June 7

Income Tax

2011
Why people dont pay taxes in Pakistan

This document highlights some issues of why people dont pay taxes in a Pakistan and as well as there are some problems and as well suggestions or solutions are there.

Submitted to: Section:

Prof: Umer Zaka E

Name of Group Members:

Rashid Azam Rana Waqar Ahmad Arslan Arshad Momina Arif Farah Waseem

L1S10MBAM2010 L1S10MBAM L1S10MBAM l1S10MBAM l1S10MBAM

Assignment No:

3 & Project

WHY PEOPLE DONT PAY TAXES IN PAKISTAN?

Definition of Tax A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. Purpose of Taxation The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes. TAX IN PAKISTAN: Law concerning taxation of income in Pakistan is stated in the Income Tax Ordinance, 2001 (the Ordinance) and the rules framed there under viz. Income Tax Rules, 2002 (the Rules). The Ordinance is a Central statute and is, therefore, applicable to the whole of Pakistan .Under section 4 of the Ordinance, income tax is imposed for each tax year at specified rates on every person who has taxable income for the year. The tax payable is calculated by applying the rate(s) of tax to the taxable income of the taxpayer for the year. Tax Year in Pakistan Tax year is a period of twelve months ending on 30th June and shall be denoted by the calendar year in which the said date falls. Taxable Income in Pakistan It is the total income of a person for a tax year reduced by the total of any deductible allowances, under the Ordinance, for the year. A person is entitled to a deductible allowance for the amount of any Zakat paid by the person in a tax
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year under the Zakat & Ushr Ordinance, 1980.

THE PROCESS OF TAXATION AND TAX-COLLECTION IN PAKISTAN

In Pakistan, taxes are levied at three levels: Federal Provincial local At federal level, Central Board of Revenue (CBR) takes care of the revenuecollection. At this level, there are four major taxes: Income Customs Excise Sales Tax

At provincial level, various departments perform this task. Major taxes at this level are: Stamp Duty, Motor Vehicle, Entertainment, and Electricity taxes. And, at local level, entities of district government levy taxes.

High tax stat:

Pakistani state is such a high tax state. On the one hand, it is not providing the least of the essential services to its citizens; that is, maintaining law and order, and protecting life, liberty and property of its citizens. On the other, under the slogan of Welfarism, it is resorting to high taxes and control over the lives of the people, and thus it has to sustain an ever-increasing state-machinery. Moreover, it has instituted monopolies, and likes to take care of their interests. And, last but not least, it has gathered around a ring of rent-seekers in the shape of politicians, privileged groups, civil and military bureaucrats, etc. who cause to manipulate its policy of taxation to their own benefit or to the detriment of others.

Tax evasion and FBR:

Every year a budget is presented and goals set, which are never to be realized. Tax evasion in Pakistan according to former Finance Minister Shaukat Tarin is in the range of Rs798 billion annually. The FBR in Pakistan is biggest facilitator of tax evasion, which is evident from the fact that targets set for tax collection are never achieved, nor are the criminals responsible for this crime against the state ever been punished, tax evasion is the worst of all crimes that can be committed against a state. According to FBR some seven hundred thousand tax thieves have been identified and over 4,000 companies involved in obtaining fake refunds identified, yet the FBR for some strange reasons wants to protect their identities. While millions of poor suffer due lack of funds as a consequence of tax revenue targets not being achieved, yet the criminals responsible for this crime within the administration and business community are being protected. No nation can survive, or function if its tax collection agency is riddled by massive corruption and less than 40% of targeted tax revenues collected as is the case in Pakistan. Hundreds of thousands of poor die of starvation and many of them commit suicide, yet those responsible for tax evasion, a crime against the state, are being facilitated by none other than the FBR and their political godfathers.

POLITICAL VIEW AT TAXATION Taxation has become a very sensitive political issue. Because of the disappointment that had accumulated on the management (collection / utilization) taxes, there arose a very serious moral movement impact, tax boycott. If not treated quickly, the movement could be a wild ball which threatens the legitimacy of governments, even the existence of the state itself. Taxes are the life blood (life blood) countries. Taxes paid by the state erect; tax boycott collapsed state.

RELIGIOUS VIEW AT TAXATION

According to Islamic jurisprudence, the definition of obligatory alms tax is levied by the government over citizens. Called the dole because there is no direct benefit (iwadl mubasyir) received by the payer. Mandatory in the sense of enforceable public interest (mashalih ammah). Given how absolute role for the existence of the state tax and welfare of people (if managed correctly), Islamic super-serious attention through its main teachings (pillars of Islam), namely zakat. Throughout the history of the country, the tax has developed (evolved) through three concepts meaning. First, taxes as a tribute (dharibah) to be paid by the people solely because they are the servants who should serve the interests of the ruler as his master, ruler. The king claimed to be incarnations of gods ruling the universe. At this stage, the tax is defined as proof of loyalty to the people as servants in the palace to the king's palace as a Look-so, to borrow a phrase of Java. There are no moral rules or laws that govern how and to whom tax money should be managed. Also, not yet known concept of corruption as a crime lord, or officials of state finances. Tribute this era is the era of absolute kings of feudalism. Second, conceived as compensation, tax (jizya) to the rulers of the people. This concept came after the people of the taxpayer (tax payers) started to realize that the king / ruler is not a god who may treat people arbitrarily. Authorities are also human beings who hold the power because the mandate of the people. Neither taxpayers nor the ruler of the people the tax collectors are human beings who more or less equivalent. So, if the authorities levy taxes, should no longer free. Taxes must be balanced with service to the people who pay for it.
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Second, conceived as compensation, tax (jizya) to the rulers of the people. This concept came after the people of the taxpayer (tax payers) started to realize that the king / ruler is not a god who may treat people arbitrarily. Authorities are also human beings who hold the power because the mandate of the people. Neither taxpayers nor the ruler of the people the tax collectors are human beings who more or less equivalent. So, if the authorities levy taxes, should no longer free. Taxes must be balanced with service to the people who pay for it. This second concept is clearly more advanced and feels more civilized than the first draft. However, there are structural defects that could widen the gap between powerful people on the one hand and weak-poor people on the other. Because the fee concept (jizya), large taxpayers feel entitled to get great service from the state, while the small taxpayer is only entitled for small services. If you want to uphold justice, as in the Pancasila, there is no other option for us other than the third, the tax as a handout for the Lord God Almighty, the Creator of heaven and earth, for justice and prosperity for all. Taxes with the meaning of Islam called zakat, which literally means purity and growth. That is, with taxes as a charity, we purify our hearts from envy of others, as well as develop the prosperity and justice for all. That is, taxes are no longer as gifts (bribes) or fee (jizya) to the ruler, but as a charitable exemption for justice and prosperity for all, especially those who are weak, poor and destitute (Attaubat 60). In this concept, every dollar of tax money is money God is mandated to officials of the state as a servant of God and the people (Amil) with a full sense of responsibility. Those who abuse the tax money, is responsible to the people in the world and God in the Hereafter.

FBR FBR vying to meet tax collection target:

ISLAMABAD - The Federal Board of Revenue (FBR) is struggling to achieve the revised annual tax collection target of Rs 1604 billion owing to the slowdown

of the economy, as the Board needs another Rs 843 billion in the remaining five months of the financial year to meet the target. The data shows that the FBR collected Rs 761 billion in the first seven months (July-January) of the financial year 2010-11, while to reach the revised annual target of Rs 1604 billion; the tax department needs further Rs 843 billion in just five months period. It is worth mentioning here that in the budget, the original tax target was fixed at Rs 1,667 billion, which was revised, downward to Rs 1,604 billion after the unprecedented floods in the country and further reduction is expected in view of the current slowdown of the economy. The FBR has provisionally collected Rs 761b in the first seven months (July-Jan) of the ongoing financial year against the collection of Rs 695b in the same period last year, showing an increase of 9.5pc in one year, Israr Rauf, Member Direct Tax and official spokesman of the FBR, said while talking to TheNation on Tuesday. He further said that these were provisional figures and would be finalized in next few days. Meanwhile, the tax department has missed the revenue collection target in the month of January by some Rs 23 billion, as the Board has collected Rs 99.3 billion during the last month against the target of Rs 123 billion. According to the sources, FBR might reach Rs 110 billion in the next few days, as tax collection of far-flung are still in pipeline. However, if FBR reaches Rs 110 billion than still, shortfall would remain at Rs 13 billion. The break-up of Rs 761b collected in seven months shows that FBR collected Rs 272b as direct tax and Rs 489b as indirect tax in July-Jan period of 2010-11. Meanwhile, in indirect taxes, FBR accumulated Rs 327b as Sales Tax, Rs 67b as FED and Rs 94b as Customs Duty in the first seven months of current fiscal year.

TAX CONCEALMENT IN PAKISTAN

There are so many factors involved in tax concealment or people dont want to pay taxes in Pakistan.

Culture
Now that is a part of our culture to dont pay easily we dont want to pay our bills for that things which we have used so then how can we be ready to pay taxes to our government.

Inflation
There are too much inflation exists in these days into Pakistan people dont have enough money for living then paying taxes is difficult for them.

Peoples perception
There is a general perception about the government that they will not utilize our money for their welfare and they will use it for themselves.

Consideration
Consideration is a very major factor for people are not agreeing to pay taxes because they will not get any benefit in return of that money which they will pay to our government.

Corruption
There are so many corruption scandals are out there related to our politicians so corruption is prevail round us so now through media awareness people are very much known about our politics and politicians. Internationally, Pakistan is considered a soft state. But its too soft an acronym. Pakistan is one of the most corrupt states of the world. According to the Transparency Internationals ranking of the most corrupt countries of the world, in 1996, Pakistan stood 2nd.

"Pakistan is one of the countries of the world that has achieved notoriety in terms of its association with twin evils (corruption and money-laundering) and particularly with corruption. The gravity of the situation can be gauged from the fact that the then prime minister of Pakistan, Nawaz Sharif, himself admitted sometime back that the country was losing Rs.2 billion a day or Rs.720 billion a year to corruption. (This is significant because the total revenue collection in Pakistan is a little over Rs.300 billion.)" [Ijaz Hussain] After the martial law of 1977, when a civilian government was installed, a new political tradition got started that strengthened the institution of corruption in Pakistan. Members of the parliament were to be given funds to use for the development of their constituencies; these funds were never to be audited. And there are a lot of politicians are involved in corruption therefore people dont have trust on them so they do not pay taxes to government.

Indirect taxes
Our general public indirectly pays other taxes so they usually just want to conceal these taxes, like sales tax etc.

Tax rates
There are some prevailing tax rates which are so much for single individuals so people hesitate to file return and to be a tax payer.

QUETIONARE
In order to determine the different views of tax payers (businessmans, retailers, govt. officers etc) about taxation system in Pakistan we have made a questionnaire which have different options to be selected by the tax payers so that we can to know what are the reasons to pay or not to pay the tax. That questionnaire is described as under:

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Tax Law Questionnaire Name: Occupation: Age: 1. Why people dont pay taxes? a) they dont have money b) they dont have believe on tax department c) Other reason 2. How much people evade taxes in Pakistan a) b) c) d) 10% to20% 20% to 40% 40%to 60% 60% to 80% Section E Teacher: Prof. Umer Zaka

3. How much people in Pakistan pay taxes in a fair way e) f) g) h) 10% to20% 20% to 40% 40%to 60% 60% to 80%

4. How many politicians pay taxes in Pakistan? a) b) c) d) Only few Rarely any A lot of All

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5. Gov.t should collect taxes a) Yes b) No 6. What amount of tax you paid last time? 7. Did you think our government utilizes our taxes in a right way? a) Yes b) No 8. You want to pay taxes if government solves your issues? a) Yes b) No 9. Do you think corruption exist at tax department in Pakistan a) Very common b) Very few c) Very rarely

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Results and interpretation of results

QUETIONARE ANSWERS

1. Why people dont pay taxes?

20% 1 2 80% 3

a) they dont have money b) they dont have believe on tax department c) Other reason

1. 0% 2. 20% 3. 80%

Interpretation:
The result shows that only 20% out of 20 say that they dot have believe on tax department and other 80% have other reasons like: Insufficient in money Consideration error Cultures part(Other people dot pay so I will not pay ) Tax concealment

And their and other reasons can be.

2. How much people evade taxes in Pakistan a) b) c) d) 10% to20% 20% to 40% 40%to 60% 60% to 80% 0% 50% 35% 15%
15% 50% 35% 1 2 3 4

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Interpretation:
The results show that majority of the people think that only 20 to 40 percentage of people evade taxes in Pakistan except those other 60% use to pay taxes or pay little amount they pay . 3. How much people in Pakistan pay taxes in a fair way
0 0 1

a) b) c) d)

10% to20% 20% to 40% 40%to 60% 60% to 80%

70% 30% 0% 0%

30% 70%

2 3 4

Interpretation:
There are very small number of people who pay taxes in Pakistan according to our survey only 10 to 20 percentage people pay taxes in a right way to federal board of revenue, thats a very small amount of people who contribute to our taxes and follow the instructions of law.

4. How many politicians pay taxes in Pakistan?

00

a) b) c) d)

Only few Rarely any A lot of All

55% 45% 0% 0%

45% 55%

2 3 4

Interpretation:
The number of politicians who pay taxes is also very low only 55 % of people thinks that only few one will pay taxes in Pakistan and 45%said that only rarely any one pay taxes because they are in gov.t so they dot have any need to pay taxes even media tell us that our president even dot pay their amount of obligation so other will follow him.
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5. Gov.t should collect taxes? a) Yes b) No 90% 10%

10% 1 2 90%

Interpretation:

The people to whom we did survey they were agree on that point that our gov.t should collect taxes because we use roads, sewerage, electricity and other facilities but when these facilities will not available to us then no one will want to pay out of his pocket because they felt there is no return .

6. What amount of tax you paid last time?

Interpretation:
The people give us answers according to their limit Rs:5000 to Rs 10000.

7. Did you think our government utilizes our taxes in a right way?
0

a) Yes b) No

0% 100%
100%

1 2

Interpretation:

As I mentioned above that gov.t should utilize our taxes in a right way so when I ask this question to our people so they were agree on my point or as we can see there are no proper facilities available to the people .

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8. You want to pay taxes if government solves your issues? a) Yes b) No 100% 0%

0 1 2 100%

Interpretation:
Then I ask to people that if gov.t solve their issues they will be ready to pay taxes then all answers were positive and all were ready to pay taxes. 9. Do you think corruption exist at tax department in Pakistan
0

a) Very common b) Very few c) Very rarely

80% 20% 0%

20%

1 2 80% 3

Interpretation:
There are majority people thinks that corruption exixts at tax department because the taxers become involve in tax evasion process and charge less amount of tax after taking their commission to people.

QUETIONARE ANALYSIS
The above questionnaire analysis clearly shows that most of the tax payers dont pay taxes because they receive nothing in return so if Gov.t facilitate them according to their needs then definitely people will pay taxes in Pakistan.

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Personal Opinion:
Our personal opinion on that situation is that government should take some important actions and form very medium size of committees for the collection of taxes and as well as for the welfare of that people too from where they collect these taxes once in five year the demands of the people to whom they collect these amount of taxes should be fulfilled like make the road, sewerage system repairing electric wires problem etc. When the people will pay taxes and then once they get what they want, I think people will not evade tax at all because that know that this amount will be use for their welfare.

Suggestions:
Gov.t should adopt policy that pay taxes from at higher level then it will be imposed at lower level Their should be properly equality occur Should facilitate our general public or taxer

Conclusions:
Collection of taxes is not bad but collect to one community more and to the others are free from this obligation is wrong so the tax is good the welfare of our country it must be collect by us but process, rates, utilization is also very important as tax is.

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