Individual Income Tax

Best, M. C. (2014). The Role of Firms in Workers’ Earnings Responses to Taxes: Evidence From Pakistan. – May2014 – The Role of Firms in Workers Earnings Responses to Taxes.pdf

This paper explores the role of firms in determining how workers’ taxable earnings respond to taxation using administrative tax data on salaried workers in Pakistan. Data from income tax returns from Pakistan covering fiscal years 2007/08-2011/12 from FBR has been used. Three types of evidence have been presented: third- party reporting of salaries makes underreporting taxable income more costly for workers and reduces evasion of the income tax. Secondly, firms’ equilibrium salary hours offers respond endogenously to the presence of adjustment costs in the labor market by tailoring offers to aggregate worker preferences. Thirdly, workers learn about the tax schedule from firms’ salary offers, making them more responsive to taxation both contemporaneously (by 130%) and in subsequent years (by 100%). The author suggests that while third party reporting makes misreporting more costly, it does not eliminate it in a low tax capacity setting: 19 percent of the workers continue to underreport their salaries leading to a loss of 5 percent of tax revenue, indicating high returns to investments in improving enforcement capacity. The large role played by firms in determining workers’ earnings implies that firms need to play a central role in our analysis of income taxation in low-income countries.

Personal and Corporate Income Tax in Pakistan. (2013). Federal Bureau of Revenue & International Growth Centre.

This brief focuses on direct taxes- corporate and individual income tax that contribute around 97 percent of direct tax revenue in Pakistan. The brief suggests that tax exemptions result in a loss of Rs 69.6 billion to usually high-income taxpayers. Partial decrease in income tax collection in Pakistan over the years can be linked to a decrease in the income tax rate. The rest can be linked to voluntary incompliance. Corporate income tax rates have decreased substantially from 66 percent 55 percent and 44 percent for banking, private and public companies respectively in the 1990s, to a uniform corporate tax rate of 35 percent of taxable profits for all large (public and private) companies. In 2010, only 17 percent of the taxable population filed tax returns. Corporations as taxpayers could also improve further. There are 50,839 companies regulated by the Securities and Exchange Commission of Pakistan (SECP). From them, a compliance rate of less than 42 percent is demonstrated. Similarly, for corporate income tax, while there are 50,839 companies regulated by SECP, a compliance rate of less than 42 percent was demonstrated. The brief ends with the recommendation of adopting a credible audit deterrent. The current audit system is severely limited in its breadth and frequency, non-uniform in application and discretionary in its case-selection process, rendering it extremely ineffective for encouraging compliance.

Taxation crisis in Pakistan. (2013). Federal Bureau of Revenue & International Growth Centre.

The authors highlight the need for indirect taxation due to the shortage in income tax payers in the country. They are less than 1 percent of the population of 180 million. The individual income tax from salaried workforce accounts for only 3 percent of all taxes collected by the government. Indirect taxation is considered regressive. Twenty-five percent of all taxes in Pakistan come from just one sector – the energy sector.
The paper suggests that the problem thus does not lie in high tax burden on those who pay taxes but in the lack of fairness in the sense that too few people pay most of the tax. This happens when rules and regulations allow many people to escape the tax net legally and also illegally through poor enforcement. The paper suggests that it is not the “burdened middle class” but in fact the corporate sector of Pakistan that pays over 62.4 percent of all income tax in Pakistan. Due to the unfairness of the income tax system many interest groups have been able to dodge taxation altogether by remaining informal or non registered. Taxation policies need to be drafted in a manner that result in higher taxation of the corporate sector compared to the non-corporate informal sector encourages firms to remain informal.

Ameer, M. W. &Mohd, S. (2012). Personal Income Tax Progressivity in Pakistan.

The study aims to analyze the progressivity or repressiveness of personal income taxes in Pakistan. To determine the nature of income taxation, marginal tax rate, suits index and average tax rate are employed. Data for analysis has been taken from Federal Board of Revenue Pakistan. The authors conclude that the personal income taxes are not very progressive and the tax burden is also very low. They suggest that the tax system in Pakistan is progressive. Lower income groups pay lower taxes and higher income groups pay higher tax. The ATR and MTR show that the tax rates of all the income groups are reduced over the years but it is still a progressive system. The authors suggest that the distribution of tax burden in Pakistan is equitable but from 2009 it is going towards inequitable tax burden.

Ahmed, V. & Donoghue, C. O. (2009). Redistributive Effect of Personal Income Taxation in Pakistan.

The authors aim to study the impact of personal income tax in Pakistan. Income tax is important not only for meeting the government’s expenditure needs but also for reducing inequality. The concept of redistribution in a tax system is not necessarily a static concept, time period over which we measure income and wealth are likely to influence the measures of redistribution and progressivity. The role of personal income taxes has been declining in developing countries however it is still important and can’t be completely discarded. The overall tax system in order to evaluate the contribution of rate, allowances, deductions, exemptions and credits has been decomposed in the study. Data from Household Income and Expenditure survey 2001-2 has been used. The structure given in Income Tax Ordinance, 2001, is applied to gross household incomes in 2002 (low growth year) and 2005 (high growth year). Their findings reveal that the reforms laid down in the Tax Ordinance resulted in a greater redistribution of income. The redistributive effect increases as the analysis moves from 2002 to more recent years. Deductions for salaries tax payers contribute the most towards progressivity. These results contradict results from other countries with advanced taxation systems that rely on allowances followed by tax rate.