Determinants of Income Tax Base in Pakistan: A Policy Review

Abstract

This paper is divided into six parts. Following this introduction a reivew of the fiscal policies pursued by the Government of Pakistan is presented in the second section. The third section contains an assessment of the performance of different taxes while the fourth presents the reasons for low revenue performance. The key issues in tax policy reform are discussed in the fIfth section. The final section presents the recommendations for future policy directions. The taxation structure of Pakistan is both Federal and Provincial in nature. This structure was derived from the revenue-sharing provisions of the Government of India Act, 1935 and has been incorporated into successive constitutions delineating the respective revenue powers of the Federal and Provincial Governments. Under the present constitution, the Federal Government has the constitutional right to levy a wide range of direct and indirect taxes [Government of Pakistan (1973)]. Federal direct taxes comprise of personal and corporate income tax (excluding tax on agriculture income), and capital taxes (excluding tax on immovable property). Since the abolition of estate duties and gift taxes, the latter include wealth tax and Capital Value Tax. One time Capital Assets Tax on companies was levied in 1991. Income of small businesses is subject to fixed tax. Minimum tax at the rate of 0.5 percent of turnover applies to Corporate and Registered Firm taxpayers. Presumptive tax regime applies to dividends and interest, prizes on prize bonds, lotteries and raffles, payments for contract execution and supply of goods, and value of imported and exported goods [Government of Pakistan (1991)].