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Taxation System

Federal taxes in Pakistan like most of the taxation systems in


the world are classified into two broad categories, viz., direct
and indirect taxes. A broad description regarding the nature of
administration of these taxes is explained below:
Direct Taxes
Direct taxes primarily comprise income tax, alongwith
supplementary role of wealth tax. For the purpose of the charge
of tax and the computation of total income, all income is
classified under the following heads:
1. Salaries
2. Interest on securities;
3. Income from property;
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4. Income from business or professions


5. Capital gains; and
6. Income from other sources.
Personal Tax
All individuals, unregistered firms, associations of persons, etc.,
are liable to tax, at the rates ranging from 10 to 35 per cent.
Tax on Companies
All public companies (other than banking companies)
incorporated in Pakistan are assessed for tax at corporate rate
of 39%. However, the effective rate is likely to differ on account
of allowances and exemptions related to industry, location,
exports, etc.
Inter-Corporate Dividend Tax
Tax on the dividends received by a public company from a
Pakistan company is payable at the rate of 5% and at the rate
of 15% in case dividends are received by a foreign company.
Inetr-corporate dividends declared or distributed by power
generation companies is subject to reduced rate of tax i.e.,
7.5%. Other companies are taxed at the rate of 20%. Dividends
paid to all non-company shareholders by the companies are
subject to withholding tax of 10% which is treated as a full and final
discharge of tax liability in respect of this source of income.

Treatment of Dividend Income


Dividend income received as below enjoys tax exemption,
provided it does not exceed Rs. 10,000/-.
1. Dividend received by non-resident from the state enterprises
Mutual Fund set by the Investment Corporation of Pakistan.
2. Dividends received from a domestic company out of income
earned abroad provided it is engaged abroad exclusively in
rendering technical services in accordance with an agreement
approved by the Central Board of Revenue.

Unilateral Relief
A person resident in Pakistan is entitled to a relief in tax on any
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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. The list of
countries with which Pakistan has concluded tax treaties is
given below:
Austria Belgium Bangladesh Canada
China Denmark Egypt France
Finland Germany Greece India
Indonesia Iran Ireland Italy
Japan South Korea Lebanon Libya
Malta Mauritius Saudi Arabia Singapore
Poland Romania Switzerland Thailand
Sri Lanka Sweden Turkmenistan U.K.
Turkey Tunisia Kazakistan U.A.E.
U.S.A

Customs
Goods imported and exported from Pakistan are liable to rates
of Customs duties as prescribed in Pakistan Customs Tariff.
Customs duties in the form of import duties and export duties
constitute about 37% of the total tax receipts. The rate
structure of customs duty is determined by a large number of

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socio-economic factors. However, the general scheme


envisages higher rates on luxury items as well as on less
essential goods. The import tariff has been given an industrial
bias by keeping the duties on industrial plants and machinery
and raw material lower than those on consumer goods.
Central Excise
Central Excise duties are leviable on a limited number of goods
produced or manufactured, and services provided or rendered
in Pakistan. On most of the items Central Excise duty is charged
on the basis of value or retail price. Some items are, however,
chargeable to duty on the basis of weight or quantity.
Classification of goods is done in accordance with the
Harmonized Commodity Description and Coding system which
is being used all over the world. All exports are exempted from
Central Excise Duty.

Sales Tax
· Sales Tax is levied at various stages of economic activity at
the rate of 15 per cent on:
· all goods imported into Pakistan, payable by the importers;
· all supplies made in Pakistan by a registered person in the
course of furtherance of any business carried on by him;
· there is an in-built system of input tax adjustment and a
registered person can make adjustment of tax paid at earlier
stages against the tax payable by him on his supplies. Thus the
tax paid at any stage does not exceed 15% of the total sales
price of the supplies;

Table 1: Collection and Growth

Average Annual Average Annual


Collection1 Growth2

1950
s 3 12.2
1960 8 8.9
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s
1970
s 20 18.5
1980
s 120 24.0
1990
s 806 21.8
2000
s 2668 20.0
1
Collection in millions (converted into US$ at the
current exchange rate Pak Rs.60 =US$ 1)
2
Growth in percent

Pakistan today has a mind-boggling taxation system that defies


comprehension of the average citizens and experts alike. In 1990,
Karachi Chamber of Commerce and Industry had established that
the industry was subjected to 50 direct and indirect taxes but the
statement of Senator Ilyas Bilour, President PFCCI at the
Businessmen Conference in Islamabad on March 25, 1997 that 37
govt. departments and agencies were collecting taxes gives a
measure of the proliferation of taxes that has taken place in
Pakistan.

It was not in the province of this book to catalogue the taxes


being collected by the federal, provincial and local governments
but I have identified 70 major taxes to which consumers and
producers are subjected. In addition there are host of specific
taxes like a Research and Development Levy, Drug Manufacturing
License Fee and Drug Registration Fee. It can be said safely that
there are at least 100 taxes in vogue in Pakistan.

It is not the proliferation of taxes that is mind-boggling. It is the


exemptions to these taxes for the privileged, their duplication and
triplication for the common man, the method of their collection
and making refunds, utilization of specific-purpose taxes that is
mind-boggling. There is an education cess levied by the federal
govt., another education cess is collected by provincial govts. The
Central Excise Duty (CED) is being collected on the telephone bills
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by Pakistan Telecommunication Corporation but Baluchistan govt.


introduced a duty on telephone calls in the 1996-97 budget.
Federal govt. has levied a Tobacco cess but in the 1997-98
budget the provincial govt. of NWFP levied a Rs one per Kilo
Tobacco Cess. Civil Aviation Authority collects an airport tax.
There is a Workers Participation Fund and another Workers
Welfare Fund.

There are federal taxes like Ushr being collected by the provincial
govts, provincial taxes like motor vehicle tax being collected by
the federal govt. Local taxes like the property tax is being
collected by the provincial govt. and reimbursed to municipal
corporation and committees.

An appeal by the leading hotels and restaurants of Lahore in the


national newspapers after the 1997-98 budget exemplifies the
multiplication of taxes in Pakistan.

"In the recent Punjab provincial budget, an additional tax of 10%


has been levied on the posh restaurants and international hotels
of the province. This is in addition to 12.5% Central Excise Duty
and 5% provincial tax levied on July 1, 1996. Cumulatively, these
taxes add up to about 30% which, by any national and
international standards is extremely high", the appeal said.
The Stamp Act provides for stamp duty on 55 different categories
of documents at a prescribed rate. Some of the documents
specified are affidavits, agreements, allotment orders,
attestations, bank guarantees, custom bonds, debentures, import
documents, insurance policy, lease, partnership, power of
attorney, security bonds, share transfer certificates, cheques,
bank drafts and pay orders.

It is this proliferation of taxes and tax collectors which create an


ideal situation for pilferages. This proliferation and pilferage of
taxes has pitched the people and govt. in Pakistan, at two
opposite horns of an economic dilemma. While the people are
groaning under the heavy burden of taxation, the govt. leaders
bemoan that the people do not pay taxes. They are both right
because the taxes paid by the people do not reach the govt.
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coffers. They end up lining the pockets of the contractors and


collectors.

Following are major taxes levied by the federal and provincial


governments.

Federal Government Taxes:

Income Tax

Super Tax

Wealth Tax

Gift tax

Turnover Tax

Corporate Asset Tax

Corporate Income Tax (A)

Import Duties

Import Surcharge

Export Duties

Iqra Surcharge

Income Tax on imports

Import License Fee

Import Registration Fee

Export Registration Fee

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Central Excise Duty

Sales Tax on Manufactured goods

Capital Value Tax

Export development Surcharge

Development Surcharge on Petroleum

Gas Development Surcharge

General Sales Tax

Federal Education Cess

Workers Participation Fund

Workers Welfare Fund

Estate Duty

Zakat

Ushr

Oilseeds Development Cess on Companies

Tobacco Cess

Cotton Cess

Development Surcharge on Electricity

Textile Technology Cess

Airport Tax

Cargo throughout @ 2% charges freight charges and an


additional three 3% for immediate clearance at Quaid-e-
Azam Airport, according to an advertisement in daily,
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Business Recorder, February 12, 1998.

Capital Gain Tax

Provincial Taxes:

1. Professional Tax
2. Property Tax
3. Vehicle Tax
4. Stamp Duty
5. Entertainment Tax
6. Betterment Tax
7. Social Security Contribution
8. Explosive License Fee
9. Provincial Education Cess
10. Capital Gain Tax
11. Punjab Airport Tax
12. Provincial Excise Duty
13. Karachi Dock Labor Board Cess
14. Cess on Hotels
15. Cotton Fees
16. Paddy Development Cess
17. Provincial Excise Duty
18. Land Revenue Tax
19. Employee Old Age Benefit Contribution
20. Trade Tax on Jewelers, Garment shops imposed by
Baluchistan govt. in 1997-98 budget

The Municipal Taxes:

Like development, corruption bubbles up and trickles down and


Pakistan excels in corruption both at the top and the bottom.
While corruption at the top has been frequently highlighted,
particularly by the sacking of three successive govts during 1990-
96, very little is known about the corruption in municipal bodies
which are the lowest wrung of govt. administration and exemplify
the rot at the grass-root in Pakistan.

The Presidential Orders for the dismissals of the federal govts in


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1990, 1993 and 1996 had referred to corruption in various govt.


bodies and “authorities" as a ground for dismissal. The word
“authorities" was used to refer to corruption in the development
authorities like Capital Development Authority, Lahore
Development Authority and Karachi Development Authority.

Pakistan has at least 16 development authorities and each one


requires volumes like the exploits of Casanova to touch upon their
corruption and rot. The 7-hour ordeal that Prime Minister Nawaz
Sharif underwent on March 11, 1997 in the Faisalabad
Development Authority, viewed by millions of people over
Pakistan Television gave only a birds-eye view of the tip of
iceberg of corruption in these authorities.

In addition to the 16 development authorities, Pakistan has two


metropolitan corporations, 12 big municipal corporations, 24
cantonment boards, 6 Water and Sewerage Authorities and more
than a hundred municipal committees. All these local govt. units
have their own sources of income and budgets amounting to Rs
25 billion per annum nearly.

The tales of corruption that the govt. and opposition has been
telling the nation for last two decades including the ripping-off the
biggest development authorities like CDA,LDA, KDA and PDA.
However , the plunder of smaller development authorities like the
Rawalpindi Development Authority, Gujranwala Development
Authority and Faisalabad Development Authority has largely
remained untold.

The foundation of corruption in the local bodies is the system of


awarding contracts for revenue collection and other municipal
functions to private contractors and over the years, the
contractors, colluding officials and politicians have hammered out
a mutually beneficial, pool system under which they are ripping
off the common men but only a fraction of the amount reaches
the govt. coffers. The common men and businessmen from all
over Pakistan have complained against overcharging by octroi
contractors who are invariably political heavyweights or their
henchmen. It was in response to this hue and cry that Punjab
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govt. put up advertisements in newspapers in the third week of


March, 1998 asking the people to ring up two telephone numbers
in Lahore if they have complaints of overcharging by octroi
contractors.

The contractors and those who award the contracts have a simple
way of cheating, both the govt. and the common men. The bids
are invited on the basis of unrealistic low rates with the result that
contract is awarded for a nominal amount. However, once the
contract is awarded the contractor is given a free hand to
overcharge and the bulk of the amount charged as octroi and
other municipal taxes end up lining the pockets of the
bureaucrats and contractors.

The daily Business Recorder, Karachi has regularly carried


complaints by the business community against overcharging of
municipal taxes by the contractors. According to a report in
December 9, 1997 issue, the export of Molasses by the sugar
mills in up country came to a standstill because the octroi
contractors in Sindh were charging several times the due amount.
Quoting the exporters of Molasses by sugar mills , the report said
" Rawangi Mahsool (Export Tax)" on Molasses was fixed at Rs 15
per truck but the contractors were charging at Rs 75 per ton. In
addition the exporters had to pay Rs 25 per ton at Karachi and
KMC octroi of Rs 2 per ton. Thus total levies came to Rs 117 per
ton which was more than 10% of the value of exports.

On June 25, 1996 when the Supreme Court restored the Local
Bodies in Punjab, the first official work, some of the restored
chairmen performed on rushing to their offices was cancelling
octroi contracts and stop payment on the so-called development
projects. They knew that their chairmanship was not worth a
penny if the contractors awarded by their predecessors were to
stay.

The municipal corporations and cantonment boards have up to 30


sources of income but the major head of income include the
following.

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1. Octroi consisting of import and export tax


2. Property tax levied at 3-4 percent if the value of transaction
3. License fee from vendors and shop keepers
4. Auction of bus-stops and stands for other vehicles
5. Auction of vegetable markets and slaughter houses
6. Water Tax
7. Fee for advertisement boards
8. Fee for approval of construction maps

The local bodies also raise small revenue from auctions for
public latrines, disposal of trash and sewer water which is used
as fertilizer but the income from sewer water has ceased
because farmers have stopped using it as fertilizer because of
plastic bags getting mixed into it.

Corruption in State-owned Enterprises (SOEs)

PAKISTAN INTERNATIONAL AIRLINES

PIA was suffering Air line lost Rs. 4.4 billion in 2005; Rs. 12.8
billion in 2006 and Rs. 13.6 billion in 2007, which surged to Rs40
billion in 2008. The balance sheet of the national airlines is in
such a condition that it could be declared bankrupt. According to
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experts and PIA sources, PIA with current deficit and number of
employees could not earn profit in next 50 years.

On one hand the PIA is struggling to run its financial matters on


daily basis and grounded dozens of its planes while on the other
hand the Managing Director of PIA Captain Aijaz Haroon is
planning to purchase new planes at a cost of Rs160 billion.

PIA is suffering loses of millions of rupees due to the monopoly of


travel agents on transportation and tickets. Despite record
financial deficit, on the directives of the government, the PIA
managing director made fresh recruitments of 6,000 workers in
the airlines. PIA is on top compared to other airlines in employing
maximum number of workers per aircraft.

How PIA got in to this money crisis and how it can turn around?

Due to the losses in 2005;2006;2007 and 2008, PIA becomes one


of the eight airlines of the world functioning with costs higher
than returns.
In 2007, PIA had 18,231 employees, which makes 434 employees
per air craft; no major airline in the world has that kind of ratio.
The average ratio of the industry is 170 employees per air craft
and best are 70 employees per air craft.
It’s a big question: airline with such overpopulated human power
not doing well? Why the chairman increased number of
permanent staff at a time, when PIA already incurring higher level
of fixed cost? Why thousands of contractual employees have been
regularized at a time when airlines around the world practicing
downsizing, to cut their cost by minimizing the employee per air
craft ratio? What are the criteria of hiring these people? Why PIA
is not turning around? All questions are needed to be answered.
The answer is simple, loud and clear; nepotism and corruption.

Solution

Everyone knows that PIA needs a turnaround, but it’s really


difficult to turn around a giant like PIA with 15000 employees,
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straight away. First they need right leadership, qualified staff, un-
biased and merit based hiring, clear vision, right direction for a
business, better technology, service quality and good public
image. These are the main areas to give serious and immediate
attention, in order to improve performance of PIA. Although this is
not an easy task to change the whole system right away, but we
can do little, to start anything big, and someone has to take the
initiative, before it’s too late. Virtually, PIA is already bankrupt
and now is the time to start taking actions, rather sit idle and
waiting for miracles.

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PAKISTAN STEEL MILLS

Pakistan Steel had a reserve of Rs11 billion and an inventory of


products worth at least Rs6 billion in June 2008. In July 2009,
Pakistan Steel’s current liabilities reached Rs21 billion.

The Pakistan Steel management has already consumed the


entire amount of employees’ gratuity and provident fund. In the
absence of blast furnace, the steel mills is running at 15 per cent
of its capacity.

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PAKISTAN RAILWAYS

Pakistan Railways is continuously making billions of losses


despite billions of subsidies over the last two years. In 2007-
2008, it suffered a loss of Rs 12.66 billion which has increased
to Rs 18.609 in 2008-2009.

Conclusion and Suggestions

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With the help of media, news reports and various reports by


international institutes available on Internet we are able to predict
the economy of Pakistan. It is needed to put forward immediate
measures to tackle the future threats to economy. In this regard
first there is needed to clean completely the foundations for
corruption. NRO declarations as unconstitutional sort out more
than 8000 people who get benefit of this ordinance and, save
them after misconduct. Supreme Court has now opened all these
cases but there is a need of immediate action to save the
Pakistan. Our president along with other 33 companions in the
government also enlisted in NRO beneficiaries it is the extreme
bad luck of Pakistan to have such leaders in power. In the
presence of such leaders not a single positive policy measure
could benefit the country because corrupt minds of these
politicians do not give place for prosperity.

It is required to establish transparent system to put policy


measure to solve various above discussed issues. Sugar crisis,
energy crisis, water crisis and all other are just due to corruption.
Various international reports showed the personal interests of the
politicians towards their interventions to solve the problem.
Supreme Court should take notice of these policies on
international reports. Independent institutes should all condemn
politician's corruption and put forward solid steps to stub down
the corrupt politicians

Pakistan is an agricultural economy based country. Agriculture


has the main share to economy. It contributes 21.8% to GDP,
providing employment to 44.65% of labour force and occupies
nearly 60% of total exports. Although in the early years after
independence of Pakistan the agriculture share to GDP was 62%
but with the passage of time it decreased due to IMF conditions
on one hand and poor policy implementations by different
governments on the other hand. Various circles blaming climate
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changes for this decrease but despite huge climate change we


still have yet enough water and land to cultivate enough to use
locally besides export but the need is only of effective work and
policies. To tackle with the agriculture losses water issue should
be solved immediately and advance fertilizers, pesticides and
insecticides along with good quality seeds and machinery should
be introduced in the country. Agricultural problems should be
addressed and solved by participatory approach and loss of land
due to salination should be rehabilitating and using advance
technologies available worldwide.

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