Taxes are required to meet the expenditure that a country needs to serve its people.

Pakistan operates through hybrid system whereby Federal Board of Revenue (FBR)
collects taxes on goods and the provinces levy on services.
Direct taxes
Pay As You Earn (PAYE) is an important form of direct tax whereby an employer deducts
income tax from an employee’s wages before paying them to the employee and sends
the deductions to the government.
==> A direct tax is paid directly by an individual or organization to an imposing authority.
==> Unlike an indirect tax, this tax can’t be passed onto a different person or entity.
==> This equitable principle of direct taxation is a cardinal principle of any good taxation
system.
==> Direct taxation is a preferred taxation system in the civilized world.
==> In UK, the direct taxes constitute more than 60% of the country’s tax revenue.
Regrettably, the state of direct taxation in Pakistan is anything but satisfactory. Direct
taxes constitute only around (12-17)% of the tax revenues in Pakistan. In our region,
Bangladesh has achieved an impressive target of direct tax collection which currently
stands at 20.2% of government revenues. Similarly, India collects one third of its tax
revenues through direct taxes.
Indirect taxes
Indirect taxes are basically taxes that can be passed on to another entity or individual.
They are usually imposed on a manufacturer or supplier who then passes on the tax to
the consumer.
==> Currently, there exists an extensive indirect tax regime in the country in the form of
sales tax, federal excise duty, customs duty etc.
==> This unjust taxation has constantly been impairing the purchasing capacity of the
lower and middle income groups, which are otherwise not liable to pay taxes under the
normal tax regime.
==> We pay more for fuel and electricity than other regional countries because of the
surcharges added.
==> Big companies pay billions in taxes which are collected from customers through the
supply chain, as companies merely act as collectors and consolidators of those tax sums.
Partial Tax Laws
Tax laws are such that the individuals with same income, businesses and profits are
treated very unequally. For instance, 1/5th of the GDP comes from agriculture and a
handsome amount of revenue could be generated by taxing the income from this
particular sector but legally the tax base is not extended to tax the income from
agriculture. The shortfall in agriculture and services puts a burden on industrial sector.
Regressive Taxation
There is an evident overdependence on indirect taxes which until recently accounted for
a share in revenues of over 80%. This has increased regressivity of the tax system.  And
imposed an excess burden of taxation. The nature of taxation is regressive in general,
meaning a tax is imposed uniformly to everyone regardless of individual income.
Real Estate
==> The real estate sector is the second-largest sector of job provider and also
stimulates the growth of industries like cement, steel and other building material. But,
negligible taxes on home, land and other forms of real estate in Pakistan is one of the
key issues that impedes achieving tax revenue targets.
==> Pakistan spends $5.2 billion on constructions in a year and many more billions are
spent on buying residential and commercial plots but the contribution of real estate
sector in national economy stands low.
==> One of the key reasons for low tax collection from the real estate sector is that all
big housing societies do business without recording their transactions.
==> The revenue contribution from property tax should be 1% of the GDP in
developing countries. But in reality, real estate tax in developing countries is 0.1% of
the GDP and rarely 0.5%. While in the United States, Canada and Australia property
tax collected is close to 2% of the GDP on average
Poor administration
Another problem is the poor tax administration of tax system. Reports suggest that
people while filling their returns, provide incomplete information and data and since our
tax system uses orthodox and primitive procedures to analyze the data, it makes it very
complex to highlight the offenders (tax evaders). The alleged reasons behind the lag are
corruption and institutional inefficiencies.
Lack of trust
The reason why people evade taxes primarily is absence of trust towards the
administration. People do not see their efforts being paid back. So, they don’t find a
point of making efforts at all. There is a lack of transparency and accountability within
the system that makes public question themselves whether their money is actually being
used for their benefit or is gone into satisfying someone else’s vested interests.
What is Withholding Tax?
A withholding tax is an amount that an employer withholds from employees' wages and
pays directly to the government. The amount withheld is a credit against the income
taxes the employee must pay during the year.
==> About 70% of total direct tax collection is in the ‘withholding tax’ (WHT) mode. This
includes deductions from salaries by employers, deductions on contracts, on cash
withdrawals, on dividends and so forth.
==> ‘Advance tax’ collection is like the WHT which is collected in indirect mode,
contributed 22% to total direct tax collection.
Way Forward
==> To promote a tax paying culture, children in primary schools need to be informed
about their civic responsibility of paying taxes.
==> Media should be used to sensitise the common man about the gravity of this issue.
Unless we start paying our taxes, the country will remain in doldrums and public services
will remain dilapidated.
In 2018, the government unveiled a populist economic reforms package (ERP) envisaging
amnesty scheme to whiten undeclared assets at home and abroad, reduction in income
tax rates for existing taxpayers and issuance of dollar-denominated bond. The new
scheme was to facilitate taxpayers and expand tax net to at least 3 million people from
less than 1.2 million.
The perception in this country is that paying income tax is an option. This is not true, in
fact evading tax is a criminal offence. This is unsustainable and hence need radical
approach to ensure that all citizens through use of technology and data pay taxes as an
obligation to take the country forward. People with higher incomes should pay higher
taxes so that unfair burden could not fall on the shoulders of poor people through
indirect taxes.
The amnesties of 1958 and 2000 helped file only 71,289 and 79,411 newly declared. The
amnesty of 2008 generated the highest collection of Rs2.8 billion at the announcing rate
of 2pc, while that of 1997 could raise only Rs141 million. The Indonesian amnesty bill of
2016 which added at least 745,000 taxpayers declaring more than $330bn of assets.
The world is clamping down hard on any undeclared assets, cash or property. This will
push Pakistanis to take amnesty and legalise the assets. Secondly, the charging rate is
considerably lower with a maximum rate of 5pc when the person wants to come into the
tax net but wants to maintain assets outside the country.
Compare it to the 45pc charge rate in amnesty offered recently in India to its citizens.
The overwhelmingly lower new income tax rates would motivate people to come into
the tax net.
People do not pay taxes because they believe they will not get caught. A solid tax base
can only be warranted through an efficient tax system that ensures that evasion will
eventually lead to punishment.
The government needs a constitutional amendment to enforce a model similar to the
Indian one of buying property by paying some additional price if it thinks that property
value is under-reported.
Additionally, there will be complete tax exemption on annual income up to Rs1.2m.
Many will fall out of the tax net. The scheme also does not offer any distinction between
declared assets that are repatriated for the purpose of investment and those not
destined to investment.
Finance Act of 2019-20
According to Section 236(I) of the Finance Act 2019:
==> Every educational institution is liable to collect advance income tax at the rate of 5%
on fees exceeding Rs200,000 per annum.
==> The Punjab Revenue Authority (PRA) has also introduced a 5% service tax on
doctors’ consultation fee exceeding Rs1,500 per patient and on hospitals bills where per-
night room charges exceed Rs6,000.
Over the past three decades, many educational and health organisations are registered
in the Large Taxpayers’ Units in Karachi and Lahore.
A member of the FBR’s hierarchy mentioned legal battles where even foreign embassies
are involved to shield private companies from the tax net.
Some Proposed Measures
==> Satellite mapping of shops in major cities
==> Electronic surveillance (especially of cigarettes manufacturers)
==> Reducing tax evasion on imports
==> Increasing taxpayers’ compliance by enhancing the cost of evasion
==> Encouraging business through banks to enhance documentation
==> Ensuring across the board accountability of FBR employees
Taxation Problems
==> First, tax collectors routinely extort bribes and are so well-connected politically that
they can’t be restrained.
==> Second, the rich lend to the government, but won’t pay taxes (nor return loans).
Consequently, the government spends more on interest payments to rich citizens than it
does on defence or development.
==> Third, the many exemptions (especially of landlords from federal income tax) and
the non-coverage of newer sources of income (like capital gains from real-estate
transactions), reduce tax yields and open the floodgates to tax avoidance and evasion.
Corruption in Taxation
Unless extortive corruption in taxation is controlled, only the helpless taxpayer will
comply. Corruption has been addressed at length in reports of the 2001 (Shahid Husain)
Task Force on Reform of Tax Administration and the earlier 1984 National Taxation
Reform (Qamar ul Islam) Commission. While neither was fully implemented and
subsequent developments are also relevant, the bottom-line recommendation of the
Islam Commission remains valid: “Inquiries, suspensions and periodic wholesale
removals have been tried but the basic weapon against corruption is the confiscation of
the ill-gotten gains. This has not been practiced so far”. This is still true in 2018.
Solution
Simplify Tax Laws:
There is a need to rewrite and simplify tax laws, which have become an
incomprehensible jumble of ad hoc appendages to a now-incomprehensible original
text. As a result, tax authorities are both unable and unwilling to assist taxpayers.
Instead, they direct them to a booming industry of accountants, lawyers and tax advisers
who settle tax matters through negotiation rather than law and precedent, thus
institutionalising corruption.
Other Recommendations:
==> There is a need to rationalise tax structure
==> Reduce the discretionary powers of officials
==> Strengthen monitoring and supervision
==> Increase accountability and transparency in tax administration
==> Reduce - if not end - interference from the political leadership.