1. FISCAL REFORMS IN 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 A.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 PAKISTAN 2000-01 To 2009-10 (% of GDP) Year Direct Taxes Indirect Taxes Surcharge /Levy* Total Taxes FBR Revenue Share of Direct Taxes 2000-012.996.890.7310.619.4228.18 2001-023.206.411.2310.839.1129.54 2002-033.176.941.4111.539.5727.49 2003-042.926.841.0910.849.2526.94 2004-052.727.010.4110.149.0526.82 2005-062.827.060.6710.549.3626.75 2006-073.856.410.7411.009.7635.00 2007-083.796.470.3410.609.8335.75 2008-093.466.000.9910.449.0833.14 2009-103.665.830.9010.399.0535.23 * On petroleum products and natural gas Source: Ministry of Finance, Government of Pakistan.

5. THE IMBALANCED SECTORAL DISTRIBUTION OF THE TAX BURDEN 2004-05 (%) Share in GDP Share in Tax Revenue Ratio Agriculture22.51.20.053 Industry23.570.42.995 Services54.028.40.526 Total100.0 1.000 Source: Ministry of Finance, Fiscal Policy Statement.

6. WHY THE TAX-TO-GDP RATIO DID NOT RISE DURING THE PERIOD OF 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 DID NOT 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 REFORMS Introduction 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 REFORMS Provincial 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.