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Direct & Presented By: Karim Ismail Dinani 2008-1-40-9185 Indir ect Taxe s

Direct & Indirect Taxes

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Page 1: Direct & Indirect Taxes

Direct &

Presented By: Karim Ismail Dinani

2008-1-40-9185

Indi

rect

Taxes

Page 2: Direct & Indirect Taxes

Taxation system of Pakistan: Structure

trendsan d

Starting

Brief discussionWith

Page 3: Direct & Indirect Taxes

Economic Objectives

While resource mobilization remains as the primary objective of taxation system in Pakistan, through the medium of various exemptions and incentives, the tax system embodies a wide range of secondary objective as well. These include:•Encouragement of savings•Stimulation of certain industries•Development of backward areas•Encouragement of fixed investment•Promotion of exports•Promotion of capital markets•Support for charity•Support for welfare activities•Promotion of house building

Assigned to Taxation

Page 4: Direct & Indirect Taxes

Tax Structure

• Fiscal structure in Pakistan is divided between the Federal and the Provincial Governments.

• This structure was derived from the revenue-sharing provisions of the Government of India Act 1935 and has been incorporated into successive constitutional provisions outlining the respective revenue powers of the Federal and Provincial Governments.

Page 5: Direct & Indirect Taxes

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 Licence Fee • Import Registration Fee • Export Registration Fee • Central Excise Duty • Sales Tax on Manufactured

goods

Taxation StructureFederal Government Taxes:• 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

Provincial Government Taxes:• Professional Tax Property Tax• Vehicle Tax Stamp Duty• Entertainment Tax• Betterment Tax Social Security• Contribution Explosive• Licence Fee Provincial• Education Cess Capital Gain• Tax Punjab Airport Tax • Provincial Excise Duty Karachi • Dock Labor Board Cess Cess • on Hotels Cotton Fees Paddy • Development Cess Provincial • Excise Duty Land Revenue Tax • Employee Old Age Benefit • Contribution Trade Tax on • Jewelers, Garment shops

Page 6: Direct & Indirect Taxes

Taxation Structure

• Under the present 1973 constitution, Federal and Provincial Governments are assigned separate revenue jurisdictions.

• Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories:1. Direct taxes2. Indirect taxes

Page 7: Direct & Indirect Taxes

Taxation Structure

Direct Taxes:The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.Indirect Taxes:Indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return.

Page 8: Direct & Indirect Taxes

Division of Direct & Indirect Taxes

The Federal Government has the constitutional right to levy a wide range of Direct Taxes including:• Personal and corporate tax (excluding tax on agricultural

income)• Workers Welfare Tax• Capital Value Tax• Worker profits participation tax

Indirect Taxes Include:• Custom Duties• Federal Excise• Sales Tax• Others

Page 9: Direct & Indirect Taxes

Com

pone

nts o

f

Federal Taxes (FY10)

(PKR in million) 2010-11 Budgeted 2010-11 % Change

Total Tax 1,778,715 1,679,363 -5.6%

Direct Tax 657,700 626,900 -4.7%

Income Tax 633,000 602,500 -4.8%

Workers' Welfare Tax 20,000 20,000 0.0%

Capital Value Tax 4,700 4,400 -6.4%

Indirect Taxes 1,121,051 1,052,463 -6.1%

Custom 180,800 173,300 -4.1%

Sales 674,900 654,600 -3.0%

Federal Excise 153,600 132,900 -13.5%

Petroleum Levy 110,000 90,000 -18.2%

Other Tax 1,715 1,663 -3.0%

Page 10: Direct & Indirect Taxes

Income Tax (Personal & Corporate)• Income tax is levied on the total income of a person

from all sources including salaries, interest on securities, income from house property, income from business, professional or vocation, capital gains, and 'other sources of income'.

• Income Tax Ordinance, 1979 and the rules made thereunder provide the mechanism for computation of income and tax.

• The structure of income tax is based on withholding taxes (WHT), voluntary payments (VP) and collection on demand (COD).

Description Direct Taxesof

Page 11: Direct & Indirect Taxes

• For salaried person, minimum threshold of Rs.35,000 is allowed for all other income sources.

• Corporate taxpayers do not enjoy any minimum threshold.

Description Direct Taxesof

Page 12: Direct & Indirect Taxes

• Withholding taxes (WHT), Withholding is an act of deduction or collection of tax at source. Withholding taxes are collected from more than 20 sources - the major sources are salaries, bank interest, contracts, imports, exports, electricity and telephone bills.

• The collection on demand (COD) includes arrear demand and current demand.

• Voluntary payments include; payments with returns and advance payments.

Description Direct Taxesof

Page 13: Direct & Indirect Taxes

• In respect of business income, losses are allowed to be off-set against current income from all sources and where these are not completely absorbed, these can be carried forward for six years to be set-off against future profits from the same business, profession or vocation.

• The six years time limit, however, does not apply to un-absorbed depreciation allowance which can be carried forward indefinitely.

• Industries set-up in Export Processing Zone enjoy concessional tax treatment in respect of profits and gains. Salary income of expatriate workers and technicians is tax exempt. Similarly, foreign investment enjoy extensive tax concessions.

Description Direct Taxesof

Page 14: Direct & Indirect Taxes

Workers Welfare Tax:

• It is charged at 2% on the manufacturers having income of Rs 100,000 and above. Employees Old Age Benefit Scheme is financed through this fund.

Capital Value Tax:

• Capital Value Tax is payable by every individual, association of persons, firm and company, not born on the National Tax Register. Currently CVT is payable with different rates on immovable commercial and non commercial property, residential flats, and purchase of shares of stock exchange.

Workers Profits Participation Fund:• This tax is paid by the industrial undertaking having more than 10 workers

at 5% of their profits for distribution amongst workers. Any leftover amount after distribution amongst the workers is deposited with the government to become part of the WWF.

Description Direct Taxesof

Page 15: Direct & Indirect Taxes

Custom Duties:Customs duties are levied through Customs Act, 1969 on goods imported into Pakistan. It contributes 18.8% in the indirect taxes and 12% in total taxes collected by FBR. Only 20 major commodity groups contributed 78% of the total customs duties during 2010-11. Auto sector is the top contributor of the customs duty. The composition of gross customs duty collection is provided as following:• Import Duties• Warehouse Surcharge• Export Development Surcharge• Misc (auctions, recovery of arrears, defense etc)

Description Indirect Taxesof

Page 16: Direct & Indirect Taxes

Federal Excise:

Federal Excise Duties are levied on domestic production, imports and services rendered in the country. The major excisable commodities include cigarettes, cement, beverages, natural gas and POL products whereas excisable services are; Air Travel, Insurance, Non-Fund Services provided by banking or non-bank financial companies and Franchise services. As part of budgetary measures for the year 2010-11, Special FED at 1% has been levied on goods which are manufactured or are imported in Pakistan.

Sales Tax:

This tax is being implemented in our country in the mode of Value Added Tax (VAT). At each stage a manufacturer, a wholesaler and a retailer is required to pay tax only on the value its business activity adds. Sales tax is liable on sales of all goods and services produced in the country excluding those goods exempted in the Sales Tax Act, 1990. The major commodity groups that have contributed around 87% of total ST (imports) collection include POL Products, Edible Oil, Plastic, Vehicles and Parts, Iron and Steel, Mechanical Machinery, Electrical Machinery, Organic Chemicals, Paper & Paper Board, Oil seeds etc , Misc Chemicals Products, Rubber, Coffee, Tea, and Spices, Aluminum Products and Iron & Steel .

Description Indirect Taxesof

Page 17: Direct & Indirect Taxes

The Provincial Government is empowered to legislate in respect of direct and Indirect taxes that are not reserved to the Federal Government. The provinces levy the following Direct Taxes:• Property Tax• Agriculture Income Tax• Land Revenue TaxIndirect Taxes:• Provincial Excise Duties• Stamp Duties• Motor Vehicle Taxes• Others

Taxation Structure

Page 18: Direct & Indirect Taxes

Property Tax:• Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed on

owners.

• The tax base is the annual rateable value (ARV) or area-based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent.

• Vacant land is generally exempt. Central government properties are exempt.

Agriculture Income Tax:An agricultural income is the income which can be generated through rent or revenue from the land used for agricultural purposes. Income from sales of cultivator or any income from such process that is related to some agricultural activity will also be considered as agricultural income.

• The income is derived from the land. That income can be in either form of rent or revenue.

• The land from which this kind of income is derived it must be situated in the Pakistan.

• And that land from which agricultural income is generated it should be used for agricultural purposes.

Direct Taxes

Description Provincial Taxesof

Page 19: Direct & Indirect Taxes

Land Revenue Tax:Land tax is a tax levied on the owners of land, In general, your principal place of residence (your home) or land used for primary production (a farm) is exempt from land tax. You may be liable for land tax if you own or part-own:

• vacant land, including vacant rural land

• land where a house, residential unit or flat has been built

• a holiday home

• investment properties

• company title units

• residential, commercial or industrial units, including car spaces

• commercial properties, including factories, shops and warehouses

• land leased from state or local government.

Direct Taxes

Description Provincial Taxesof

Page 20: Direct & Indirect Taxes

Indirect Taxes

Stamp Duties:Stamp duty is a tax that is levied on documents. This Includes the majority of legal documents such as cheques, receipts, etc. A physical stamp (a revenue stamp) has to be attached to the document to denote that stamp duty has been paid before the document was legally effective.

Description Provincial Taxesof

Page 21: Direct & Indirect Taxes

Provincial Excise Duties:An excise or excise tax (sometimes called a special tax) is commonly refers to as a tax on a goods produced for sale, or sold, within the country. An excise is considered an indirect tax, meaning that the producer or seller who pays the tax to the government is expected to try to recover the tax by raising the price paid by the buyer

Motor Vehicle Duties:A need to pay duty on an application to register a motor vehicle when:• It is new and is being registered for the first time • Registration is being transferred to another person • An imported second hand vehicle is first registered in the country.

Indirect Taxes

Description Provincial Taxesof

Page 22: Direct & Indirect Taxes

Taxation system of Pakistan

.:.trends .:.

Page 23: Direct & Indirect Taxes

Taxation Trends: Direct vs Indirect Tax

PeriodTax Collection (PKR Million) Growth (%)

Direct Tax Indirect Tax Total Direct Tax Indirect Tax Total

2001-02 142,505 261,565 404,070

2002-03 151,898 308,729 460,627 6.6% 18.0% 14.0%

2003-04 165,079 355,764 520,843 8.7% 15.2% 13.1%

2004-05 183,372 407,015 590,387 11.1% 14.4% 13.4%

2005-06 224,988 488,454 713,442 22.7% 20.0% 20.8%

2006-07 333,737 513,499 847,236 48.3% 5.1% 18.8%

2007-08 383,276 617,923 1,001,199 14.8% 20.3% 18.2%

2008-09 440,271 716,731 1,157,002 14.9% 16.0% 15.6%

2009-2010 528477 799,973 1,405,598 20.0% 11.6% 21.5%

2010-2011 626,900 1,052,463 1,679,363 18.6% 31.6% 19.5%

2011-2012 B 743,600 1,330,582 2,074,182 18.6% 26.4% 23.5%

Source: State Bank of Pakistan, Federal Budget 2011-12

Page 24: Direct & Indirect Taxes

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-100.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

35.3% 33.0% 31.7% 31.1% 31.5%39.4% 38.3% 38.1% 37.6%

64.7% 67.0% 68.3% 68.9% 68.5%60.6% 61.7% 61.9%

56.9%

Indirect Tax Direct Tax Growth Direct Tax

Growth Indirect Tax

Page 25: Direct & Indirect Taxes

Tax Collection – PKR Million Period Direct Taxes

Indirect TaxesTotal Taxes

Sales Excise Customs Total

2001-02 142,505 166,561 47,186 47,818 261,565 404,070

2002-03 151,898 195,139 44,754 68,836 308,729 460,627

2003-04 165,079 219,167 45,552 91,045 355,764 520,843

2004-05 183,372 238,537 53,104 115,374 407,015 590,387

2005-06 224,988 294,798 55,272 138,384 488,454 713,442

2006-07 333,737 309,396 71,804 132,299 513,499 847,236

2007-08 383,276 375,754 91,423 150,746 617,923 1,001,199

2008-09 440,271 452,294 116,055 148,382 716,731 1,157,002

2009-2010 528477 517302 121182 161489 799973 1,405,598

2010-2011 626,900 654,600 132,900 173,300 1,052,463 1,679,363

2011-2012 B 743,600 836,700 165,600 206,400 1,330,582 2,074,182

Source: State Bank of Pakistan, Federal Budget 2011-12

Page 26: Direct & Indirect Taxes

Break up wise Period Direct Taxes

Indirect TaxesTotal Taxes

Sales Excise Customs Total

2001-02 35% 41.2% 12% 12% 64.7% 100%

2002-03 33% 42.4% 10% 15% 67.0% 100%

2003-04 32% 42.1% 9% 17% 68.3% 100%

2004-05 31% 40.4% 9% 20% 68.9% 100%

2005-06 32% 41.3% 8% 19% 68.5% 100%

2006-07 39% 36.5% 8% 16% 60.6% 100%

2007-08 38% 37.5% 9% 15% 61.7% 100%

2008-09 38% 39.1% 10% 13% 61.9% 100%

2009-2010 38% 36.8% 9% 11% 56.9% 100%

2010-2011 37% 39.0% 8% 10% 62.7% 100%

2011-2011 B 36% 40.3% 8% 10% 64.1% 100%

Source: State Bank of Pakistan, Federal Budget 2011-12

Page 27: Direct & Indirect Taxes

Growth RatePeriod Direct Taxes

Indirect TaxesTotal Taxes

Sales Excise Customs Total

2002-03 6.6% 17.2% -5.2% 44.0% 18.0% 14.0%

2003-04 8.7% 12.3% 1.8% 32.3% 15.2% 13.1%

2004-05 11.1% 8.8% 16.6% 26.7% 14.4% 13.4%

2005-06 22.7% 23.6% 4.1% 19.9% 20.0% 20.8%

2006-07 48.3% 5.0% 29.9% -4.4% 5.1% 18.8%

2007-08 14.8% 21.4% 27.3% 13.9% 20.3% 18.2%

2008-09 14.9% 20.4% 26.9% -1.6% 16.0% 15.6%

2009-2010 20.0% 14.4% 4.4% 8.8% 11.6% 21.5%

2010-2011 18.6% 26.5% 9.7% 7.3% 31.6% 19.5%

2011-2012 B 18.6% 27.8% 24.6% 19.1% 26.4% 23.5%

Source: State Bank of Pakistan, Federal Budget 2011-12

Page 28: Direct & Indirect Taxes

Sales Tax; 52%

Excise duty; 16%

Surcharges; 15%

Int. trade; 17%

Others; 0%Break-up of

Taxes (FY09 - 10)In

dire

ct

Page 29: Direct & Indirect Taxes

Direct Tax; 37%

Sales Tax; 33%

Excise duty; 10%

Sur-charges;

9%

Int. Trade; 11%Others; 0%

TotalTaxes (FY09 - 10)Br

eak-u

p of

Page 30: Direct & Indirect Taxes

Taxation system of Pakistan .:.Reasons for Distorti on . : .

Page 31: Direct & Indirect Taxes

Income From Agriculture Untaxed:

The most glaring abnormality in the fiscal policy adopted by every government in Pakistan is to leave the income from agriculture untaxed.

Tax-Payer evading Sales Tax:

• The sales tax is being implemented in our country in the mode of Value Added Tax (VAT).

• Fortunes are being built on evasion of sales tax.

• It is a difficult tax to administer in a poorly documented economy like ours.

• There are innumerable cases of tax evasions through what are called “fake and flying vouchers” in the parlance of the Sales Tax department.

Reasons DistortionsFor

Page 32: Direct & Indirect Taxes

ALack of Political Will: All governments in Pakistan, whether military dictatorships or democratic governments, have lacked the will to implement an equitable tax system.

Corruption:Dramatic Increase in corruption since the last 10 years

Tax Exemptions:Businesses granted exemptions of income tax, sales tax and excise duty have led people on a number of instances to misuse these policies and almost never yielded the desired results. We have already considered the most abused exemption, that of agricultural income.

Reasons DistortionsFor

Page 33: Direct & Indirect Taxes

..

Thank

U O

Y