Najam I. Chaudhri, FCA
President, The Institute of Chartered
Accountants of Pakistan
July 26 - August 1, 1999

The Total Tax Revenue collection by the government varies between Rs 300 to Rs 350 billion per annum versus revenue expenditures and debt servicing of over Rs 500 billion leaving a huge deficit in the budget every year. This does not include the funds required for public sector development projects. The Government therefore has no choice but to resort to heavy borrowing both locally as well from international sources. Thus there is an urgent need for substantial increase in revenue collection for the smooth functioning of the State.

The Income Tax Department, despite having a large establishment fails to meet its collection target each year, and actual collections made on account of Direct Taxes have hovered around Rs 100 billion for the last several years. The Department has also failed to significantly increase the number of Income Tax / Wealth Tax Assessees, despite many attempts. One such attempt which made a noticeable impact was the introduction of presumptive tax regime which empowered the Government to raise revenue under Direct Tax by levying tax at specified rates on sale of supplies and services. This tax though purported to be categorized as income tax was in effect an indirect tax as its burden is borne by the ultimate consumer in the same manner as Custom Duty, Excise Duty or Sales Tax.

Over the past years various governments have made numerous endeavours to improve the integrity and efficiency of the Tax Department, but each endeavour has miserably failed. The Department continues to be infested with corruption and inefficiency, and is the cause of much frustration to the corporate and business community. On the other hand, several amnesties were offered to launder black money at highly concessional rates with pious intentions that assessees would henceforth avoid evasion and pay their due share of taxes. But unfortunately that was not to be. Old habits die hard and the pollution which permeated the Department made radical improvements well nigh impossible.

The Income Tax laws are very complicated, subject to frequent changes, and replete with discretionary powers to the Assessing Officers as well as the Appellate Officers. Add to this the assessment procedures which subject the assessee to a number of hearings along with the bothersome hassle to produce books of accounts and other documentation. This gets aggravated when he goes through the drill of various Appeal stages, suffering added costs of litigation, annoying uncertainties and unproductive paper work.

During the last quarter of the financial year, the tax payer is often coerced by the Tax Department to make unreasonable payments to meet revenue targets. This is one major reason which is driving away prospective investors from Pakistan. Under the present system, levy and collection of tax is primarily dependent on documentation of economy. Inspite of various attempts the Revenue authorities have not succeeded in achieving the documentation of the non-corporate sectorís economy nor is it likely that the same would be achieved in the foreseeable future. The tragedy of the existing system is that the same documented corporate sector and the salaried class bears the brunt of any increase in taxes, and a very large segment of the society remains outside the tax net.

With the objectives of increasing the government revenue collection, increasing the tax base so that the burden of taxes is more evenly spread and relieving the corporate and business community from harassment by the tax department, it is proposed that the collection of levies under the Income Tax, Wealth Tax and Capital Value Tax be abolished, and be replaced by a Tax on Expenditure to be called Payment Value Tax (PVT). The change being proposed is indeed radical but such a radical step is essential as all earlier efforts made to streamline the Tax collection machinery to increase revenue collection and expand the tax base have not met with any significant success.

Salient features of the scheme

All direct taxes i.e. Income Tax, Wealth Tax and Capital Value Tax are to be abolished. In lieu of the above taxes, a tax on expenditure to be introduced. This would be called Payment Value Tax (PVT).

PVT is chargeable on all payments routed through banks, financial institutions, credit card agencies and like bodies who would be responsible to collect tax at a fixed percentage of the amount of payment. For example, if an account holder draws a cheque of Rs 100 on his bank and the PVT rate is say 3 percent, the bank will debit Rs 103 to the customerís account and credit Government of Pakistan with Rs 3.

The aforesaid entities responsible for collection of PVT would be designated as Collecting Agents. Private Exchange Bureaus would also be placed in the categories of Collecting Agents.

PVT collected by the Collecting Agents would be deemed to be the final tax liability of the person/entity (taxpayer) from whose payment PVT was collected. The taxpayer would not be (i) required to file a return of income; (ii) there would be no assessment nor assessment proceedings; and (iii) nor would he (the tax payer) be entitled to any refund or adjustment of PVT.

Certain payments and transactions would be exempt from PVT and such payments would have to be routed through special bank accounts styled ìPVT Exempt Bank Accountsî. There could be certain payments to non-residents where Tax Treaty provisions would be applicable and tax rates determined thereby would be applicable. There are also special provisions for non-residents receiving payments for royalty, technical fees, shipping and air transport business. The rate of collection of PVT on such transactions should equate what is payable under the Tax treaties or the special rates may be prescribed under the PVT Act. Such payments to be routed through a special bank account to be opened by the tax payer styled ìPVT Special Rate Bank Accountî.

Collections of PVT by the Collecting Agents would be deposited into the government treasury latest by the close of the next working day.

The PVT Scheme is to be administrated and managed by a Corporation wholly owned by the government. The Corporation is to be formed under its own Ordinance in the name of Federal Revenue Management Corporation (FRMC).

Prior to introduction of PVT and to minimise cash payments which would escape PVT, currency notes of Rs 500 and Rs 1,000 should be demonetized. Holders of the demonetized currency would be asked to deposit the currency with a scheduled bank in their accounts. Alternatively over a period, such high denomination notes would be withdrawn from circulation by SBP. In any case the highest denomination note in circulation should eventually be of Rs 100.

The Collecting Agents would be compensated for their services at a fixed percentage of the PVT revenue generated through them and all Collecting Agents are to be subjected to a Special Audit by professional firms to be appointed by FRMC.

The Scheme would be governed by Rules to be prepared pursuant to an Act which may be termed as the ëPayment Value Taxí Act. This PVT Act would result in the present Income Tax Ordinance, 1979 and Income Tax Rules, 1982 being rendered ineffective and would eventually be repealed. However, some portions of the present Ordinance and Rules, which require to be continued, could be included in the new PVT Act/Rules.

PVT Revenue estimate

Based on information obtained from the relevant bodies and from discussions with senior bankers, it is estimated that annual value of payments through banking system currently amount to Rs. 6000 billion. These include (a) debits passing through the Clearing Houses managed by SBP in 15 cities (b) debits passing through the Clearing Houses managed by NBP in other cities (c) cash drawn (d) intra-bank debits within city (transfer delivery) (e) intra-bank debits outside city (collection business) (f) outward remittances for imports, expenses, fees dividends and profits (g) remittances ñ local (h) travellers cheques issued

(Rupees in billion)

* Projected base

Present base Year 1 Year 2 Year 3

Value of payments through

banking system 6,000 7,200 8,280 9,108

Worked out at the rate of Estimated PVT Revenue

3% 180 216 247 273

21/2% 150 180 207 228

2% 120 144 165 182

* Increase in value of payments through banks have been estimated at 20%, 15% and 10% for years 1, 2 and 3 respectively. However, these projections are on the conservative side and it is expected that, once the steps suggested to curb the cash economy have been taken, the increase will be substantially more. Similarly when the economy gets out of recession, the base figure should further increase giving substantive rise to the PVT revenue.

The estimated PVT revenue compares very favourably with the current collection of about Rs 100 billion per year from Direct Taxes. The direct cost of collection of PVT is estimated not to exceed 0.75 percent of the PVT revenue and is made up as under:

Percentage of gross

PVT revenue

Collecting Agents fees 0.25

Management expenses of FRMC, cost of audit and other professional services outsourced 0.50

0.75

 

The net yield from PVT would be augmented by (a) the establishment and audit costs, and collection charges are expected to be lower than the present cost of collecting Direct Taxes (b) the number of personnel required to administer the PVT Scheme would be much lower than that required for administrating Direct Taxes (c) valuable immovable properties presently occupied by various Direct Tax functionaries would, to a large extent, be surplus and could be sold (d) PVT would be collected immediately upon occurrence of the transaction, and the revenue simultaneously transferred to the government treasury (e) there would be no pending tax refunds since PVT would be the final tax liability of the taxpayer.

3. Advantages of PTV

Net annual revenue from PVT is expected to be higher than under the present system of Direct Taxes.

PVT System is easily understood and simple in its operation. Taxpayers as a rule are critical about the complex tax laws, the complexity of which is compounded each year by the annual Finance Acts and SRO Notifications containing innumerable amendments, new rates of tax and new categories of transactions deemed to be income by fiction of law. The already wide and arbitrary discretionary powers of the assessing officer is made wider each year. Even an honest taxpayer feels that he is being harassed and is a victim to injustice. The Scheme of PVT can be introduced in the name of tax simplification and would remove the aforementioned misgivings of the taxpayers.

PVT would bring in revenue upfront ñ as soon as the transaction is effected - rather than after a long wait for assessments to be completed, appeals finalised, refunds to be adjusted and in some cases long drawn out legal recovery proceedings.

The taxpayer would also welcome PVT as it ensures a finality of his tax liability rather than waiting for years for appeals to be decided.

PVT would improve the cash flow of the government and could reduce its borrowing costs resulting in speedier decisions by the government in approving expenditure on welfare and development projects.

Taxpayers would not be coerced into making unreasonable adhoc tax payments to accommodate the tax department to meet their budgetary requirements which has become a normal feature in the closing months of each financial year.

The legitimate complaint of refunds being held up by the Department, which is a major irritant to honest taxpayers, would be removed.

PVT would also remove the following apprehensions and complaints of honest taxpayers: (a) tax laws change very frequently making long term business planning an exercise in futility (b) poor tax administration emanating from frequent changes in the tax laws (c) blatant abuse of power by officers employed in the execution of the tax laws (d) the rampant corruption and tax evasion culture of a large segment of our society and the tax collectors (e) the inefficient and corrupt practices adopted by the revenue authorities.

Demonetization or withdrawal of Rs 500 and Rs 1,000 currency notes would minimise cash payments, discourage the prevalent cash economy and go a long way towards documentation of the economy.

The business community has been averse to the levy of General Sales Tax, (GST) which is presently being introduced. The reason for this is that they believe that documentation for Sales Tax would be used to impose additional Income Tax on the concerned business. However, with the introduction of PVT the fear of imposing additional Income Tax or falling in the tax net would not exist, and the General Sales Tax regime would be readily accepted.

If it is decided to demonetize large currency notes, then their deposit into scheduled banks, would have the advantage of bringing the hidden wealth into the main stream of economy for productive purposes.

A larger segment of the society would contribute towards state revenue rather the insignificant number of present taxpayers.

PVT being the final tax liability, taxpayers would be absolved of filing returns of income and the inconvenience of assessment proceedings, appeals and pursuing refunds of taxes unjustly collected.

Taxpayers would be absolved of the irksome task of collecting revenue on behalf of the government through the complicated and constantly changing withholding tax provisions. Taxpayers, over the years, have not only been made tax collectors without any remuneration but have, on the other hand, been burdened with increased expenditure for staff costs in collecting withholding taxes, providing voluminous statements to the tax department and are further harassed by a withholding tax audit from time to time by the assessing officers.

The controversial issue of taxing agricultural income would to a large extent be resolved.

PVT could lead to increased growth of the banking industry in Pakistan and would increase the volume of banking business which would speed up electronic banking in the country.

 

 

4. Steps to discourage the cash economy

These include withdrawal / demonetization of currency notes of Rs 500 and Rs 1,000, a complete ban on issue of bearer securities (including prize bonds) by the government and commercial banks and all existing bearer certificates issued by the government including prize bonds to be converted into registered securities.

Profits and prizes on securities, bonds, etc., to be paid by crossed cheques or bank transfers and not in cash over a certain limit.

Salaries, wages and perquisites to be paid by bank transfer or crossed cheques. Salaries and wages of individuals having monthly earnings of less than Rs 5,000 may be paid in cash or by bearer cheques.

All payments to Federal, Provincial Governments and local bodies to be made through banking channels except for items such as railway tickets, postage, utility bills, etc. Except for petty purchases (say below Rs 10,000), the Federal and Provincial Governments and local bodies to endeavour to make all payments through banking channels.

Non-cash perquisites and benefits to employees and others to be quantified in cash and paid through banking channels.

Change in legislation may be required so that (a) the payments in excess of Rs 5,000, if made in cash, even if supported by a proper receipt, are not accepted as proof of payment in law (b) splitting of a transaction with a view to evade the tax be made a criminal offence (c) bouncing of a cheque be made a criminal offence.

Transactions to be processed through banking channels include: (a) purchase/sale of real estate (b) purchase/sale of motor vehicle (c) property rentals. The Registration authorities should ensure compliance with regard to use of banking channels for these transactions before accepting documents for registration.

 

5. Collecting agents

PVT to be collected by all Collecting Agents (including Private Exchange Bureaus) at a flat rate of say 3 percent on all payments made on account of third parties except in the following cases (a) no PVT is to be collected from certain exempt payments to be specified under the Scheme by the FRMC. Tax payers would have to open PVT Exempt Bank Accounts for making payments which are exempt from PVT (b) for payments to non-residents who are subject to a special rate of tax under Tax Treaties or under the Scheme, the FRMC to specify the type of payments, payees and the rate of collection. PVT Special Rates Bank Accounts to be opened by the tax payers for making such payments where the rate of collection of PVT is to be more or less than 3 percent.

The payments to which PVT would apply include (a) cheques honoured (b) drafts/payorders, travellers cheques issued (c) transfers made (d) LCs/Bills retired (e) markup, interest & charges.

Private Exchange Bureaus would also collect PVT at the rate of 3 percent on all transactions of transfer, purchase and sale of foreign currency.

Collecting Agents being banks, financial institutions and like bodies would debit PVT to the tax payers accounts. For drafts, payorders and travellers cheques issued against cash, PVT would be collected in cash and credited to GOP account.

PVT debited to customer accounts or collected in cash to be credited by the Collecting Agents to the governmentís account latest by the close of the next working day.

Debits to customerís accounts for custom duty, LCs, bills, mark-up, interest etc., are also subject to PVT.

A daily statement of collection of PVT at the standard rate (3 percent) to be made out and sent to FRMC by the end of the next working day . Similarly, a separate statement to be prepared for daily collections in PVT Special Rate Bank Accounts and sent to FRMC. Separate statements are also to be prepared daily for payments out of PVT Exempt Bank Accounts (on which no PVT is to be collected) and sent to FRMC.

Where the Collecting Agent fails to collect PVT or having collected fails to remit the same to the government by the due date, the total amount of PVT would be recoverable from the Collecting Agent together with penalties to be prescribed.

 

6. Private exchange bureaus (Money changers)

The business of Private Exchange Bureaus (Money Changers), including purchase and sale of foreign currency should ideally be transferred to scheduled banks. However, if the system of Exchange Bureaus is to be continued then they will assume the role of Collecting Agents and accordingly be required to collect PVT on all transactions including but not restricted to purchase and sale of foreign currency, transfers etc. Private Exchange Bureaus being identified as Collecting Agents would also be subject to the Special Audit and be entitled to the remuneration payable to Collecting Agents.

 

7. Special audits

The number of Collecting Agents comprising branches of Scheduled Banks, Investment Banks, DFIs, Credit Card Companies and Exchange Bureaus is estimated to exceed 6,000 throughout the country. All Collecting Agents are to be subjected to a Special Audit by professional firms to ensure correct collection of PVT and its timely transfer to the government treasury. Special Audits to be conducted quarterly/half yearly/annually by professional firms to be appointed by FRMC. The scope of the audit and reporting requirements to be specified in the PVT Act. PVT Exempted Bank Accounts and PVT Special Rates Bank Accounts would be a part of the Special Audit to ensure that the said bank accounts are not misused.

 

8. Corporation for pvt management

A wholly owned government Corporation to be formed under the name of Federal Revenue Management Corporation (FRMC) would implement the PVT Scheme and generally administer the collection of PVT in a business - like manner. FRMC would employ qualified and experienced staff from chartered accountants, bankers and information technology experts, on salaries commensurate with the market rates. FRMC would be required to have regional offices or representations in the major cities and towns to monitor PVT collections. However, FRMC is expected to have a sleek and lean set-up. Staff presently employed in the revenue departments dealing with Direct Taxes are to be considered for employment in FRMC; however it should be ensured that only those who have demonstrated efficiency and integrity are considered for employment. They should get remuneration equal to other professionals employed in the same grade.

The functions of the FRMC would include (a) making rules and regulations for implementation and collection of PVT (b) liaison with Collecting Agents for smooth operation of the PVT System (c) preparing monthly, quarterly and annual budgets for collection of PVT and comparison thereof with the statements received from the Collecting Agents and analysis of major deviations (d) according approval to opening of PVT Exempt Bank Accounts and PVT Special Rate Bank Accounts and their subsequent monitoring (e) monitoring the collection of PVT and its almost simultaneous transfer into the government treasury (f) arranging for the Special Audits of the Collecting Agents and determining the scope and frequency of the Special Audit (g) receiving audit reports, reviewing these and taking disciplinary action where required (h) developing a programme and acting as a catalyst for promoting modern banking products such as cards and plastics and electronization of banking system and commerce in the country in the shortest possible time.

Rules are to be framed to provide for penalties to be levied on Collecting Agents for failure to collect PVT and for late credit/deposit into the government treasury. The penalties should also cover cases of collusion between the Collecting Agents and taxpayers to evade PVT. Rules to also provide for penal action against auditors who knowingly and willfully aid, abet, assist or induce the Collecting Agent and/or the taxpayer to evade PVT.

 

Pvt exempt bank accounts

It is recognised that certain transactions would have to be exempted from PVT and a detailed exercise in this matter would have to be undertaken and be subject to constant revision to reflect economic changes. All such exempt transactions/payments to be routed through special PVT Exempt Bank Account to be opened and operated by the tax-payer with any scheduled bank.

PVT Exempt Bank Accounts to be opened only after approval has been granted by FRMC. Applications for this purpose to be made to FRMC in a prescribed form. Rules to be made specifying transactions and bodies which would qualify for exemption from PVT. Approval for PVT Exempt Bank Accounts to be renewed annually by FRMC after reviewing the Special Audit report. Appropriate penalties to be levied for misuse of PVT Exempt Bank Accounts.

PVT exempt transactions would normally include (a) payments made by the Federal Government and Provincial Governments (b) payments made by local authorities (c) disbursement of corporate loans direct to borrowers and repayment of the principal amount of the loan (d) transfers from one bank account to another of the same account holder (e) payment of taxes collected from customers on behalf of the Federal and Provincial Governments such as sales tax, excise duty, PVT, etc. (f) loans to employees (g) profit payments on present tax exempt investments in National Savings Schemes and post office savings accounts (h) pension payments received by individuals over 60 years (i) payments from post office savings accounts for which an upper ceiling for maximum balance be fixed say at Rs 20,000 (j) payments made by religious or charitable trusts approved by FRMC, provided these organizations submit audited accounts every year to the satisfaction of FRMC (k) payments exempt under Tax Treaties

In addition to the above, certain Funds and Institutions by the very nature of their function may be exempted from payment of PVT. These include (a) provident funds (b) pension funds (c) gratuity funds (d) charitable institutions to be specified by FRMC (e) universities and other educational institutions established solely for education purposes and not for purposes of profit.

 

PVT Special rate bank account

Pakistan has entered into Tax Treaties with various countries which not only provide for avoidance of double taxation but also prescribe special rates of tax and the basis of computation. These international treaties would always override the local legislation. A detailed exercise would have to be undertaken to determine and identify payments which come within a tax treaty and in such cases, the treaty provisions should be made applicable.

For example, payments to a non-resident chargeable to tax as fees for technical services are presently taxable at the rate of 15 percent on gross payments and where a reduced rate is prescribed under a Tax Treaty which in any case would be more than the standard 3 percent PVT rate. Royalty payments is another example, royalty payable to a non-resident company is taxable at the full private company rate of tax unless a lower treaty rate is prescribed. The rate of tax on dividends also is more than 3 percent. Furthermore, a non-resident enterprise of a Treaty country could insist on taxation on its business profits and not under the system of PVT.

For all such payments made to non-residents, a special bank account would have to opened by the tax payers styled PVT Special Rate Bank Account. A detailed exercise would have to be undertaken by FRMC to determine the transactions to be effected and the rate of collections to be made on all such payments made to non-residents.

Similarly there could be certain business transactions, on which the PVT at a General Flat Rate may not be practical/advisable and a special rate has to be prescribed. Such payments too could be routed through PVT Special Rate Bank Account.

 

Special cases

It is recognised that in certain cases special treatment would be necessary to ensure equitable application of the Scheme. Such cases would fall into two categories: (i) entities with high turnover and high expenditure level but with very low margin of profits e.g. oil and gas marketing companies, petroleum dealers and highly excised industries such as cigarette manufacturing; and (ii) entities which are capable to earn very high quantum of profits compared with their level of expenditures e.g. banking and non-banking financial institutions.

In devising special provisions in such cases it is important that primary characteristic of the Scheme, viz simplicity, is maintained. Accordingly following recommendations are proposed: or

For entities with high level of expenditure and very low margin of profits e.g. oil and gas marketing companies. By and large these entities operate under a regulated regime where profit margins are to a great extent determined by the regulator. At present the two major oil distribution companies are paying direct taxes which work out to less than the conceived PVT liability calculated at the rate of 3 percent on their total payments during the year. If their profit margin is adjusted upward by reducing the rate of excise duty and surcharge, these organisations can easily pay PVT at 3 percent. Similar arrangements could be worked out for other organisations like SNGPL and SSGCL.

Entities capable of earning high quantum of profit compared to level of expenditure e.g. banking and non-banking financial institutions. Banking companies are capable of earning very high level of profits if efficiently run as is evident from the results consistently achieved by major foreign banks operating in Pakistan. Recognizing this fact the government has always levied a much higher rate of taxation on them, compared to other business concerns. In order that such entities should also contribute a reasonable amount to the exchequer it is recommended that PVT be applied as follows:

Banking companies are to be subject to 3 percent of expenditure or 50 percent of pre-tax profit according to their audited accounts, whichever is higher.

Non-banking financial institutions are to be subject to 3 percent of expenditure or 35 percent of pre-tax profit according to their audited accounts, whichever is higher.

These entities would continue to be subject to payment of PVT at the rate of 3 percent of expenditure throughout the year. After the financial statements have been audited and it transpires that 50 percent or 35 percent, as appropriate, of the net profit is more than the PVT paid in the normal course of business, then the balance would be required to be paid.

 

Apprehensions

As PVT is payable on bank transactions, to avoid PVT, there could be a move towards cash payments for as many transactions as possible. However, the proposed withdrawal of high denominated currency notes from circulation would eventually limit cash transactions to minor amounts and Bankís cards and plastics would be used for payments of higher amounts.

PVT being an indirect tax may give rise to the mis-conception that it would increase inflation in the same manner as the prevailing withholding tax, as the vendor adds the amount of withholding tax to the selling price. However, PVT is in lieu of income tax; it is payable by the purchaser and not deducted from the payment due to the vendor, who thus does not need to inflate the selling price. Furthermore, over a time individuals and businesses learn to adjust to the direct tax. Whenever a business, makes its price and profit projections, income tax is always built-in as a cost, calculated in a special way. This is equally true of salaried people as both, employer and employee, look at the take-home pay, and try to protect it. PVT would thus not contribute to increasing inflation.

It is possible that certain business transactions would be carried out using the medium of foreign currency and gold. The downside to such transactions is that there is no legal cover, the value of gold and foreign exchange fluctuate and the rate differs from city to city and even during the course of one single day. Furthermore physical handling is inconvenient and carries security risks.

As PVT would also be applicable on payments for capital expenditure, the initial investment cost for projects would increase. However, the PVT fixed rate of 3 percent applicable is very small and should not normally deter investments.

Certain green field projects do not have any taxable income in the formative years, but are subject to minimum tax of 0.5 percent of turnover under section 80D of the Income Tax Ordinance. Such projects, would have to pay higher PVT in the early years, but again the rate of PVT is very small and unlikely to adversely affect new investments.

Certain agents receive payments on behalf of their principals and in turn pass on the same to the principals. There is likely to be an incidence of double PVT in such cases e.g. Stock brokers. This could be overcome by arranging payments to be made directly to the principal or through a ëclearing houseí account which could be exempted from PVT.

The downside of PVT could be that it does not represent progressive taxation in as much as the rate of taxation is fixed and does not increase with income. In fact the proposed scheme shifts the concept of taxing income to a fixed low rate of tax on all expenditure incurred. To an extent the concept of not taxing income is already prevalent in the tax law under the presumptive tax regime and payment of minimum tax.

It is possible that the perchee system (private IOUs) may be used to by-pass the banking system, and thereby evade payment of PVT. However, using the perchee system is risky for the traders, and thus not expected to flourish. Furthermore, the perchee system may be prevalent only in few markets and there too amongst few traders. The life of such perchee would be short as it could support one or two stages of business transaction only and would ultimately have to be exchanged for monetary consideration.

It is true that PVT is not a tax on income. However, the current income tax collections are also largely not taxes on income, as a result of the withholding and presumptive tax reqime in force.

PVT is, in fact, payable each time a transaction takes place, which is similar to the system of income tax, i.e. the manufacturer, wholesaler, retailer and consumer will all pay PVT, just as they are all subject to payment of income tax in their individual capacity.

At present the exporters pay income tax which varies between 0.5 percent to 1.0 percent of their export sales. Under the proposed scheme, the exporters should pay PVT in the normal course; however, if the government wishes to give preferential treatment to the exporters, then a suitable export rebate should be allowed upon receipt of export proceeds to compensate for the higher PVT levy.

PVT is essentially a tax on expenditure. It has a greater scope than sales tax. The Federal Legislative List of the Constitution does not envisage tax on expenditure. An amendment of the Constitution would be required to enable necessary legislation to be passed.

 

Conclusions

The Income Tax Department has failed to deliver the goods as tax revenue collected from Direct Taxes has hovered around Rs 100 billion for the last several years, which is well below the annual collection target and true potential. The Department has not achieved any significant success in documentation of the economy, and in increasing the number of Income Tax/Wealth Tax Assessees, despite many attempts. These failures are perceived to be due to wide-spread corruption and/or inefficiency, causing much frustration to the corporate and business community. On the other hand the culture of tax evasion has taken deep root, particularly in the unorganized sector; furthermore there has been no appreciable progress in the introduction of income tax on agriculture income.

Hence there is a dire need for some radical tax reforms. This innovative proposal to abolish all direct taxes (Income Tax, Wealth Tax and Capital Value Tax) and to replace these with the proposed tax called Payment Value Tax (PVT), would have the desired effect of substantially increasing the governmentís revenue collections to approximately Rs 200 billion @ 3 percent collection rate, as compared with present collection of Rs 100 billion from Direct Taxes. The PVT system is simple, straight forward, and easy to implement through the existing network of banks, financial institutions and similar bodies. These Collecting Agents would be responsible to collect tax at a fixed percentage of the amount of the payment.

Under the PVT system, existing taxpayers would be saved from the cumbersome procedure of income tax returns, assessments and appeals, etc., and would be absolved from the harassment of the Income Tax Department. The tax base would be expanded, and thus the existing tax payers would not be over burdened with higher taxes. The rampant corruption of tax collectors, and tax evasion culture of a large segment of society would largely be eliminated.

It is expected that the demonetization or withdrawal of Rs 500 and Rs1,000 currency notes, and imposition of a complete ban on issue of bearer securities by the government and other institutions, would discourage the prevalent cash economy and go a long way towards documentation of economy with the use of banking channels and use of plastics for retail purchases.

All Collecting Agents would be subject to special audits; appropriate fines and penalties would be imposed where a Collecting Agent fails to collect PVT or having collected fails to make timely payment to the government.

It is generally believed that the business community is averse to the levy of General Sales Tax (GST) as they fear that documentation for Sales Tax would be used for imposition of additional Income Tax. However, with the introduction of PVT this reservation would no longer be valid.

The PVT Scheme could be criticized as not being a progressive tax, as it shifts the concept of taxing income to a fixed low rate of tax on all payments made through banking and similar channels. The Scheme could be criticized on the basis that the same rate of tax is being imposed on both higher and lower income groups and as such it is not a progressive taxation. However, it may be noted that progressive taxation has not helped significantly in reducing inequalities in developing countries. Furthermore, under the proposed scheme the income groups with a greater capacity to spend would obviously pay more tax in absolute terms than the groups with lesser income and as such the scheme can not be labeled as regressive in nature. The PVT Scheme offers a simple system, easy to understand and convenient to implement. The Scheme would certainly be acceptable to most taxpayers. In any case, with the introduction of presumptive tax, minimum tax and tax on payments through credit cards as well as withholding tax in the current income tax laws, the concept of not taxing income is already prevalent.

Successive governments in Pakistan have not succeeded in bringing large number of potential tax payers in the tax net and the income tax assesses remain substantially restricted only to companies, registered firms and salaried persons who continue to bear a major burden of the income tax and other direct taxes. The futile and doctrine-driven attempt to chase the mirage of direct taxes has simply driven vast amounts of money underground. The attempt has been counter productive, and has severely damaged the economy. The direct taxes regime does not suit our culture and conditions. We shall do well to abolish all direct taxes and replace these with the PVT Scheme. B

The views expressed in this article are those of the author. Pakistan & Gulf Economist however always re, respects and appreciates new ideas and suggetions that will help Pakistan develop. We look forword to reciving one articles from our readers.