TAX ADMINISTRATION CAPACITY AND CAPABILITY TAX BAR ASSOCIATION KARACHI KHAWAJA TANVEER AHMED Member (Tax Policy

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TAX ADMINISTRATIONCAPACITY AND CAPABILITY TAX
BAR ASSOCIATION KARACHIKHAWAJA 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 Contd

• 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 Pakistans spending
  levels and the ongoing federal deficit, the ratio
  is too low

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Tax GDP RatiosOverall 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 RatiosCBR 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
• Low buoyancy of some particular taxes (e.g.
  excises plus effects of tariff / trade reform)
• Sizable underground economy (it has been
  estimated at 35-40 of GDP)
• Considerable tax evasion (it has been estimated
  at 7 of GDP)
• Narrow tax bases of major taxes (income and GST)
• Low tax effort of sub-national governments, soft
  budget constraint / convenient dependency on
  transfers / revenue sharing arrangements
• 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)
• CBRs 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. In over 100 appeals, taxpayers preferred the ADRC and requested stay of appeals proceedings. In over 100 appeals, taxpayers preferred the ADRC and requested stay of appeals proceedings. In over 100 appeals, taxpayers preferred the ADRC and requested stay of appeals proceedings. In over 100 appeals, taxpayers preferred the ADRC and requested stay of appeals proceedings.
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OUTCOME OF REFORM MEASURESIN 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
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PROJECTS IN 2006-2007

• 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

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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 Contd

• 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