Direct Tax Policy Principles

First of all, I would like to applaud the efforts of UN awarded and world’s leading accounting body ACCA for utilizing its notable expertise owing to its presence in 160 countries by providing us an opportunity to share our expectations and thoughts on prospective budget for the fiscal year 2007-2008.

Minimization of compliance costs not only for businesses but also for the collectors and maximization of revenue for Pakistan seems to be the core issue of this seminar. When I use the word direct taxation, I would mean to include income tax (Federal and Provincial) and Capital Value Tax broadly speaking and in one sense can be effectively categorized as direct taxes.

TAXES – a source of Public Finance

Taxes are essential to finance public services but there are good and bad ways to collect them. The design of the tax system can have significant economic impacts and can influence residents of a country and multinationals in deciding where to invest.

Tax collection has long been a despised activity. But taxes are essential. Without them there would be no money to build schools, hospitals, courts, roads, airports or other public infrastructure that helps business and society to be more productive and better off.

TAX REGIMES

There are two types of tax regimes – complex and simple as there is no third type.

Complex tax regimes
Tax regimes with relatively high marginal rates and which include a number of exemptions and allowances tend to be less economically efficient in relation to encouraging employment, saving and investment. Such regimes generally also impose higher tax compliance and administration cost which is evident from Income Tax Ordinance, 2001.

We have experienced Acts of 1918 and 1922 which have lead the basis of creation of Income Tax Ordinance, 1979, however, Income Tax Ordinance, 2001 was created to make the things simple. We know from our experiences about acts and ordinances, burdensome tax systems served as a deterrent and normally lead to tax evasion. According to a World Bank survey, Companies in 90% of surveyed countries [175 Countries including Pakistan] rank tax administration among the top five obstacles to doing business. The main factors contributing to this are

The large number of business taxes to pay
Lengthy and complex tax administration
Complex tax legislation
High tax rates
Simple tax regimes
Evidence suggest that simpler tax systems promote economic growth and can help achieve a win:win for government and industry. To help with paying taxes and implementing reforms, government and CBR need to consider all aspects of tax system. All taxes borne and collected by businesses should be recognized along with the related tax compliance costs not just federal taxes.

IMPACT OF TAX RATE OVER COMPLIANCE

In the ongoing reforms, tax administration and compliance, being significant obstacle to businesses, needs to be considered as part of the decision on reform. One should not loose its sight over the fact that government imposes taxes to finance public services but taxes must first be collected and high tax rates do not always lead to high tax revenues. However, the larger the share of informal business activity before reform, the higher the revenue growth after and is evident in Pakistan.

On average, Middle Eastern and East Asian countries make paying taxes the easiest. OECD countries impose the smallest administrative burdens and charge moderate tax bills. According to a World Bank study, between 1982 and 1999, the average corporate income tax rate worldwide fell from 46% to 33% while corporate income tax collection rose from 2.1% to 2.4% of national income [Hines (2005)].

This outcome was achieved because more businesses entered the formal economy and because tax exemptions and other tax incentives were reduced or eliminated.

Developed countries tend to have lower business taxes and less complex tax administration processes. Simple moderate taxes and fast, cheap administration mean less hassle for businesses – as well as higher revenues.

In contrast, Developing countries tend to use business as a collection point, charging higher business taxes. Latin American and South Asian countries impose the heaviest burdens, mainly because of high compliance costs. Africa follows, largely because of high taxes.

As stated earlier, Developing countries try to levy the highest amount of tax on businesses on the premise that these high taxes are needed to fund public services and correct fiscal deficits. However, the evidence suggest otherwise. Higher rates typically do not lead to higher revenues in developing countries. Instead they push businesses into the informal economy. As a result the tax base shrinks and less revenue is collected.

Lower rates work best when their administration is simple. Growing evidence shows that tax reforms creates more vibrant businesses and is evident in Pakistan. A smaller tax burden encourages firms to invest. However, they are undermined by exemptions that shrink tax base. I would like to share an adverse experience, tax revenues has fallen in Uzbekistan, where the enthusiasm for income tax cuts was not matched by efforts to improve tax administration and expand the tax base and that where CBR is trying to move through recent conference which requires more than a simple applaud.

Recent Reformers – Tax Rate Cut and Higher Revenue Target

Ghana Exceeded its mid-year revenue targets despite significant cuts in corporate tax rates in the last two years
Albania Corporate tax revenue rose 21% after the rate was cut
Moldova Corporate tax revenue rose 28% after the rate was cut
Latvia Corporate tax revenue rose 37% after the rate was cut
Romania Corporate tax revenue rose 8% in real terms after cut in tax rate in 2004

Economic growth in these countries is a factor in the increased revenue but compliance is also up [Source: World Bank (2006)]. Overall growth is also higher with lower taxes and better collection [Lee and Gordon (2004)].

Overall growth is also higher with lower taxes and better collection. And with tax incentives aligned to encourage work, more firms and more jobs are created. One study shows a cut of one percentage point in corporate tax rate is associated with up to a 3.7% increase in the number of firms and up to 1.1% higher employment [Goolsbee (2002)]. Tax reforms inspire political debate and can be hotly contested. But both businesses and government benefit when taxes are simple and fair and set incentives for growth.

TRANSPARENCY and CORRUPTION

Transparency is the key – Governments need to be accountable for how taxes are spent. Businesses will potentially be more willing to pay taxes if they can see the benefits of improved public services and infrastructure.

Businesses are more willing to pay taxes if they see that the money is used to improve public services. Yet many developing countries with high tax rates fail to improved business infrastructure or education and training – two things that employers care about.

Across countries, higher taxes payable are not associated with better social outcomes, even allowing for country income levels. They do not increase government spending on health and education, raise literacy or life expectancy or lower child mortality, nor are they associated with better infrastructure and other public services.

Burdensome taxes do however generate other undesirable outcomes. They are associated with more informality, as entrepreneurs often choose to avoid the formal system altogether and operate underground. They also breed corruption as every point of contact between a bureaucrat and an entrepreneur could present a dander of bribery and confusion on voluminous, often contradictory rules which may create room for discretion.
Simplifying the tax regime by reducing tax rates and eliminating exemptions is the main way to reduce corruption in tax administration. According to a World Bank survey, Georgia introduced major reductions in tax rates and simplifications to the tax system in 2004 – has seen a drastic fall in perceived corruption of tax officials. Georgia showed the sharpest drop in perceived corruption among 27 transition economies.

Recent Reformers – Tax Rate Cut and Corruption

Georgia Previous level 44% Current level 11%
Romania Previous level 14% Current level 8%
Slovakia Previous level 11% Current level 5%

[Source: World Bank (2006)]

All the above referred factors, tax rate cut and corruption, tax rate cut and transparency, tax rate cut and increased compliance etc present a good case for reduction in corporate tax rate while applicability of individual’s tax rate over small companies.

TAX COMPLIANCE COST

Businesses need to understand and communicate their total tax contribution, so that they are more able to manage and control it and demonstrate the full extent of the contribution made to public finances. I would suggest using indirect tax expense and taxing compliance cost as a separate head of expense in profit and loss account instead of rent, rate and taxes.

A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate. Russia’s large tax cuts in 2001 did exactly that. Corporate tax rates fell from 35% to 24% and a simplified tax scheme lowered rates for small business. Yet tax revenue increases – by an annual average of 14% over the next three years. One study showed that the new revenue was due to increased compliance [Ivanova, Keen and Klemm (2005)].

It is not just businesses that gain from reforms. Streamlining taxes also brings savings for government. A Complicated tax system costs a lot of money to run – funds that could be better spent on education, health care and infrastructure. In Denmark, one Kroner spent on tax administration generates 113 Kroner of tax revenue. In Hungary, one forint produces only 77 and in Mexico one peso produces only 33. Such data is missing from performance measurement and must include the loans and grants received.

COMPLEXITY AND ITO, 2001

A particularly worrying consequent is that with sheer volume of tax legislation no one individual can possibly read all of it. So the days of a tax director being confident of spanning all the relevant parts of the tax code seem to have all but disappeared. Embodying all previous SRO’s of section 50 of Income Tax Ordinance, 1979 by virtue of section 239 (10) did the rest.

Similarly, at least as regards advising large to medium size corporate, the ability of a single tax advisor to span all the relevant tax legislation is circumscribed, hence, increased the relevance of specialists and sub-specialists.

This leads to an at least two tier market – those who can afford the necessary advice, and those for whom such advice may be of only marginal benefit on a cost/benefit analysis. It is also leading to a situation where the primary tax legislation is being read by fewer and fewer people.

The boldest reform is to simplify tax law so that every business faces the same tax burden – with no exemptions, tax holidays or special treatment for large or foreign businesses. Income Tax Ordinance, 2001 has also started in that way! But when hard times come and government needs revenue, tax rates are if not rates are freeze at current level.

This is unpopular, and large or well connected businesses usually obtain special treatment. Soon the tax law becomes riddled with exceptions, generally at the expense of small businesses, which have the least ability to lobby. Often they are pushed into the informal sector. Few reformers dare eliminate exemptions like Egypt – 3000 Exemptions.

To conclude, Central Board of Revenue needs to reflect on the likely deterrent effect of the ever increasing complexity of Income Tax Ordinance, 2001 and the resulting probable reduction their international competitiveness. Ultimately, when tax legislation becomes too voluminous, compliance drops more through ignorance then deliberate evasion.

SIMPLER TAX REGIME with CONSOLIDATED TAXES

Number

Corporate Income Tax Payments 5
Labor Tax Payments 25
Other Tax Payments 17
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Total Tax Payments 47
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Hours

Compliance Time – Corporate Income Tax 40
Compliance Time – Labor Tax 40
Compliance Time – Consumption Tax 480
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Total Compliance Time 560
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Corporate Income Tax – Average 27.00%
Statutory Corporate Income Tax 37.00%
Labor Taxes - Average 14.6%
Other Taxes 1.80%
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Total Tax Rate 43.40%
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Consolidating taxes is also a worthwhile reform

For instance, Pakistan have more than one labor tax, yet such taxes are typically based on gross salaries, why not unify them? Tax offices can then distribute the revenues among government agencies – Slovakia just did that.

A practical problem arose in many countries where social security agencies would be reluctant to part with their powers – especially if there is a chance that tax offices won’t give them their share of revenue. To gain their trust, an automatic separation of revenue can be introduced so that there is no room for discretion through codes on tax payment receipt. Moreover, stamp duty needs to be collected by Central Board of Revenue along with CVT on tax payment receipt.

Recent Reformers – Cut in number of Taxes

Georgia [2004] Number of taxes from 21 to 9
Russia [2001] Number of taxes from 20 to 15
Iran [Recently] Number of taxes from 3 to 1

[Source: Georgia Business Council Interview and FIAS (2004)]

Reforms should also target minor taxes like stamp duties – which cost money to administer but do not raise much revenue – or particularly distorting taxes. Small businesses have a particularly hard time dealing with multiple tax payments. Why not help them by making their interactions with the tax agency simpler? Central Board of Revenue Chief should work with federal and provincial ministries in this regard.

WHT AGENT RISK

Withholding Tax agents’ costs have three folds – taxes borne, taxes collected/deducted and tax administration. The question arises whether Withholding Tax agents are properly focused on managing these significant tax costs. Bear in mind that risks in the tax arena generally come in many guises and Withholding Tax risks are no different.

Operational Risk The possibility of processing errors, which because of volume involved could lead to significant additional costs in the shape of additional tax.
Compliance Risk The possibility of late submission with consequent penalties
Reputation Risk Making errors in the employment tax arena is unlikely to lead to adverse external publicity but it could impact on staff relations

Some might argue that these risks have always been present. However, it is apparent that tax authorities see the Withholding Tax compliance arena as a fruitful area for their efforts. It is suggested that companies and governments alike need to consider them and make sure that they factor them properly into planning. The important issue is transparency through WHT Audit and that they are properly reported.

Honorable Chairman with due respect, I totally disagree regarding recent mechanism of filing of Withholding Tax forms. Being an accountant you will agree over the fact that accountants are normally busy in management reporting during the first 10 days of the month and this include monthly closing apart from preparation of monthly profit and loss account.

It is suggested that the filing date of 15th of every month needs to be extended to 25th of every month, quarterly statements needs to be submitted after one month and annual statement after three months instead of current two months. However, these statements need to be submitted branch wise without any need of consolidation along with Cash/bank ledger of every branch and summary of adjustments of payments involving deduction of tax. This will also put the tax department on their toes and also give an ease.

Concept of adjustment needs to be specifically incorporated into Withholding Tax sections of Income Tax Ordinance, 2001 however; this needs to be reflected in Foreign Exchange Manual of Pakistan. Any amendment in this regard needs to be made after close consultation with State Bank of Pakistan. This will also provide an ease to the local and multinational businesses; however, transaction involving foreign exchange needs to be reported to Central Board of Revenue and SBP.

RECONCILING PRINCIPLES - FINANCIAL ACCOUNTING AND TAX ACCOUNTING

The IASB is developing a financial reporting matrix whereby the various components of a company’s result are split broadly into two categories – Operating income which comprises cash or near-cash items and valuation adjustments, leading to a total performance column described as comprehensive income. This future format of profit and loss account needs to be incorporated into section 34 of the Income Tax Ordinance, 2001.

I believe that items falling into operating income should form a reasonable basis for tax reporting and assessment. Items included as valuation adjustments need to be considered in more detail. They may include items such as provisions for doubtful debts and obsolete stock etc, they may form a normal part of taxable income according to the provisions of Income Tax Ordinance, 2001 and various precedence.

However, valuation adjustments are of more subjective and volatile nature and do not therefore posses the features which have traditionally been seen necessary of costs having been incurred or income having been realized, or certainty as to amount to be appropriate to utilized for tax purposes.

There needs to be a detailed review of the items falling into the valuation adjustment category and principles must be developed in the common rules chapter of Income Tax Ordinance, 2001 in dealing with these items and any other items that may arise in future.
The main principles should revolve around the distinction between assets readily convertible into cash where adjustments would be taxed or allowed and other assets which would be dealt with on a realization basis for tax purposes. Moreover, plethora of precedence relating of principles of capital and revenue expenditure/income and realized and unrealized income needs to be immediately considered in the common rules chapter of Income Tax Ordinance, 2001.

It is a detailed topic and I was working for almost three months on this. This cannot be covered in this small passage of time and you may see my detailed article on this in near future.

COHERENT STRATEGY OF ACCOUNTING AND RECORD KEEPING

Section 32 to 36 of Income Tax Ordinance, 2001 and Chapter VII – Records and Book-keeping must be aligned with organizational hierarchy of tax department and needs to be aligned with indirect tax laws. A suggestive structure is as follows.



SUGGESTED STRUCTURE

Category Tax Policy Record Type Legal Organizational Structure
Large Tax according to normal accounting practice IAS/IFRS
Fourth Schedule of Companies' Ordinance, 1984 Incorporated/ Unincorporated
SME Medium Tax according to normal accounting practice Fourth Schedule of Companies' Ordinance, 1984 Incorporated/ Unincorporated
SME Micro Tax according to normal accounting practice
OR
Final Tax Regime Fourth Schedule of Companies' Ordinance, 1984
Record Keeping
Postulates prescribed in Income Tax Rules, 2002 - Chapter VII Incorporated/ Unincorporated
SME Small Final Tax Regime Suggestive record format to be prescribed in schedule of Income Tax Rules, 2002 Unincorporated

Following is a suggestive structure which may be used in conjunction with existing threshold for LTU, MTU and RTO.
Category Sub-category Quantitative Criterion Monetary limit of Quantitative Criterion
Large 1. listed companies Nil Nil
2. Susidiary of a listed company
3. PE or Non-Resident Company
4. Monetary criterion of LTU Turnover
Staff
Capital
SME Medium 1. Non-Listed Nil Nil
2. Private Limted Company Nil Nil
3. Manufacturing Turnover
Staff
Capital 2 Billion
500
500 million
4. Trading Turnover
Staff
Capital 900 Million
200
200 million
5. Service Turnover
Staff
Capital 500 Million
200
200 million
SME Micro 1. Single Member Private Limited Company Nil Nil
2. Manufacturing Turnover
Staff
Capital 500 Million
250
50 Million
3. Trading Turnover
Staff
Capital 90 Million
100
10 million
4. Services Turnover
Staff
Capital 50 Million
50
10 million
SME Small 1. Manufacturing Turnover
Staff
Capital 50 Million
50
5 million
2. Trading Turnover
Staff
Capital 10 Million
10
1 million
3. Services Turnover
Staff
Capital 50 Million
50
0.5 million

ACCOUNTING QUALIFICATIONS

Honorable chairman, ACCA syllabus is the benchmark for the whole world according to the United Nations and Pakistan’s student have the option to choose Pakistan’s tax and corporate as part of their studies for appearance in exam. A level playing field with a conducive environment needs to be provided.

This will also help Central Board of Revenue in interacting with various accounting bodies like ACCA, ICAP and ICMAP which will enable to them to draw the conclusion on the basis of pool of opinions bodies of public accountants. Moreover, this will also bring healthier competition which will end up on Quality improvement.

AUDIT

A section is not enough and a chapter needs to be devoted for Audit. Moreover, the existing audit section needs to be rephrased under one chapter which may include audit management, taxpayers’ obligation, authorized representative obligation, modus operandi of audit, modus operandi of audit decision, postulates of an audit order and time frame to conduct & complete the audit.

STANDARDIZATION OF ORDERS

Current practice is that good orders are awarded; however, this exercise is not cashed yet by finalizing a standard format of order. There seems to be a dire need to finalize a standard format of orders for assessment, amendment in orders, revision, appeal effect and audit.

Moreover, a standard format of order is also required for CIT Appeals and ITAT, however, when I use the word standard this means that basic principle based postulates needs to be prescribed, for instance for appellate forums transaction nature, sections applied, sections not considered, beneficial circulars, accounting and tax principles applicable, department’s argument, taxpayer’s argument, precedence available, reasons of not considering any of the afore mentioned point, argument or precedence and finally the decision itself. A good speaking order normally reflects this but we must strive to make all order speaking!

Moreover, I would request honorable Chairman to please specify a time limit for appeal effect orders.

TRANSFER PRICING

Internationally, the horizon is much bigger than pharmaceuticals and time has come to bring certainty in businesses. I would suggest that Chapter VI – Transfer Pricing needs to include what State Administration of Taxation of China has done in line with OECD guidelines. They have included a principle set of documentation and includes

Business and Industry Analysis, that is, description of the industry in which the company operates
Functional Analysis, that is, description of the functions carried out, the assets used and the risks borne by the company in question
Identification and quantification of the related party transactions
Selection of the most appropriate transfer pricing methodology to analyze arm’s length nature of the related party transactions and
Application of the most appropriate methodology, with conclusions on arm’s length nature of the pricing of the related party transaction
This documentation should be prepared before the tax return for the year in question is submitted but there will no requirement to submit the report to the Income Tax at the time of return just a box ticking, however, no time will be given when the report is required to be submitted through a special notice.
However, I would like to go beyond this and would like to suggest about the Advance Pricing Arrangements [APA], although my detailed article was published on this three years back, suggested in OECD Transfer Pricing Guidelines.

APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time.

An APA is formally initiated by a taxpayer and requires negotiations between taxpayer, one or more associated enterprises and one or more tax administrations, hence, can be unilateral, bilateral and multilateral.

TAKAFUL INSURANCE AND REINSURANCE

My detailed articles has been published in local and international press on this topic, however, I would like the honorable Chairman to consider introduction of a new schedule for re-insurance and provide special exemption or deductions to the payers. This will not only help in development of a new industry but will also save outflow of foreign exchange.

SHARIAH COMPLIANT FINANCIAL PRODUCTS

It is high time that a framework needs to be incorporated in Income Tax Ordinance, 2001 whereby Shariah compliant products are taxed in a way that is neither more nor less advantageous than equivalent banking products. The intended effect must be to allow providers to offer Shariah compliant products without facing commercial disadvantage, and to enable customers to take up these products without encountering uncertainty or disadvantage over tax treatment.

Murabaha
The most common problem of Shariah compliant financial products is the involvement of series of transaction which falls within the ambit of minimum tax, capital gain and fair market value related provision which is not the case under conventional financial products.

Section 113 needs to be amended to exclude the sale transaction of a Shariah compliant financial product from the definition of turnover. Moreover, section 153 also needs to be suitably amended to exclude deduction of tax from the installments by the customer instead of exemption certificate approach.

In furtherance, section 37, 68, 75, 77 and 78 needs to be amended in such a manner that transaction, involving capital gain, entered into by a Shariah compliant financial product provider should not be taxed under any provision of Income Tax Ordinance, 2001 in the hands of Shariah Compliant financial product provider.

Ijara, Ijara wa Iqtina and Diminishing Musharaka
Section 18 needs to be suitably amended to incorporate the concept of Ijara and Ijara wa Iqtina. In the absence of a suitable amendment, the Ijara wa Iqtina relating to a house will fall under section 15 and would put the Shariah compliant product provider at a disadvantage over the conventional bank. The core basis of such amendment is based on the fact that it involves payment of rent and principal with rent.

Wakala – Agency
It is suggested that such an income needs to be considered in line with section 151 in the hands of the customer.

Donation out of Penalty
A heavy non-performing portfolio and default on part of clients is a serious problem confronted by the Shariah compliant financial product provider. This problem could be threat to success of Shariah compliant financial product service provider. If clients do not honor their commitment in respect of timely payment in respect of a Shariah compliant financial product, it could cause irreparable loss to the system.

In Islam, it is permissible to penalize a financially debtor but delays payment of debt without any genuine reason. Last Prophet (PBUH) said, “A rich debtor who delays payment of debt commits zulm”. Hence, the jurists allow the punishment (Taazir) to such borrower in the form of fine. In the opinion of some Maliki jurists, a delaying borrower would be obliged to pay for charitable activities.

In view of the severity of the problem, all Shariah bodies including Shariah bench of the Supreme Court of Pakistan have approved the provision of penalty clause in the contractual agreements that keeps a balance between the requirement in view of severity of the problem and that of the Shariah conditions/principles to keep the fine difference between interest and profit on Shariah compliant financial product intact.

However, the penalty proceeds would be used for charity because penalty on default in repayment cannot become an automatic source of income for the creditor. Hence, it is imperative that a new sub-section needs to be introduced in section 20, whereby all such penalties are donated and amounts are reflected in the tax returns of such not for profit making organizations having NTN.

GROUP RELIEF

I would like the honorable chairman to also consider following question.

LOCAL CONSOLIDATION

How will the territorial boundary of a multinational group be defined
Will the controlled foreign companies be included in a group
The term group is not defined in Companies' Ordinance, 1984, hence, will any new framework will have its own definition
Should groups be given the option to be taxed on the basis of group consolidated account or should the consolidated basis be mandatory – and what about groups which are not required to produce consolidated accounts under Companies' Ordinance, 1984
How will associated companies and minority interests be dealt with
How will losses be dealt with
Will the elimination, on consolidation, of profits on intra group sales of trading stocks and other intra group trading transactions be followed for tax purposes
How will consolidation adjustments be dealt with
To the extent that group member companies outside the national territory are included, how will the limitation on national taxing right afforded under bilateral tax treaties be identified
INTERNATIONAL CONSOLIDATION

It will be necessary to harmonize the basis of computation of similar profit and gains, especially trading profit
It will be necessary to harmonize the basis of taxation of intra-group dividends
It will be necessary to determine some method of apportioning consolidated profits and losses between countries having DTT and dealing with effects of cross-border set-off of losses against profits
TAX RETURNS

It is requested that the tax return dates should be extended from September 30 to October 31 and from December 31 to January 31 as this will provide an ease to the taxpayers. However, this needs to be coupled with obligation over Withholding Tax agents to send Withholding Tax deduction certificate and tax payment receipts to the person from whom tax was collected or deducted till September 30 or December 31. This may also be coupled with rigorous penalties.

It is also suggested that persons, from whom Withholding Tax was deducted or collected, needs to file tax returns, however, the literacy rate may become an impediment in this.

TAX REFUND, ADJUSTMENT AND VERIFICATION

Central Board of Revenue’s recent refund adjustment circular is highly applauded, however, the point is to verify the refund. Refund was verified at the time of assessment and then again at the time of refund. The problem is coupled when the tax payment receipt are from all over Pakistan. This needs to be resolved.

ROOT CAUSES OF TAX EVASION - PERCEPTION

Firstly, this Income Tax was introduced in 1860 after the Ghadar or Battle of Freedom for five years and then there was a three years gap in order to subsidize the loss of this battle. It was again imposed in 1868 till 1873 and then again imposed in 1886 for around 30 years. Then in 1918 a new enactment was enacted which was renamed as 1922 after some amendments which was then changed into Income Tax Ordinance, 1979 and currently available in the shape Income Tax Ordinance, 2001.

However, in Pakistan there were and are many perceptions regarding the applicability of Income Tax being Un-Islamic as people believe that zakat, khiraj, fai and Jazia are the only prescribed taxes. However, taxes are not limited to that but one may wonder import tax – chungi was first imposed during the period of first four Caliphs as this is a need of the society.

However, still the wrong perception about tax has not been corrected, although corrective measure has been taken by reducing tax rate, etc, still owing to the following reasons they remain intact.

Name based exemptions instead of industry or principle based exemptions
Social welfare schemes are not normally undertaken owing to non-availability of principle based exemptions for donations and deduction for the taxpayer
In Islam there is a concept of donation, left hand should not know when the right hand donates and one must help their poor relative, however, no such concept is recognized in Income Tax Ordinance, 2001
Zakat is a deductible allowance but it is not allowed to be deducted from tax payable – this strengthens the concept that Income Tax is Un-Islamic.
A person earning 200K required to feed a family of three member while another person earning the same income are required to feed not only his family but parents and small sister and brother – Both are taxed in the same way!
Concept of one’s deduction and other’s income is absent - as this may bring new taxpayers on verification.
POINT FOR CONSIDERATION

Central Board of Revenue

Consider tax reform which takes into account all taxes borne and collected by businesses as well as the cost of tax compliance – Total Tax Contribution
Increase governments accountability and communicate with taxpayers as to how taxes are spent
Consider clear tax education campaigns to explain the taxes, how to pay them and the benefits to all stakeholders
Consider how simplification of tax legislation, the ease of compliance burden, and the consolidation of taxes might generate benefits for both governments and taxpayers.
Consider consultation with taxpayers when developing ideas for tax changes
Taxpayers

Gather information on the total tax contribution including all taxes borne and collected, as well as the cost of tax compliance.
Ensure that information around the total tax contribution is made accessible to governments and tax authorities to help inform their decisions over reform.
Communicate the total tax contribution to the wider stakeholder groups to demonstrate the extent to which they are supporting public finances through taxes.
Engage in regular dialogue with Central Board of Revenue over the need for reform and specific areas of concern.
I personally appreciate the efforts of CBR who is trying to provide developed countries facilities in a developing country, however, they are in a room full of age old garbage with a vision of clean room. Central Board of Revenue is moving right direction but when things move in right direction than expectation grows! As stated earlier, taxpayer’s need to know how their taxes are spent and I would like to end up on small part of history.

“At times, Syria (Sham) was attacked by Tatars, the King decided to take judicial decree from the Islamic Scholars for imposing a tax to meet the expenses. When the issue came before Imam Noovi [Rahmat ullah Alah], he opined

The King lives a lavish life and has a lot of wealth, he also spends a lot of money but his wealth, income and perquisites are not taxable, let him start first by donating his wealth and then the treasury has the right to tax over the common people.”

[The writer is an International Tax Advisor and this paper was read at ACCA’s pre-budget seminar held in Islamabad]

Article courtesy of Muhammad Ashraf