1 tax administration capacity and capability tax bar association karachi khawaja tanveer ahmed...
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TAX ADMINISTRATIONCAPACITY AND CAPABILITY
TAX BAR ASSOCIATION KARACHI
KHAWAJA TANVEER AHMEDMember (Tax Policy & Reforms)
March 18, 2006
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NEED FOR REFORMS
Overall Fiscal Effort low – stagnant Tax / GDP Ratio (Details to be followed)
Heavy Reliance on Indirect Taxes leading to Regressive Taxation System
Protectionism through high tariffs leading to inefficiencies and anti-export bias
Taxation on Production and Trade Activities rather than consumption and income
Wide-ranging exemptions and concessions
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NEED FOR REFORMS Cont’d
Primitive and antiquated tax administration (Cylindrical instead of Functional)
Complexity of tax laws and arbitrariness in their application
Persistence within manual record keeping and limited IT support
Lack of transparency; and inadequate HR Skills and / Capabilities
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NEED FOR REFORMS [Extract from Report of the Task Force on Reform of Tax Administration, April 2001]
Legal and administrative changes are frequent and adhoc.
Major tax policy changes are not accompanied by adequate changes in administrative framework.
Relationship between the taxpayer and tax collector is largely adversial.
Organization, business processes, systems, facilities and budget have not kept pace with the growing demands on tax administration.
Management of human resources is severely deficient. Thus there was a Need for major changes in the taxation
system through tax policy and administrative reforms
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LOW TAX EFFORT – TAX POLICY ISSUES
Revenue adequacy; Tax / GDP ratio - By
international comparisons the ratio is low
More relevant: According to Pakistan’s spending levels and the ongoing federal deficit, the ratio is too low
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Tax – GDP Ratios:Overall & Federal & Provincial Comparison
FY Total Rev.
Tax Rev.
Federal Taxes
CBR Rev.
Sur-charges
Prov. Taxes
1999-00 13.5 10.7 10.2 9.2 1.0 0.5
2000-01 13.4 10.7 10.2 9.4 0.7 0.5
2001-02 14.2 10.9 10.5 9.2 1.2 0.4
2002-03 14.9 11.5 11.0 9.6 1.4 0.5
2003-04 14.8 11.5 10.5 9.4 1.1 0.5
2004-05 13.5 10.6 9.6 9.0 0.5 0.5
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Tax – GDP Ratios:CBR Revenue
FY CBR Revenue
Direct Taxes
Sales Tax
Customs Excise
1999-00 9.2 3.0 3.1 1.6 1.5
2000-01 9.4 3.0 3.7 1.6 1.2
2001-02 9.2 3.2 3.8 1.1 1.1
2002-03 9.6 3.1 4.1 1.4 0.9
2003-04 9.4 3.0 4.0 1.6 0.8
2004-05 9.0 2.8 3.6 1.8 0.8
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REASONS FOR LOW TAX – GDP RATIO The causes are multiple and often interconnected
o Low buoyancy of some particular taxes (e.g. excises plus effects of tariff / trade reform)
o Sizable underground economy (it has been estimated at 35-40% of GDP)
o Considerable tax evasion (it has been estimated at 7% of GDP)
o Narrow tax bases of major taxes (income and GST)
o Low tax effort of sub-national governments, soft budget constraint / convenient dependency on transfers / revenue sharing arrangements
o Over the long run, tax revenue buoyancy has been low (at 0.93 for tax revenues at 0.47 for total revenues) hence a declining Tax /GDP ratio.
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REASONS FOR LOW TAX-GDP RATIO Mismatch Between Sectoral Shares in Tax
and GDP Composition
Share of Agriculture in GDP-MP 22% and in Taxes 1.2%
Share of Manufacturing in GDP-MP 17.1% and in Taxes 62.2%
Share of Services Sector in GDP-MP over 50% and its share in Taxes is 27.3%
(continued)
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REASONS FOR LOW TAX-GDP RATIO Within services sector
Share of Transport, Storage & Communication in GDP 13.8% and in Taxes 4.5% ;
Share of Finance and insurance in GDP 3.2% and in Taxes 3.9%;
Share of Construction in GDP 2.2% and in Taxes 2.9%;
Share of Wholesale & Retail Trade in GDP 16.9% and in Taxes 2.8%;
Thus, Low contribution of agriculture and leading service sectors highlights the need to diversify to the un-tapped areas/ sectors
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OBJECTIVES OF TAX REFORMS To increase revenue
To widen taxpayers base
To simplify tax laws and evolve effective dispute resolution mechanism
To provide end to end automation of work processes
Taxpayer friendly environment
To develop an honest and efficient tax administration
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STRATEGY FOR REFORM New Organizational Structure
Combating Corruption
Financial & Administrative Issues
Universal Self Assessment
IT Management Function HRM - Evaluation of strengths &
weaknesses
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NEW ORGANIZATIONAL STRUCTURE Re-organization of CBR on functional lines
Five new Members from Private Sector
Complete overhaul of Income Tax operations
Strengthening of GST, Excise and Customs
Re-engineering of all Business Processes
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COMBATING CORRUPTION Re-Design of Jobs to Minimize Possibilities of
Corruption
Extensive Use of Technology to Reduce Corruption
Public Commitment for Striking Against Corruption
Special Code of Conduct for Employees
Training to Emphasize Integrity Issues
Severe & Timely Penalties
Clear Guidelines Regarding Handling of Complaints of Corruption
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FINANCIAL & ADMINISTRATIVE ISSUES CBR to remain a Division of the Government
Enhanced Autonomy to formulate expenditure and resource Budget
Formulate own recruitment and staffing structure
Protect itself against external intrusion
Committee of the Cabinet to approve Budget and Policies
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UNIVERSAL SELF ASSESSMENT Introduction of Universal Self Assessment
System
Selectivity and Risk Assessment for Audit and Taxpayers to be provided reasons
Contact between officials and Taxpayers to be minimized.
Large scale taxpayers education
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INFORMATION MANAGEMENT FUNCTION
Achieve developed countries level of taxpayer convenience and voluntary compliance by
Making significant investment in IT
Establishing Information System Plan (ISP)
CBR’s nationwide IT structure
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HRM - EVALUATION OF STRENGTHS & WEAKNESSES
Human Resource Audit
Decision processes review
Future competencies & training needs
Compensation package
Workforce Planning and sequencing
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SPECIFIC TAX POLICY MEASURES IN THE DIRECT TAX REGIME
Revision in Individual and Company Rates in Budget 2002-03
Introduction of Self Assessment
Streamlining the WHT Structure, less dependence on presumptive tax regime
Withdrawal of Exemptions
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SPECIFIC TAX POLICY MEASURES IN SALES TAX
4 rates of 15%, 18%, 20% and 23% substituted with single uniform rate of 15%
Threshold of turnover raised from Rs.0.5 million to Rs.5.0 million
Aberrations like turnover scheme and Enlisting Scheme abolished
Refund regime automated and five major sectors zero rated
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SPECIFIC TAX POLICY MEASURES IN CUSTOMS
Highest tariff brought down from 80% in 1993-94 to 25% in 2002-03
Multiple slabs reduced to 4, i.e. 5%, 10%, 20% and 25%
Tariff protection to locally produced goods
Automated business process legally covered through changes in customs laws and procedures
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TAX ADMINISTRATION REFORMSFollowing Table shows that the number of applications for the ADRC are growing – 15.1.2006
Category Customs Sales Tax Income Tax Total
Application received
155 490 161 806
Rejected for the ADRC
14 31 42 87
Cases decided 47 141 47 235
Under process 22 46 21 89
Pending with Committee
72 288 51 411
In over 100 appeals, taxpayers preferred the ADRC and requested stay of appeals proceedings.
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OUTCOME OF REFORM MEASURES:IN TERMS OF CHANGE IN TAX MIX
Direct Taxes (Percent) Sales Tax Customs Excise
Indirect Taxes (Percent)
1990-91 18.0 15.4 45.7 20.9 82.0
1995-96 29.2 18.6 33.2 19.1 70.8
1997-98 35.1 18.4 25.4 21.1 64.9
99-2000 2.5 33.6 27.8 16.1 67.5
2000-01 31.8 39.1 16.6 12.5 68.2
2001-02 35.3 41.2 11.8 11.7 64.7
2002-03 32.9 42.3 15.0 9.8 67.1
2003-04 31.7 42.1 17.5 8.7 68.3
2004-05 30.9 40.6 19.5 8.9 69.0
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OUTCOMEOF REFORMS IN REVENUE COLLECTION
(Rs. Billion)
YEARS
Budget Estimates
Revised Estimates
Collection
Downward Revision
Achievement (%)
B.E. R.E
1990-91 123.3 120.6 110.5 -2.19 89.6 91.6
1991-92 149.5 145.0 139.8 -4.35 93.5 97.8
1992-93 174.8 160.0 153.2 -8.47 87.6 95.8
1993-94 190.7 180.3 172.6 -5.45 90.5 95.7
1994-95 259.9 225.0 226.6 -13.43 87.2 100.7
1995-96 270.5 264.8 268.0 -2.11 99.1 101.2
1996-97 328.0 286.0 282.1 -12.8 86.0 98.6
1997-98 324.0 297.6 293.6 -8.15 90.6 98.7
1998-99 354.0 308.0 308.5 -12.99 87.1 100.2
1999-00 362.5 351.7 347.1 -2.98 95.8 98.7
2000-01 430.0 406.5 392.3 -5.47 91.2 96.5
2001-02 457.7 414.2 404.1 -9.5 88.3 97.6
2002-03 458.9 No Revision 460.2 NA 100.3 NA
2003-04 510.0 No Revision 518.00 NA 101.7 NA
2004-05 580.0 590.0 591.085 NA 100.2 NA
NA means Not Applicable
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12 RTOs to start functioning in 2006
LTU at Islamabad
Roll out of CARE Plan to other Customs stations by December 2006
Taxpayers Facilitation Centres
Business Process Re-engineering of Sales Tax and Income Tax Operations
End to end automation
PROJECTS IN 2006-2007
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FUTURE STRATEGY Continue to create enabling environment for
various stakeholders. The idea is to
Promote Economic Activity Encourage Investment
Spread out commercial activities
Expand exports
Create incentive driven taxation structure with adequate safe-guards to deal with delinquent taxpayers
Promote efficiency, equity and transparency
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FUTURE STRATEGY Cont’d Further simplification of Rules and Procedures; Continuous Reduction and Rationalization of Tax and
Tariff Structure; Strengthening the HRM and Audit functions; Co-location and Integration of Taxes End-to-end Automation of work processes to minimize
taxpayer – tax collector interface; and Emphasis on taxpayers’ education and facilitation and
wider dissemination of CBR efforts
THANK YOU