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Accelerating Tax Reforms in Pakistan
Dr Manzoor Ahmad Chief Executive, World Trade Advisors [email protected] www.worldtradeadvisors.com
www.worldtradeadvisors.com
Federal Board of Revenue
February 2013
Three key questions
1. What’s wrong with our Tax Policy?
2. How can we move in the right direction?
3. What key reforms are needed for each type of tax?
1
What’s wrong with our Tax Policy
It’s not fair
Impedes economic growth and creates distortions
Highly opaque and thus makes it easy to indulge in corrupt practices
Yields one of the worlds lowest tax to GDP ratios (115th out of 179 countries)
2
It lets the rich get away without paying their fair share
No tax on wealth and gift or inheritance (estate duty)
Nominal tax on agricultural income
Different sources of income treated differently
Income created through inactive activities receives preference
Income Tax
Small and Medium enterprises
Poorer regions through high protection of industries in more developed areas
The poor by taxing items consumed by them
Customs tariff discriminates against the following
Why it is unfair
Sales tax regime full of loopholes
Sales Tax
3
How our Tax Policy impedes economic growth
It relies for taxes on international trade
It discriminates against more productive economic activities, particularly manufacturing
It provides opportunities for corruption
4
Pakistan’s inward looking policies and its results
0
50
100
150
200
250
Pakistan Turkey Indonesia Thailand Brazil Malaysia
Value of exports in 2010
US
$ b
illio
n
5
Our Tax Policy is opaque and convoluted
Customs tariff: 54 % of tariff lines have different tariff rates for different importers through SROs
Income tax: It takes 560 hours per year preparing and
filing returns and paying taxes compared to 227 hours in East Asia
Sales Tax – multiple rates (0, 5%, 7%, 16%, 19.5%, 22% & 3% additional tax on commercial importers)
Withholding income tax in many cases is not an income tax but is an indirect tax like customs duty, which is passed on to consumers
6
7
An example of taxes on imports and complexity of Customs tariff
Commodity Description CD ST FED WHT SROs FTAs Other Req.
General principles for moving in the right direction
Expand the base of direct taxation
Reduce reliance on taxes on international trade
Eliminate discrimination between incomes earned in different ways
Greater transparency
8
Recommendations for Income Tax
Tax all income above a certain threshold irrespective
of source
Re-introduce wealth, gift, inheritance (estate) taxes
There should be correlation between an individual's living costs and his declared income
9
Recommendations for Customs Duty
Abolish all duty concession SROs
Lower tariff rates to those applicable to FTA partners
Keep a maximum of four tariff slabs
10
Recommendations for Sales Tax
Overhaul the system by getting rid of exemptions
Merge various rates into a single or two-rates (other
than a zero rate for exports)
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Conclusions
1. Our Tax Policy is seriously flawed; impedes economic growth and is opaque
2. Can be rectified by reducing taxes on international trade; expanding the base of direct taxes; eliminating discrimination between incomes earned in different ways; and ensuring greater transparency
“The best time to plant a tree is twenty years ago. The second best time is now.” Chinese Proverb
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