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