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
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
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
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
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
Collecting Agents fees 0.25
Management expenses of FRMC, cost of audit and other professional
services outsourced 0.50
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
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
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
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
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
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
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
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.
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
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
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.
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
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
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
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
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
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.
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