Tax structure of Pakistan(A bird eye view)
Abdul Basit Sultani
To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law.
In the general sense, a direct tax is one paid directly to the government by the persons (juristic or natural) on whom it is imposed (often accompanied by a tax return filed by the taxpayer). Examples include some income taxes, some corporate taxes, and transfer taxes such as estate (inheritance) tax and gift tax.
Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be”.
an indirect tax or "collected" tax (such as sales tax or value added tax (VAT)); a "collected" tax is one which is collected by intermediaries who turn over the proceeds to the government and file the related tax return.
A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. Most sales taxes are collected from the buyer by the seller, who remits the tax to a government agency. Sales taxes are commonly charged on sales of goods, but many sales taxes are also charged on sales of services. Ideally, a sales tax would have a high compliance rate, be difficult to avoid, and be simple to calculate and collect.
A income tax is a tax levied on the income of individuals or businesses (corporations or other legal entities). When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs).
Income tax Pakistan
Law concerning taxation of income in Pakistan is stated in the Income Tax Ordinance, 2001 (the Ordinance) and the rules framed there under viz. Income Tax Rules, 2002 (the Rules). The Ordinance is a Central statute and is, therefore, applicable to the whole of Pakistan .Under section 4 of the Ordinance, income tax is imposed for each tax year at specified rates on every person who has taxable income for the year.
Tax Year in PakistanTax year is a period of twelve months ending on 30th June and shall be denoted by the calendar year in which the said date falls.
Total Incomeit is the sum of a person's income under each of the heads of income for the year.
Heads of Income in PakistanUnder the Ordinance income is classified into the following five heads:Salary, Income from property, Income from business, Capital gains and Income from other sources.
The income of a person under a head of income shall be the total of the amount derived by the person in a tax year that are chargeable to tax under the head as reduced by the total deductions allowed under the ordinance to the person under that head.
Taxable Income in PakistanIt is the total income of a person for a tax year reduced by the total of any deductible allowances, under the Ordinance, for the year. A person is entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax year under the Zakat & Ushr Ordinance, 1980.
An individual is considered resident for a tax year if he/she is in Pakistan for more than 182 days in that tax year.
Tax Deductions and tax allowances
Deductions and allowances are available for the non salaried class, but not for the salaried class.
The penalty for failure to file a tax return is 0.1% of the amount of the tax payable for each day of default. The minimum penalty is PKR 500 and the maximum is 25% of the amount of tax payable.
Tax Filing status
Joint tax returns are not permitted; each individual must file a separate tax return.
Real property tax
A 6% tax is imposed on the value of real property
are allowed under Chapter 3 Part 10 of the Ordinance:Charitable donations, investment in shares, retirement annuity scheme and profit on debt.
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG). The second kind is a tax that is paid from the employer's own funds and that is directly related to employing a worker, which can consist of a fixed charge or be proportionally linked to an employee's pay.
Tax rates for the salaried class in Pakistan are 0.5% to 20%, and for other taxpayers, 0.5% to 25%.Basis – Income tax is payable by salaried male individuals if taxable income exceeds PKR 200,000 and by female individuals if taxable income exceeds PKR 260,000. Income tax is payable by non-salaried individuals if taxable income exceeds PKR 100,000. These thresholds are effective from 1 July 2009.
The limit not chargeable to tax for Tax Year 2010 is: Rs. 200,000.The limit not chargeable to tax for salaried women is: Rs. 260,000
CORPORATE TAX RATES
Pakistan corporate tax rate is 35% of net taxable income of a company. For nonresidents, a 15% rate is levied on the gross amount of royalties or technical service fees, and 30% for other payments under the presumptive tax regime.
Residence – An entity is resident if it is registered under the law of Pakistan or its management and control is situated wholly in Pakistan.Basis– Resident entities are taxed on worldwide business income; nonresidents pay tax only on Pakistan-source income.
Business income is taxed under the following "heads" of income:
business income, capital gains and other income.
Taxation of Capital gains
Capital gains are one of the heads of income and are taxed at the normal corporate rate. Gains derived from the sale of capital assets held for more than 1 year are reduced by 25% for tax purposes and, therefore, 75% of the net gain is taxable at a rate of 35%.
Taxation of dividends
A resident entity pays tax at a rate of 10% on dividend income regardless of whether the dividends are Pakistan or foreign source. A nonresident pays tax at a rate of 10% on Pakistan source dividends.
PAKISTAN SALES TAX
The standard rate of Sales Tax in Pakistan is 16%.
Sales Tax is levied on the supply of goods and services, and the import of goods.
Filing and sales tax payment
Sales Tax returns and payments must be made on a monthly basis.
Sales Tax Registration
is mandatory for manufacturers if turnover exceeds PKR 5 million; for retailers, if the value of supplies exceeds PKR 5 million; and for importers and other persons if required by another federal or provincial law
Who is involved?
The key players behind the proposed RGST are the International Monetary Fund (IMF), the World Bank, United States Mission to the European Union (USEU) and other assorted donors who are tired of paying their taxpayers money to cover up for the leaks in our taxation system. But this is not to say that we do not need reforms in our taxation system. The International Monetary Organizations might be the catalysts towards the reforms just now, but in all reality, tax reforms have been long overdue
The RGST is actually plain old Value Added Tax (VAT) with a new name. Since the VAT has already had its fill of bad publicity, the government decided it would be a smart move to rename and repackage the new taxation system.
The RGST is a taxation system that operates by an addition of 15 per cent tax on each and every value addition on taxable products
Those who will be affected in one way or other are the suppliers, the manufacturers and the retailers who will all have to maintain and disclose proper sales and production records and would thus find tax evasion pretty difficult. Of course, the real victims are the consumers who would bear the burden of higher costs.
Salient features of RGST
GST will replace the existing regimes of sales tax and excises on services.
GST will apply on both at import and local supply stages.
Standard rate of 15% has been proposed instead of the present rate of 17% or multiple other rates going up to 25%.
There shall be no fixed tax, reduced tax, enhanced tax, retail price-based tax or special tax scheme under the new GST system.
A uniform enhanced annual exemption threshold of Rs.7.5 million (which is presently Rs. 5 million) shall be applied to keep small businesses including small traders/retailers/cottage industry out of mandatory tax compliance.
Input tax adjustment of both direct and indirect constituents shall be allowed on “totals” basis (excluding entertainment and non-business use passenger vehicles).
Sales tax on goods and services where so authorized by the Provinces shall be mutually adjustable so that double taxation does not occur.
No general zero-rating shall be admissible on any commercial form of domestic supply or on any local consumption.
The GST system will work purely on “self-assessment and self-policing” basis.
Cash flow of businesses shall be facilitated through expeditious centralized (Electronic) refund payment system.
All exports shall be zero-rated.
How RGST work?
Unlike the old GST, the RGST will not be imposed just on the final price of a product; rather, a certain amount of tax will be added at each stage of production.
For example if a supplier sells raw material worth Rs100 to a manufacturer, he would charge Rs115 instead of Rs100, and remit the extra Rs15 as tax.
After manufacturing the product, the manufacturer, for example, adds a profit of Rs2o. The product now costs Rs135, but instead of selling it to the retailer at Rs135, the manufacturer will add another 15 per cent to the value addition of Rs20 which will bring up the cost to Rs138. The extra Rs3 will be remitted as tax.
Finally, the retailer will add his profit. Assuming that is another Rs20, the price of the product is now up to Rs158 again. Instead of selling it at Rs158, the retailer will add yet another 15 per cent of the value addition and the final cost will be Rs161. The retailer will then pay the added tax back to the treasury.