Pakistan has a very complex system of tax collection under the constitution of ‘Income Tax Ordinance of 2001’ with around 70 unique taxes administered. Pakistan’s tax collection comes under the administration of Federal Board of Revenue (FBR) that is responsible for administrating regulations of taxation, expanding tax net, and determining tax rates for each sector and category. The institute of FBR comes under the Federal Government of Pakistan but determination of tax rates is left to provincial authorities of each province under the 18th Amendment.
Recently, in an effort to improve the taxation process, Federal government under the chairmanship of Dr. Hafeez Sheikh approved establishment of a central tax body for Pakistan named as ‘National Tax Council‘ that will devise uniform tax policies for the country to avoid overlapping of provincial and federal policies.
Different Categories of Tax in Pakistan
There are several types of taxes in Pakistan with varying tax rates. some of the main types of taxes include Sales Tax (17%), Federal Excise Tax on Imports (13%-17%), Company Tax (29%), Capital Gain Tax on sale of fixed assets (25%) and Individual Tax that varies from person to person based on income. These rates also vary from province to province to a small extent. For instance, the sales tax in Punjab is 17% while in Sindh it is 13% and in KPK and Balochistan it is 15%.
Pakistan’s Historical Tax Collection
The chart below shows the tax collection in Pakistan from 1960 to 2019.
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Issues
with Tax Collection in Pakistan
The tax collection in
Pakistan has always been very low compared to global standards of tax
collection as less than 0.6% of Pakistanis pay taxes. Moreover, the taxation department
of Pakistan has been criticized for corruption and bribery when it comes to tax
assessments which makes list of tax evaders longer. Another issue is the
unregistered businesses in Pakistan which makes it difficult for FBR to bring
them under tax bracket.
Current Tax Collection Scenario
Although the tax collection in Pakistan has increased over the years to around Rs. 3,828,500 million in 2019, the percentage of tax revenue to GDP is extremely low. The FBR’s tax to GDP ratio was around 10% in 2018-19 where it was around 11.6% in 2017-18. Currently, the tax to GDP ratio stands at 12% of GDP compared to its target of 23% according to World Bank. The present government is working hard to expand the tax bracket in country by applying strict rules in several sectors, however, FBR still fails to include sectors like agriculture and small scale businesses in tax bracket. The net collection for 2018-19 saw around 25% growth in income tax, sales tax and excise duty but the current restrictions by federal government on imports caused a huge loss to tax collection in terms of customs duty.
The government has implemented several new regulations regarding tax amnesty, real estate sector and business registrations which initially is making it difficult for them to collect more tax, however, with time an expanded tax net is expected by government officials. The IMF led demand for aggressive tax collection is also expected to push government towards more forceful actions in future. The establishment of National Tax Council is also a great step towards harmonizing the tax collection efforts of each province as well as increasing provincial responsibility that causes a huge debate when National Finance Commission (NFC) award distribution comes each year.
