INCOME TAX SELF ASSESSMENT SCHEME

THE NEWS:
By By Naeem Ahmed 9/24/2007
The major issues of the taxation system and revenue organisation during pre-reform period in Pakistan were; discretionary powers with tax officials, corruption, narrow tax base, high tax rates, SRO culture, low share of direct taxes, low buoyancy, heavy reliance on withholding taxes, delayed refund payments and a non-friendly environment in tax offices. These factors not only reduced the tax collection but also resulted in the loss of credibility of the tax machinery in public. Within income tax, the rates for the corporate sector were exceptionally high which not only discouraged tax compliance but also encouraged tax avoidance and evasion. During the year 1992-93 banking, public and other companies were taxed at the rate of 66 per cent, 44 per cent and 55 per cent, respectively. Similarly, income tax returns submitted by the taxpayers were subjected to full assessment resulting into un-manageable litigation process and un-necessary wastage of precious time of taxpayers. It may be realised that the direct taxes are generally progressive in nature, help in maintaining the overall proportionality of the taxation system and equitable distribution of income. The direct taxes also play a key role in ensuring a sustainable level of economic growth and development. Historically, the share of direct taxes in total tax collection in most of the advanced countries has been higher than indirect taxes. But, in Pakistan, the share of direct taxes in total federal taxes has been historically low.In this backdrop there was a need to address these issues in a manner that the taxation system becomes less complicated and cumbersome. In year 2000, the government constituted a Task Force on Reform of Tax Administration, which presented its report in April 2001. The focus of the reform report was to raise tax revenues through simplified tax laws and procedures and a congenial business environment and to regain the taxpayers’ confidence in revenue organisation. The old Income Tax Ordinance, 1979 has been replaced with the Income Tax Ordinance, 2001. The fundamental change introduced from July 2002 was the introduction of a regime of Universal Self-Assessment Scheme (USAS) in income tax. The objective of USAS was to facilitate the taxpayers, to minimise the contact between taxpayers and tax collectors and to enhance income tax revenue through increased confidence of tax payers in the system. On the other hand, the introduction of USAS had also put great responsibility on the shoulders of the taxpayers to respond positively by assessing their own income and to pay tax, due on them, honestly. The new law is in accordance with the international practices in all developed countries around the world and a first such experience in this part of the world, which has curtailed the most abused discretionary powers of the taxation officers. Some of the salient features of the Income Tax Ordinance, 2001 are: (1) The taxpayers themselves assess their income and determine their tax liability. (2) The powers of the taxation officer to make the assessment and impose tax have been reduced to a large extent.(3) All income tax returns are accepted without any conditions of compulsory enhancement of tax liability over previous year to qualify for acceptance. (4) A certain percentage of returns filed are selected for tax audit on the basis of risk assessment to verify the accuracy and correctness of income tax returns.(5) Rates of tax for the banking and private companies to be gradually brought down to 35 per cent by the year 2007.Impact on income tax revenue and compliance:There are three major components of income tax in Pakistan, namely: the collection on demand, voluntary payments, and withholding taxes. The collection on demand includes arrear demand and current demand, voluntary payments include; payments with returns and advance payments. Whereas, withholding taxes are collected from more than 20 sources - the major sources are salaries, bank interest, contracts, imports, exports, electricity and telephone bills. Until the recent past, there was heavy reliance on withholding taxes and collection on demand, contributing nearly 70 per cent of the total income tax collection (Graph-1). However, the introduction of USAS in 2002 has proved to be a success in the income tax regime, as it has shifted the focus from enforced collection to voluntary compliance with the result that the voluntary payments (VP) have emerged as a major source of income tax revenue. (see graph) In absolute terms, the collection on account of VP was Rs50.1 billion in 2002-03 which has increased to Rs165.6 billion in 2006-07. In other words, a growth of 207 per cent has been recorded during this period. During the same period, even though withholding taxes grew by 98 per cent, the overall contribution of WHT in income tax fell quite rapidly. The acceptance of USAS and new system can be further validated through the analysis of income tax returns during the last few years. (see table)It is evident that the income tax filers have increased remarkably, after the introduction of USAS. The new system has been helpful, not only in improving taxpayers’ confidence in the system; the revenue collection has recorded a notable growth of 78 per cent. Particularly, the response from the corporate sector and AOP has been very encouraging. More than 50 per cent growth in the number of returns filed has been recorded in the categories of corporate and AOP during the last four years. Moreover, during the year 2006-07, an unprecedented growth of 48 per cent has been recorded in the net income tax collection. This remarkable performance of the direct taxes enabled the CBR to achieve the rather ambitious target of Rs835 billion.To conclude, it is indeed very inspiring to observe that the government has gone out of way to commit itself to bring about qualitative changes in CBR. The reform program being undertaken in CBR through investment in technology, infrastructure and human resources has been designed to make the organisation efficient and transparent. The initial assessment is that reform objectives are being achieved and there is a definite change in the way the new taxation regime is evolving. The revenue collection is increasing significantly, a business friendly environment has been created and tax laws have been simplified. The USAS has been welcomed by the taxpayers by responding positively up to a large extent. The taxpayers are now visiting CBR field formations without any hesitation and fear. There is an unflinching resolve to pursue the reform process relentlessly with the hoe that the new approach of the revenue organisation will pave the way for further revenue generation, investment, economic growth, poverty reduction, and a dawn of new economic era in the country.— The author is Second Secretary, CBRTABLE-1: INCOME TAX RETURNS ANALYSISNo. of Returns ReceivedTaxpayers 2003-04 2006-07 Growth (%)Corporate cases 10,318 15,481 50.0AOPs 22,133 34,735 56.9Salaried individuals 431,583 76,465 -82.3Non-salaried individuals 498,690 655,876 31.5Statements 54,741 1,029,794 1781.2Total returns received 1,017,465 1,812,351 78.1