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10

Net of tax

Ali Gulzar

Ansar Bibi

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PREFACE

Getting a personal knowledge is of one of the major aims of M.Com. The Department of

Commerce Bahauddin Zakariya University Multan has followed a policy of assigning

different practical assignments to its students, so that they get the practical knowledge

of what they have studied during their lectures. Business Taxation is also one of the

subjects in M.Com. It has got application and all aspects of business and in life. So,

getting practical knowledge is a must.

In this context our respected teacher Mr. Jawad Dilawer has assigned us report. We

appreciate the fact that, by assigning us this project, our teacher has provide us the

opportunity to enhance our skills and abilities.

This project has been an educational and learning experience and we as a student of

M.Com have tried our Level best to reach up to the expectations of our revered teacher.

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Acknowledgement

IF YE GIVE THANKS, I WILL GIVE YOU MORE

(AL-QURAN)

For all we would like to express our deep gratitude to the Master

of the Day of Judgment, who enabled us to reap the fruits of our

efforts in an effective way. All our praises forALLAH THE

ALMIGHTY, WHO bestowed potentially upon us to accomplishthis present reportWe bow, beg and pray to Almighty Allah,

Rahman-o-Rahim, in the name of our beloved Prophet,

Muhammad, peace be upon him, for continued showering of His

blessings, guidance, strength, health and prosperity to us.. With

all our sincerity, we express our gratitude to the HOLY PROPHET

(peace be upon him), and his fellows, who are the source

enlighten, guidance, and wisdom for the humanity.

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Contents

Taxation system in Pakistan

y Direct Tax

y Indirect Tax

Income Tax

y Tax bracket for salary person

Custom Group

y Sales Tax

y Customs Duty

y Central Excise Duty

Proposals and recommendations

y Broadening the tax base

y Improving tax collection and enhancing the investment environment

Cases

y Sales tax on Electricity

y FBR gets nothing in form of sales tax

y Customs officials seize smuggled goods worth Rs 311 millions in October 2010

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Taxation System in Pakistan

Federal taxes in Pakistan like most of the taxation systems in the world are classifiedinto two broad categories, viz., direct and indirect taxes. A broad description regardingthe nature of administration of these taxes is explained below:

Direct TaxesDirect taxes primarily comprise income tax, along with supplementary role of wealth tax.For the purpose of the charge of tax and the computation of total income, all income isclassified under the following heads:

1. Salaries2. Interest on securities;3. Income from property;4. Income from business or professions5. Capital gains; and6. Income from other sources.

INDIRECTTAXThese are the following indirect taxes in Pakistan

Personal TaxAll individuals, unregistered firms, associations of persons, etc., are liable to tax, at therates rending from 10 to 35 per cent.

Tax on Companies

All public companies (other than banking companies) incorporated in Pakistan areassessed for tax at corporate rate of 39%. However, the effective rate is likely to differon account of allowances and exemptions related to industry, location, exports, etc.

Inter-Corporate Dividend Tax

Tax on the dividends received by a public company from a Pakistan company ispayable at the rate of 5% and at the rate of 15% in case dividends are received by aforeign company.Inter-corporate dividends declared or distributed by power generation companies issubject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%.Dividends paid to all non-company shareholders by the companies are subject to withholding tax of 10% which is treated as a full and final discharge of tax liability in respect

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of this source of income.

Treatment of Dividend Income

Dividend income received as below enjoys tax exemption, provided it does not exceedRs. 10,000/-.

1. Dividend received by non-resident from the state enterprises Mutual Fund set by theInvestment Corporation of Pakistan.2. Dividends received from a domestic company out of income earned abroad providedit is engaged abroad exclusively in rendering technical services in accordance with anagreement approved by the Central Board of Revenue.

Unilateral Relief

A person resident in Pakistan is entitled to a relief in tax on any income earned abroad,if such income has already been subjected to tax outside Pakistan. Proportionate reliefis allowed on such income at an average rate of tax in Pakistan or abroad, whichever islower.

Agreement for avoidance of double taxation

The Government of Pakistan has so far signed agreements to avoid double taxationwith 39 countries including almost all the developed countries of the world. Theseagreements lay down the ceilings on tax rates applicable to different types of incomearising in Pakistan. They also lay down some basic principles of taxation which cannot

be modified unilaterally. The list of countries with which Pakistan has concluded taxtreaties is given below:

AustriaBelgiumBangladeshCanadaChinaDenmarkEgyptFrance

FinlandGermanyGreeceIndiaIndonesiaIranIrelandItaly

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JapanSouth KoreaLebanonLibyaMalta

MauritiusSaudi ArabiaSingaporePolandRomaniaSwitzerlandThailandSri LankaSwedenTurkmenistanU.K.

TurkeyTunisiaKazakistanU.A.E.U.S.A

Customs

Goods imported and exported from Pakistan are liable to rates of Customs duties asprescribed in Pakistan Customs Tariff. Customs duties in the form of import duties andexport duties constitute about 37% of the total tax receipts. The rate structure of

customs duty is determined by a large number of socio-economic factors. However, thegeneral scheme envisages higher rates on luxury items as well as on less essentialgoods. The import tariff has been given an industrial bias by keeping the duties onindustrial plants and machinery and raw material lower than those on consumer goods.

Federal Excise Duty

Central Excise duties are levied on a limited number of goods produced ormanufactured, and services provided or rendered in Pakistan. On most of the itemsCentral Excise duty is charged on the basis of value or retail price. Some items are,however, chargeable to duty on the basis of weight or quantity. Classification of goods

is done in accordance with the Harmonized Commodity Description and Coding systemwhich is being used all over the world. All exports are exempted from Central ExciseDuty.

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Sales Tax

Sales Tax is levied at various stages of economic activity at the rate of 15 per cent on:

all goods imported into Pakistan, payable by the importers; all supplies made in Pakistan by a registered person in the course of furtherance ofany business carried on by him; there via an in-built system of input tax adjustment and a registered person can makeadjustment of tax paid at earlier stages against the tax payable by him on his supplies.Thus the tax paid at any stage does not exceed 15% of the total sales price of thesupplies;

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General concepts of Income Tax

The Federal levy on income (Income Tax), with effect from July 01, 2002, is governedby the Income Tax Ordinance, 2001 and Income Tax Rules, 2002. It is an annualcharge on theTaxable income for a tax year, if it exceeds the maximum amount that is not chargeabletoTax.Taxable Income means total income as reduced by deductible allowances on account

of: Zakat paid under the Zakat and Usher Ordinance, 1980, other than Zakat paid on aDebt, the profit of which is chargeable to tax under the head Income from OtherSources. (Such Zakat is an admissible deduction against the profit on debt); WorkersWelfare Fund paid under the Workers Welfare Fund Ordinance, 1971; and WorkersParticipation Fund paid under the Companies Profit (Workers Participation) Act, 1968.Total Income is the aggregate of income under the following heads of income: Salary;Income from property; Income from business; Capital gains; And Income from othersources [like dividend, royalty, profit on debt, ground rent, rent from Sub-lease of land orbuilding, income from lease of any building together with plant or Machinery, prize onbonds, winnings from a raffle, lottery or crossword puzzle, or a loan, Advance, depositor gift (subject to certain conditions).

Income under a specific head of income for a tax year is the total of amounts derivedunder that Head, which are chargeable to tax, as reduced by the deductions, if any,admissible under the Income Tax Ordinance, 2001. Incomes subject to Final Taxationare those, which are subject to collection or deduction of tax at source and such taxcollected or deducted at source is treated as a final tax liability in respect of suchincome e.g.: -Income arising from business of:- Import of goods;- Supply of goods;- Execution of contract;- Export of goods;

- Brokerage and commission;- Plying of goods transport vehicles;- Income of CNG Stations- Income from property- Payments to Non-Residents on accountof contracts-Dividend received from a company; and-Prize and winnings from prize bond, raffle, Lottery, crossword puzzle, quiz or sale

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-Promotion offers.

The incomes from above sources are excluded from the ambit of total / taxable incomesubject to normal taxation. The scope of total income under the Income Tax Ordinance,2001 is determined with reference to Residential status of a taxpayer. In case ofresident individual, it is both Pakistan source income and foreign source income, whilein case of non-resident individual it is restricted to Pakistan source income only. Anindividual is resident individual if: he is present in Pakistan for 183 days or more in atax year; or he is an employee or official of the Federal or a Provincial Governmentposted abroad in a tax year. An individual is non-resident if he is not a residentindividual. In order to compute the number of days an individual is present in Pakistan ina tax year, the following rules shall apply: - A part of a day that an individual is presentin Pakistan (including the day of arrival in, and the day of departure from, Pakistan)

counts as a whole day of such presence; However, a day or part of a day where anindividual is in Pakistan solely by reason of being in transit between two differentplaces outside Pakistan does not count as a day present in Pakistan.The following days in which an individual is wholly or partly present in Pakistan count asa whole day of such presence:-

y A public holiday;

y A day of leave, including sick leave;

y A day that the individuals activity in Pakistan is interrupted becauseOf a strike, lock-out or delay in receipt of supplies; or

y A holiday spent by the individual in Pakistan before, during or after

y Any activity in Pakistan;

Pakistan source income is defined in section 101 of the Income Tax Ordinance, 2001,which Caters for income under different heads and situations. Some of the commonPakistan source incomes are as under. Salary received from any employment exercisedin Pakistan wherever paid .Salary paid by, or on behalf of, the Federal Government, aProvincial Government, or a local authority in Pakistan, wherever the employment isexercised; Dividend paid by resident company; Profit on debt paid by a residentperson; Property or rental income from the lease of immovable property in Pakistan;Pension or annuity paid by a resident person or permanent establishment of a non-resident person;

Foreign source income is any income, which is not a Pakistan source income. If anemployee or official of the Federal Government or a Provincial Government is postedabroad, his residential status remains resident irrespective of his period of stay inPakistan. On the other hand, salary received from Federal or Provincial Government isPakistan source income, irrespective of the fact where the employment is exercised.This makes both Pakistan and foreign source income liable to income tax. Tax Year isa period of twelve months ending The day of June i.e. the financial year and is on 30denoted by the calendar year in which the said date falls. For example, tax year for the

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financial year from July 01, 2007 to June 30, 2008 shall be denoted by calendar year2008 and the financial year from July 01, 2008 to June 30, 2009 shall be denoted bycalendar year 2009. Maximum amount that is not chargeable to tax with effect fromJuly 2008 onwards, maximum amount that is not chargeable to tax in respect of salaryincome is Rs. 180,000 and in respect of income from sources other than salary is Rs

100,000. In case of women taxpayers maximum limit not chargeable to tax is 240,000.Loan, advance, deposit or gift received in a tax year from another person otherwisethan:By a crossed cheque drawn on a bank; or Through a banking channel from a personHolding a National Tax Number ; is treated as income chargeable to tax under theHead income from other sources. The purpose is to document the transactions ofloan, advance, deposit or gift reflected in the books of account, wealth statement orreconciliation of wealth. The following transactions, however, are excluded: Loan,advance or deposit received from a banking company or an institution notified under theCompanies Ordinance, 1984 by the Federal Government in the official gazette as afinancial institution; or Advance payment for the sale of goods or supply of services.

Self-hiring When an employee gives on rent any building (house/flat/apartment, etc.)owned by him or any of his/her family member(s) to his/her employer and the employerprovides the same against the employees entitlement for a rent-free accommodation orhousing, it results into:Provision of a perquisite (rent free accommodation or housing) by the employer to the

employee chargeable as income from salary; and Receipt of rent of land or buildingby the employee or any of his/her family members, as the case may be, chargeable asincome from property in the hands of the owner. Wealth Statement: - Wealthstatement is a document which shows details of assets andLiabilities of a person, his spouse minor children and other dependents on a specifieddate. Every resident taxpayer filing a return of income for any tax year whose lastdeclared or assessed income or the declared income for the year is five hundredthousand rupees or more shall furnish a wealth statement for that year along with suchreturn.

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Tax Brackets for Salary Income

In 2010, income from salary is charged to tax progressively at 20 different tax brackets(slabs) in Pakistan, rates ranging between 0% - 20%. Since income tax is progressive innature, it tends to reduce economic disparity.

Pakistan Personal Income Tax Rates for 2010:

Slab No. / Taxable income / Rate of tax %

1. Where taxable income is below Rs. 180,000 0%2. Where the taxable income is between Rs. 180,000 - Rs. 250,000 0.50%3. Where the taxable income is between Rs. 250,000 - Rs. 350,000 0.75%4. Where the taxable income is between Rs. 350,000 - Rs. 400,000 1.50%5. Where the taxable income is between Rs. 400,000 - Rs. 450,000 2.50%6. Where the taxable income is between Rs. 450,000 - Rs. 550,000 3.50%7. Where the taxable income is between Rs. 550,000 - Rs. 650,000 4.50%8. Where the taxable income is between Rs. 650,000 - Rs. 750,000 6.00%9. Where the taxable income is between Rs. 750,000 - Rs. 900,000 7.50%10. Where the taxable income is between Rs. 900,000 - Rs. 1,050,000 9.00%11. Where the taxable income is between Rs. 1,050,000 - Rs. 1,200,000 10.00%12. Where the taxable income is between Rs. 1,200,000 - Rs. 1,450,000 11.00%

13. Where the taxable income is between Rs. 1,450,000 - Rs. 1,700,000 12.50%14. Where the taxable income is between Rs. 1,700,000 - Rs. 1,950,000 14.00%15. Where the taxable income is between Rs. 1,950,000 - Rs. 2,250,000 15.00%16. Where the taxable income is between Rs. 2,250,000 - Rs. 2,850,000 16.00%17. Where the taxable income is between Rs. 2,850,000 - Rs. 3,550,000 17.50%18. Where the taxable income is between Rs. 3,550,000 - Rs. 4,550,000 18.50%19. Where the taxable income is between Rs. 4,550,000 - Rs. 8,650,000 19.00%20. Where the taxable income is more than Rs. 8,650,000 20.00%

The basic exemption for male salaried person has been enhanced from Rs. 150,000 toRs. 180,000. For the women taxpayers this limit will be Rs. 240,000.

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Customs Group

The Customs Group consists of three different categories of duties and taxes, namely,(1) Sales Tax, (2) Customs Duty, and (3). Central Excise Duty

Customs

Service is divided into three major areas of trade activities viz (a) Imports, (b) Exports,and (c) Anti-Smuggling (Preventive) imports is the backbone of customs service whichinvolves payment of customs duty on all the imports into the country. Exports arerelated with foreign exchange earnings and implementation of Exports Policy.Preventive department deals with anti-smuggling activities focusing mainly onprevention of drug smuggling.

Central Excise service

Is shrinking day by day. It is now an outdated mode of revenue collection CentralExcise Duty is levied on a few items. With the passage of time it is likely to bediminished.

Sales Tax

Is the tax of future. It is based upon VAT (Value Added Tax) mode of taxation system. Ithas been successfully implemented all over the world. Presently, the Sales Tax wing iscollecting the largest share of revenue collected by CBR (Central Board of Revenue). Itis a growing and expanding service The Sales Tax Act was passed in 1990.

All these three services are under the process of TAX REFORMS. A new vision ofrevenue collection and reforms has transformed the Customs, Excise and Sales Taxgroup into a service of the future. By introduction of LARGE TAX PAYERS UNIT andMODEL SALES TAX HOUSE, the Customs, Excise and Sales Tax group has become

an agent of change. It is now the most modern, high-tech and forward looking service ofthe country.

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SALES TAX System

Sales Tax was a provincial subject at the time of partition. It was being administered inthe provinces of Punjab & Sindh as provincial levy. Sales tax was declared a federalsubject in 1948 through the enactment of General Sales Tax Act, 1948 and in 1952; thislevy was transferred permanently to the Central Government. Sales tax was levied atthe standard rate of 6 pies per rupee at every stage whenever a sale was effected. Thetrading community protested against this system, and this resulted in the enactment ofSales Tax Act 1951.

A system of licensed manufacturers & wholesalers was instituted whereby they wereallowed to purchase goods free of sales tax from each other and pay tax on sales tounlicensed traders. Imports were chargeable to Sales Tax but the licensedmanufacturers & wholesalers were allowed to import goods without the payment ofSales Tax. Later on Sales Tax became chargeable on locally produced & importedgoods at the time of their sales & import, respectively. The sales tax was collectedunder the Finance Ordinance, 1956, on goods which were chargeable to Central ExciseDuty, as if it were a duty of Central Excise. In April 1981, by virtue of an amendment inthe Sales Tax act, 1951, the collection of Sales Tax on non-excisable goods was alsoentrusted to the Central Excise Department.In the late eighties the government decided to replace Sales Tax with the Value AddedTax in the country as a part of its structural adjustment program which was undertakento correct anomalies & distortions both in our tax & non-tax regimes. Accordingly newenactment titled Sales Tax Act 1990 replaced Sales Tax Act 1951 with effect from 1-11-1990.

Liability to Sales TaxFollowing sectors are required to get registration for sales tax and charge sales tax on

their supplies/ services:

y Manufacturingy Importy Servicesy Distribution, Wholesale & Retail stage.

Previously it was being charged at the manufacturing & import stage, and its scope hasbeen extended now to remaining sectors.

Sales Tax is chargeable on all locally produced and imported goods except computersoftware, poultry feeds, medicines and unprocessed agricultural produce of Pakistanand other goods specified in Sixth Schedule to The Sales Tax Act, 1990.

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REGISTRATION

Every person in sectors mentioned above, who makes a taxable supply in Pakistan isrequired to be registered under the Sales Tax Act. However, manufacturers havingtaxable turnover below five million rupees and also utility bill below Rs. 700000 duringthe last twelve months are exempted from registration and payment of sales tax. Similarexemption is also available to retailers having total turnover below Rs. five million in thelast twelve months.

The rate for sales tax is 16% of value of supplies. However, there are some items whichare chargeable to sales tax at 18.5% or 21% of value of supplies (see SRO 644(I)/2007as amended by SRO 537(I)/2008 dated 11th June 2008)

The Registration Form(s) are submitted to the Central Registration Office, FBR, orSales Tax Collect orates/ RTOs for the allotment of a Registration Number by thepersons liable to be registered under the Sales Tax Act. The taxpayer is then issued aCertificate of Registration.

RETURNSAs per law each registered person must file a return by the 15th of each monthregarding the sales made in the last month. All registered persons are required to filereturns electronically and in such cases the payment is to be made by the 15th andreturn can be submitted on FBRs e-portal by 18th. Detailed procedure in this respect isgiven in Sales Tax General Order no. 04 of 2007.There are some sectors which arerequired to file returns on quarterly (tri-monthly) basis e.g. retailers including dealers ofspecified electric goods and CNG dealers.

MAINTENANCE OF RECORDS

All registered persons are required to maintain records at their business premises of thegoods purchased and supplied made by them. All the records are required to be kept fora period of 5 years.

REFUNDS OF SALES TAX

In cases where the Input Tax exceeds the Output Tax due from the registered personin respect of a tax period because of exports or other zero-rated supplies, the excessamount of input is refunded back to the taxpayer within 45 days. In all other cases ofexcess input tax, the Board can specify the procedure for refund.

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ADDITIONAL TAXIf a registered person does not pay the tax within the specified time or claims a tax

credit or refund which is not admissible to him, or incorrectly applies the rate of zeropercent to the supplies made by him, he has to pay the additional tad at the followingrates:

One and half percent of tax due or the part thereof per moth;However, in case of tax fraud, the rate of additional tax shall be two percent per month.

ARREARS

The work regarding Arrears gets initiated in the following cases:

y Late or no submission of the Returns

y Amount paid is less than the tax amount payabley A demand raised after an audit/ scrutiny is upheld after adjudication

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Sales tax Case

Sales tax on Electricity

THE KESC, on behalf of the government of Pakistan, can collect general sales tax on electricity

charges only, now designated as variable charges in the bill, and not on any other item such asmeter rent and electricity duty.

Some time back the matter regarding fraudulent calculation and collection of GST on such

inadmissible items as meter rent and electricity duty was raised in the Lahore High Court

through a petition filed by some conscientious consumer.

In this regard the position stated in the press report applies squarely to the case of the KESC.

It is pertinent to mention here the high-handed policy of the KESC in realising the GST from its

consumers. We have received the following bill from the KESC against the consumption of 500

units.

Variable charges Rs5150.50

Meter rent Rs5.00*Electricity duty Rs78.45*

Fuel surcharge Rs142.70*

GST @ 17pc Rs915.70

TV fee Rs35.00

Bank charges Rs8.00

Total Rs6345.35

* Inadmissible items on which GST is charged

The KESC should have calculated and collected GST only on variable charges (i.e. electricity

charges) and not on other items included in the bill as meter rent, electricity duty and fuel

adjustment.Calculation and collection of GST on these item are not in order and the same be dispensed

with immediately by the KESC and the excess amount recovered in this behalf be refunded to

consumers.

Further, the KESC should notify the basis on which variable charges (i.e. electricity charges) are

being deducted. It is unfortunate that the TV license fee has been increased without notice from

Rs 25 a month to Rs35, an increase of Rs10. The authorities concerned should also explain the

reason which prompted them to increase the TV license fee when PTV is not watched by the

public.

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Sales tax Case

FBR gets nothing in form of sales tax

ISLAMABAD (September 02, 2010) : The Federal Board of Revenue (FBR) will getnothing in the form of sales tax despite sizeable escalation in the price of sugar in theopen market as the prevailing method of sales tax calculation is based on assessablevalue of the commodity. Sources told Business Recorderhere on Tuesday that themethod of sales tax calculation on the basis of fixed assessable value of the commodityallows the manufacturers to pay sales tax at the nominal price.Recently, the price of sugar has been increased from Rs 70 to nearly Rs 90 per kgdirectly passing on extraordinary burden to the consumers. On the other hand, theassessment value for the calculation of sales tax was Rs 29 per kg which was fixed afew years back. Despite substantial increase in the price of sugar, the assessmentvalue for the calculation of sales tax is still Rs 29 per kg, which is very low. Therefore,

the increase will not give any benefit to the FBR, as increase in price would notcorrespondingly increase the percentage of sales tax charged on the commodity.The FBR is already facing revenue loss of Rs 2 billion per month due 50 percentreduction in sales tax on sugar. The government had reduced the sales tax rate from 16percent to 8 percent in August 2009, but this incentive did not reach the retail stage.Despite decrease in sales tax, the benefit was not passed on to the consumers.In the past, the board had reduced assessment value from Rs 21 per kg to Rs 19 per kgon taxable supply of locally produced white crystalline sugar for calculation of sales tax.

At that time, the board had accepted the demand of the sugar industry to reduce theincidence of sales tax on the locally produced sugar falling decrease in its prices in thelocal market. Now, the situation has entirely changed, and the price of the commodity

has touched around Rs 90 per kg.The FBR had repeatedly moved summaries to the Economic Co-ordination Committee(ECC) of the Cabinet to withdraw concessionary rate of 8 percent sales tax on sugar, asdecrease in sales tax has failed to reduce the price of the commodity. The FBR wantedrestoration of 16 percent standard sales tax on sugar. The rate of sales tax wasincreased from 16 percent to 17 percent in 2010-11, but the sales tax on sugar was notincreased.The government had reduced sales tax on local supply of sugar from 16 percent to 8percent until further orders. Following PM's decision, the FBR immediately issued thenecessary notification. The notification pertaining to the assessable value of sales taxwas not rescinded. This decision was taken to reduce sugar prices in the local market,

but reduction in sales tax did not help in reducing price of the commodity.Sales tax on sugar was drastically cut to control the price of the commodity. Resultantly,the FBR suffered huge revenue loss due to reduction in sales tax. Secondly, directiveswere issued from the highest level to maintain prices of sugar. Despite all measures ofthe government, price of the commodity was not controlled which reflects that multiplefactors are responsible for increasing inflation. Therefore, the FBR is persuading thegovernment to restore sales tax on sugar through Ministry ofFinance as well as theECC.

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Customs System

Pakistan's customs tariffs get in the largest single share of national revenue. Mostdutiable items are subject to ad valorem duties that range from 0% to 30%. In many

cases, a 15% sales tax on imported goods (food, raw materials, and capital goods areexempt from this tax). Alcohol is levied at a rate up to 65%, but can be as high as 225%.These rates were significantly lowered in the late 1990s from an average high of 30% inthe early 1990s.

Tariffs are levied on major items of export, but these rates are subject to modify asmeasures are taken to promote or discourage the export of raw materials. Exports ofcertain foods, used copper and brass utensils, and some hides and skins aredisqualified. Trade with Israel, South Africa, and Taiwan is prohibited .

Import regulations Custom

Free import:Residents 18 years of age and older:a. 200 cigarettes or 50 cigars or 1/2 kilogram of tobacco;b. 1/4 litres of eau de toilette and perfume, of which not more than 1/8th litres may beperfume;c. gift articles and/or souvenirs in a reasonable number and quantity:

- first visit in one calendar year: value not more than PKR 2,000.-;- second visit in one calendar year: value not more than PKR 1,000.-;- third or subsequent visits: not duty free.

Residents under 18 years: no free import.

They are subject to payment of customs duties for any articles acquired abroad,whether used or not. Allowed for- first visit in one calendar year: value not more than PKR 1,000.-;- second visit in one calendar year: value not more than PKR 500.-;

Non-residents irrespective of age:a. 200 cigarettes or 50 cigars or 1/2 pound of tobacco;b. 1/4 litres of perfumed spirits and eau de toilette;c. gift articles and/or souvenirs in a reasonable number and quantity: value not more

than PKR 2,000.-

Warning: import of alcoholic beverages is strictly prohibited for both residents andnon-residents regardless of their nationality.

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Custom smuggled example

November 8, 2010Customs officials seize smuggled goods worth Rs 311m in October 2010

The Directorate General Intelligence & Investigation of theF

ederal Board of Revenue(FBR) has recovered smuggled goods and items worth Rs 311 million during the month

of October 2010, says a press release issued here Monday.

According to details, the Directorate effected 98 seizures of smuggled goods and 02

seizures of narcotics. The total value of seized goods, vehicles, and narcotics amounts

to Rs. 311 million. The cases include seizure of 3740 kilograms of charas having Rs.

147 million value, 269,000 litres of smuggled high-speed diesel valued at Rs. 18.5

million, 1967 foreign-brand smuggled tyres valued at Rs. 6.4 million, 49 smuggled/non-

duty paid vehicles valued at Rs 60 million and 15 tones of smuggled tea valued at Rs.

3.3 million.

The Directorate also did a commendable job on the Sales Tax side as during the month

of October 2010 as 16 units involved in evasion of Sales Tax or claiming

illegal/inadmissible input tax amounting to Rs 270 million were detected. The

Directorate also busted a gang of fraudsters involved in issuing fake/flying invoices.

Preliminary investigation revealed 26 units were part of the aforesaid cartel that caused

a loss of Rs. 140 million to the national exchequer by issuing fake/flying invoices.

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FEDERAL EXCISE DUTY System

The Federal Excise Act, 2005, was promulgated with effect from 1st July, 2005,

repealing the Central Excises Act, 1944.F

ollowing are some of the significant changesbrought about by the new Act:

y The word Federal was used in place of Central. Therefore, now the termFederal Excise Duty is more appropriate as compared to old Central ExciseDuty for the duties of excise levied under the 2005 Act.

y The system of physical supervision has been entirely done away with and now allclearances will be self-assessed and no prior permission for clearance will berequired.

y The payment of duty will be on monthly basis and the duty on all clearancesduring the month will be payable by the 15th of next month. This is in contrast to

previous requirement of payment of duty prior to clearance.y No gate passes are required for clearances as in the old system.y Double taxation has been eliminated by allowing adjustment of the excise duty

paid on the input goods used directly in the manufacture of excisable goods.y On some services and goods FED is payable in VAT more i.e. in the same

manner as provided in the Sales Tax Act, 1990. For details see the linkGoods/Services Liable to Excise Duty on this page.

Federal Excise duty is payable on:

(a) goods produced or manufactured in Pakistan;

(b) goods imported into Pakistan;

(c) such goods as the Federal Government may, by notification in the official Gazette,specify, as are produced or manufactured in the non-tariff areas and are brought to thetariff areas for sale or consumption therein; and

(d) services, provided or rendered in Pakistan;

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Long Term Planning forTaxation system

These are the recommendation and proposal for the current taxation system in

pakistan.

The Overseas Investors Chamber of Commerce & Industry (OICCI) is an importantstakeholder in the economy of Pakistan. It has prepared a brief report that takes abroader approach and focuses on long-term issues. The report gives a comprehensiveoverview of the recommended changes and the rationale for suggesting the same. Thereport outlines policy and procedural amendments that are intended towardsstrengthening the taxation system in Pakistan and hence require serious consideration.

A brief description of these proposals is presented in the executive summary

The proposals have been categorized under two main headings aimed at:

1. Broadening the tax base2. Improving tax collection and enhancing the investment environment

Broadening the tax base

Concrete measures on the part of the government are needed to enhance revenue

collected via tax receipts. OICCI recommends doing so by increasing the number oftaxpayers as opposed to taxing the already taxed.

This section aims to highlight measures that, if initiated and properly implemented, willencourage individuals as well as entitles to come in the tax bracket and consequentlyincrease the revenue generated via tax receipts, OICCI proposes:

(a) Abolish incentives to evade taxes

Improvement in the tax base essentially requires elimination of all discriminationsbetween tax payers with adequate penalties for delinquents. In Pakistan this works inthe opposite direction by way of periodic tax amnesty schemes offered by thegovernment.

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Possibilities of whitening untaxed by misuse of provisions provided in the law such asinward foreign remittance also encourage the unorganized sector to continue with taxevasion. These provisions discourage taxpayers from making positive shifts and henceneed to be abolished through constitutional amendments.

(b) Introduction of tax credit against personal taxation

There should be introduction of tax credit on submission of evidences of expensesincurred on medial, education of children and food. Such a proactive will provideincentives for the users of these services to obtain evidence of payment which willsimultaneously force the recipient to be within the documented sector. In Pakistan, thissystem had been introduced in the past but due to procedural difficulties, positiveresults were not yielded and the exercise was discontinued. It is, therefore,recommended that the government reintroduce this practice, however, with improved

service delivery mechanisms.

(c) Mandatory documentation for all sectors

It is recommended that documentation be made mandatory for all sectors. Entities thatprovide documentation of their transactions or deal only with organized suppliers andcustomers should be given 5 per cent rebate in income tax among other incentives toencourage wider adoption of this good practice.

(d) Reconcile bank accounts with NTN

It is suggested that returns filed via the National Taxation Number (NTN) be evaluatedagainst amount deposited in the bank account. This will assist in maintaining a systemof check and balance. However, it is essential to overcome issues of bankingconfidentiality and trust deficit before implementing the aforementioned regulation. Itmust be noted that this is a key long-term initiative that will help increase the tax basesignificantly.

(e) Reduce differential in corporate tax

(for small companies (20 per cent) and corporations (35 per cent)

In Pakistan a reduced rate 20 per cent for corporate taxation has been introduced forsmall companies. The differential of 15 per cent viz-a-viz general corporate rate

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discourages corporatization and expansion of companies. This differential has to bereduced to counter this disincentive towards expansion.

(f) Automation and establishment of PRAL

The establishment of the Pakistan Revenue Automation Limited (PRAL), is an excellentinitiative. However, there are significant implementation issues in STARR (Sales Tax

Automated Refund Repository). It is recommended that to get full benefit of automation,linkages need to be developed between the databases of customs, excise, income andsales tax.

Improving the tax collection and investment environment

A countrys tax system and its hassle free implementation are key determinates of itsinvestment environment. In Pakistan, the opposite is experienced as the organisedsector is subject to high levels of compliance whereas the unorganised sector appearsto have an implied amnesty.

To overcome these gaps, several mechanisms have been outlined in this segment.These proposals will not only assist in reducing the burden on the already taxed, it willaid in improving the tax culture in the short run and increase the tax base in the longrun, OICCI proposes:

(1) Reduce rate of corporation tax

Pakistan has one of the highest rates of corporate tax in the region. This discouragesinvestors from coming in the country as regional competitors not only offer lower ratesbut also better security and infrastructure facilities. It is, therefore, recommended thatthe corporate tax rate be gradually reduced from 35 to 28 per cent over the period of 2to 3 years to make it compatible with other countries in the region (average is below 30per cent)

At present, even before, an investor looks at risk adjusted returns, Pakistan is at adisadvantage by over percent.

(2) Rebates and tax credits

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Rebates and tax credits are provided to encourage reinvestment of capital in thebusiness. Through such measures the effective rate may be reduced withcorresponding economic benefits. In Pakistan all such benefits, except accelerateddepreciation have been removed. Therefore, it is imperative to re-introduce rebates andtax credits to encourage re-investment of capital in the business.

(3) Outsourcing of audit function

An audit can never be a tax collection measure, especially where there is inelasticity inconstituents and delinquents are effectively outside the tax-net. Moreover, the highlevels of compliance set for taxpayers usually result in harassment rather than havingany value addition. It is therefore suggested that a process of independent auditoutsourced to professionals can be implemented as an interim measure to buildconfidence level within the taxpayer community.

(4) Cascading in import duty structure

Throughout the world subsidiary and allied industries flourish when a sustainable basefor the primary manufacturing sector is provided. However, it has been observed thatover the past decades, cascading adjustments for local industries have beenfundamentally disturbed. The current duty structure encourages the import of finishedgoods rather than manufacturing even in those cases where reasonable manufacturingfacilities are available in Pakistan.

FBR and the National Tariff Commission (NTC) need to undertake a long-term holisticexercise for the development of an industrial and manufacturing policy for the country toencourage the manufacturing sector.

(5) Zero-rated import

Up front duties and taxes on the import of plant equipment and machinery, Spares andraw materials not locally available hamper industrial growth by limiting the amount ofF

oreign Direct Investment (F

DI) and suppressing the export potential of industries byraising costs. Zero rated import of all plant equipment and raw materials which are notlocally manufactured will result in foreign direct investment, local skill development andincremental revenue to the government from alternate revenue sources such as salesand corporate taxes with would more often then not offset the revenue lost by thegovernment .

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(6) Ceiling on imports for Afghanistan (ATT)

Agreement of a quantitative ceiling for imports for Afghanistan (Afghan Transit Treat)and streamlining of exchange control mechanism is required so that administrative andeconomic barriers are placed to control smuggling.

(7) Consolidation of all labor levies

In Pakistan, the corporate tax rate is 35 per cent. An additional 2 per cent WorkersWelfare Fund (WWF) and 5 per cent workers profit participation Fund (WPPF) is levied.This effectively makes the rate equal to 42 per cent which is one of the highestcorporate tax rates in the world.

OICCI recommends consolidation of all labor levies with a rate of 2 to 3 per cent in line

with regional standards, or allow companies to utilize the contribution for the welfare oflabor in the form of providing health, education and housing for their factory employeesor in the areas their factories/industries are located.

(8) Presumptive tax regime be eliminated

An effective tax system requires identical procedures for the same kind of business,without any discrimination between sectors. PTR has been made inapplicable for themanufacturing sector. It is recommended that this practice should be extended to other

sectors which are properly documented and should eventually be abolished completely.Continuation of PTR is a major bottleneck in the sustainable growth of Tax to GDP ratio.

(9) Overall rate of indirect taxes to be reviewed

At present effective indirect tax rate is 28 per cent (16 per cent GST + 12 per cent FED).This high level of taxation encourages a substantial part of the manufacturing base tooperate in the unorganized sector. There is a need to review the issue of overallincidence of indirect taxes so that possibilities and comparative advantages of evasion

are reduced and minimized. It is also recommended that the rate of Value Added Tax(VAT) be brought down to 10 per cent over a period of two years encompassing allsectors and segments of the economy specially the services sector.

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(10) Overhaul or Introduction of sales tax

Sales tax of 2 per cent at the import stage has been levied on all products. The rationalefor this levy is that in the case of imported products, the subsequent supply chain isunorganized and therefore, tax on the whole chain of value addition needs to be

collected at the import stage. Additionally, there is no contribution by the medium andsmall scale manufacturing sector which is responsible for 40 to 50 per cent of allmanufacturing taking place in Pakistan.

Such an instance, therefore, highlights the need for overhaul or introduction of sales taxon the whole supply chain.

(11) Promotion of retirement benefits

There should be encouragement for promotion of retirement benefit schemescomplemented with schemes for investment by such funds in investment required forindustrial growth.

(12) Special benches for tax cases

Delay in ultimate decision by the appellate authorities and their quality is a hurdle in thedevelopment of a tax base. To improve quality and capacity of the first stage of appeal,it is recommended that special benches for tax cases be set-up. It has been noticed that

even after judgment is received, execution is delayed. This needs to be reviewed.

(13) Allow ability of NPL forbanks

Debts in considered as loss under the Prudential Regulations as issued by SBP (asapplicable at that time) be allowed as deduction (pre-7th schedule). The amendments inthe Prudential Regulations (post 7th schedule) revived the Forced Sale Value (FSV) ofcollateral which was not accounted for before. Now the State Bank of Pakistan for itsown purposes has allowed credit for proportion ofFSV.

(14) Allocation of expenses

There are inconsistencies in the treatment of allocation of expenses for income exemptfrom tax. This issue attains importance for banks as there is substantial investment inshares where capital gain is exempt from tax. It is suggested that the matter ofdisallowance of allocation of expenses against exempt income should be streamlined.Specific rules need to be introduced to the effect that allocation of expenses has to be

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made on the basis of amount invested in exempt securities rather than earning therefrom.

(15) Transitional provisions

(for banks and provision for consumer loans)

Unabsorbed depreciation and written down value for assets on finance leaseoutstanding as at December 31, 2007 should be allowed over a five year period.

Furthermore, there is a need to revise the limit of 3 per cent for consumers loan for allthe years prior to tax-year 2009. In the Seventh Schedule such deductions be allowedas are approved under the Prudential Regulations.

(16) Clarification for reinsurance premium

Finance Act, 2008 has introduced withholding tax on Reinsurance Premium. Suchwithholding is not applicable where the recipients protected by the Double TaxationTreaty (DTT). A clarification needs to be issued that where there is DTT protection andthe re-insurer is not in Pakistan, either directly or through agent, provision relating towithholding shall not apply; In all other cases, standard requirement of information willapply.

(17) Withholding for insurance companies of recipient

In the case of banking companies subject to Seventh Schedule, an exemption has beenprovided to banks from withholding as recipient as such entities are all in the organizedsector and are subject to advance payment of tax. Same principle requires to beadopted for the insurance sector.

(18) Tax on transferpricing

Since the introducing of the Income tax Ordinance, 2001 there are very few caseswhere tax proceedings have been finalized under the new provisions of the Ordinance,all the cases from tax-year 2004 to tax-year 2008 are effectively exposed to action bytax officers on the matter of transfer pricing.

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However, fiscal issues relating to non-aims length consideration are a matter ofdetermination of fact rather than application and interpretation of any law. The OECDmodel also supports the same principle. It is suggested that agreed upon processes beundertaken to prescribe the procedures for implementation of fiscal measure for taxingnon-arms length transaction.

(19) Resolution of input tax adjustments

In Pakistan, credits for input taxes are treated as inadmissible whilst determining theoverall tax liability in many cases. This results in higher rates for sales tax and federalexcises. This problem emanates on account of improper implementation rather than anyprovision of law. It is required that implementation issues in the admissibility of input taxin sales tax be resolved and proper guidance on that

Matter be obtained from other countries where such systems are already in operation.

(20) Federal excise duty

In Pakistan, input tax forFederal Excise Duty (FED) for many sectors is not allowableunder the law. This places the said tax outside the ambit of VAT regime.

It needs to be decided by the government whether such a levy is to be operated as VATor a straight indirect tax. If the second option is to be implemented, that rate of tax will

have to be reduced. OICCI considers that implementation of a full-fledged VAT withsame rate, is a better option.

(21) Franchise fee

Royalty payments have been subjected to FED. The term used in the law is Franchisefee which is at time distinguishable with royalties in strict commercial and practicalsense. This has lead to serious issued of interpretation and misapplication in manyentitles. It is, therefore, recommended that FED procedures for franchise fees be

streamlined and the same be brought in line with SBPs regulation. Such measures willresolve the issue correctly as most of the organized entitles remit such fees throughSBP and there are well laid down procedures for the same.

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(22) Capacity building ofpersonnel-group taxation

Over the last two years, positive provisions have been introduced in fiscal laws forpromoting the formation of holding companies and introduction of group taxation.

However, like any other fiscal measure, problems are being faced in the implementationof group taxation as the issues are unique and new.

Therefore it is recommended that capacity building at FBR and SECP by way of trainingand study of such measures in other countries be undertaken to take full advantage ofsuch a positive provision.

(23) No taxation on inter-corporate dividends

Group taxation requires elimination of inter-corporate dividend taxation. This matter hasbeen taken care of in the present law. However, over the last two years virtually nogroup structure has evolved on account of problems relating to inter-corporatedividends. No industrial group will endeavor to switch to holding company structureunless there is a clear position with regard to no taxation on inter-corporate dividend.

(24) Stock options

In order to promote proper disclosure and taxability of stock option, it is recommendedthat stock option given by MNCs for Pakistani employees be treated similar to stockoption given by Pakistani companies. Moreover, stock option should be taxed as capital

gains.

Conclusion

Policy and procedural changes aimed at strengthening the overall taxation system areneeded so the system can be improved in the short run and the tax base be broadenedin the long run.

This is of utmost importance as Pakistan risks losing foreign investors to regional

competitors that not only offer attractive tax rates but also provide better security andinfrastructural facilities.

The policy and procedural recommendations made via this report are aimed atimproving the overall tax culture of the country. If implemented, the proposals will assistin improving the tax system in the short run and broadening of the tax base in the longrun and ultimately make Pakistan an investment friendly

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