Lahore, Rs. 35,170,187,615 from Rawalpindi, and Rs.16,264,148,003 from Faisalabad.
Sources of Income
Before getting into how taxes to be paid are varied on a corporate and individual level, we are going to identify the sources of income from which taxes are paid. These sources of income include the salary of an employee at a company which is paid by the company itself, the salary of an employee paid by or on behalf of the Provincial / Local / Federal Government, dividends paid by a Resident company, profit made on a debt by a Resident person, property or rental income from the lease of immovable property in Pakistan and pension or annuity by a Resident or a person who is not a resident but has been residing in Pakistan since a long period. On a corporate level, if the company is a Resident company i.e. if the company’s set-up is in Pakistan since its initiation, then the company must pay tax on its worldwide income whereas in the case of a Non-Resident company, which has set up a franchise or branch in Pakistan, must pay taxes on their Pakistan- source income. The taxes that companies pay vary, for example, a banking company pays the most with the tax rate being 39% in 2023 whereas small
companies may not pay as much, their tax rate may be 20% depending on how small or large the company is. Moreover, a surtax is levied when income generated exceeds Rs. 150 million. The tax rates then change depending on the slab rates. On the other hand, on an individual level, a person receiving a taxable income of Rs.600,000 or more annually must give taxes. The tax rates can be as low as 5% and as high as 35% depending on the income received or generated by an individual. Surtax may also be imposed on an individual if they receive a great fortune.
Where does Pakistan really stand?
Pakistan’s tax-to-GDP ratio is around 9.2%. This ratio makes it difficult to fund public investment which accounts for the slow economic growth rate. Where everyone eligible for taxes is required to pay taxes, the harsh reality is that most people don’t. This “group of people” not paying taxes mostly includes politicians who are rich and smart, so they figure out ways to exempt themselves. Mind you that the people who receive or generate a great deal of
fortune pay the most taxes so when these people do not pay taxes, it affects the tax collection greatly. The rules and laws remain but the majority do not abide by them. Due to this, much of the taxes are collected through indirect taxes which means rising taxes on sales goods which produces tough circumstances for the common man and especially the man struggling through poverty. Not to mention, agriculture, an industry that employs nearly half of the population and makes great profits, firstly, the industry does not have enough tax imposed on it, and secondly,
the profits made usually go to the wealthy landowners (aka the politicians).
These are the dire circumstances that cause Pakistan to ask for loans of billions of dollars and therefore leave the country in great debt. Federal Minister for Finance and Revenue Miftah Ismail said that if Pakistan boosts its rate of tax-to-GDP and exports-to-GDP up to 15 %, the government will not need to ask for aid from the world. He also mentioned that Pakistan’s exports were US $31 billion while imports were US $80 billion and this resulted in a huge trade deficit which is not affordable for any country. This however does not mean that efforts are not being put in or measures are not being taken to handle the situation, especially after the heavy rains and floods in 2022. The LCCI president said that the Ministry of Finance should take concrete measures to solve the long-standing issue (permanently) of the misuse of tax exemptions by the industries based in FATA/PATA that resulted in heavy tax evasion. Once these exemptions expire in June 2023, they should not be renewed. The concerned authorities stated that strict action was taken against the banks that were exploiting the business communities. LCCI Senior Vice President Mian Rehman Aziz Chan and Vice President Haris Ateeq said that since exports to potential markets are non-viable to increase due to the absence of adequate banking channels so SBP and other authorities can be put in charge of taking measures for this connection. LCCI President Mian Nauman Kabir believes that expanding the tax base across various sectors is the only way forward.