Tax Administration Reforms for Enhanced Capacity and Capability

1. TAX ADMINISTRATIONCAPACITY AND CAPABILITYTAX BAR ASSOCIATION KARACHIKHAWAJA TANVEER AHMEDMember (Tax Policy & Reforms)March 18, 2006

2. 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

3. NEED FOR REFORMS Cont’d • Primitive and antiquated tax administration (Cylindrical instead of Functional) • Complexity of tax laws and arbitrariness in their application • Persistence within manual record keeping and limited IT support • Lack of transparency; and inadequate HR Skills and / Capabilities

4. 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

5. LOW TAX EFFORT – TAX POLICY ISSUES • Revenue adequacy; Tax / GDP ratio - By international comparisons the ratio is low • More relevant: According to Pakistan’s spending levels and the ongoing federal deficit, the ratio is too low

6. Tax – GDP Ratios:Overall & Federal & Provincial Comparison

7. Tax – GDP Ratios:CBR Revenue

8. 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.

9. 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)

10. 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

11. 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

12. STRATEGY FOR REFORM • New Organizational Structure • Combating Corruption • Financial & Administrative Issues • Universal Self Assessment • IT Management Function • HRM - Evaluation of strengths & weaknesses

13. 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

14. 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

15. 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

16. 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

17. INFORMATION MANAGEMENT FUNCTION • Achieve developed countries level of taxpayer convenience and voluntary compliance by • Making significant investment in IT • Establishing Information System Plan (ISP) • CBR’s nationwide IT structure

18. HRM - EVALUATION OF STRENGTHS & WEAKNESSES • Human Resource Audit • Decision processes review • Future competencies & training needs • Compensation package • Workforce Planning and sequencing

19. 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

20. 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

21. 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

22. TAX ADMINISTRATION REFORMSFollowing Table shows that the number of applications for the ADRC are growing – 15.1.2006

23. OUTCOME OF REFORM MEASURES:IN TERMS OF CHANGE IN TAX MIX

24. OUTCOMEOF REFORMS IN REVENUE COLLECTION

25. 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

26. 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

27. FUTURE STRATEGY Cont’d • Further simplification of Rules and Procedures; • Continuous Reduction and Rationalization of Tax and Tariff Structure; • Strengthening the HRM and Audit functions; • Co-location and Integration of Taxes • End-to-end Automation of work processes to minimize taxpayer – tax collector interface; and • Emphasis on taxpayers’ education and facilitation and wider dissemination of CBR efforts THANK YOU