Restructuring of tax system


May 29 - June 06, 2004





The Central Excise Duty (CED) currently levied on 11 items is likely to be abolished or may be restricted to a few items only in the federal budget 2004-05. CED is to be abolished by the government in line with its policy to reduce the number of federal taxes as well as to avoid double taxation on certain items. In some cases the duty is to be merged into general sales tax by increasing the incidents of the later. Those items which are considered for withdrawal of central excuse duty are including paints and varnishes, perfumery and cosmetics, soap and detergent, insurance and bitumen. The collection of revenue under central excise duty on these items was insignificant as compared to the administrative cost for collection of the duty on these items.

Break up of the overall collection of the central excise duty reveals that cigarette industry was on top of the five major revenue contributors which are identified as cigarettes, cement, natural gas, POL products and beverages which contribute around 86 percent of the total central excuse collection last year.

The revenue raised from cigarettes during first half of the current financial year estimated at Rs7.5 billion which indicates that the total collection of the duty on cigarettes is expected to be around Rs15 billion during the whole financial year 2003-04. Revenue from cement stood at Rs4.324 billion against Rs5.352 billion over the same period last year, indicating a decline of 19 percent during the year. The obvious reason for decline was the reduction of the central excise duty last year to enable this sector to help generate economic activity in the housing and construction industry. Unfortunately, the benefit of reduction in duty was however not passed on to the consumers.

The natural gas contributed Rs2.31 billion during first half of the fiscal as against Rs2.12 billion last year showing an increase of 9.2 percent.

Revenue from POL products stood at Rs1.639 billion as against Rs1.693 billion last year showing a decline of 3.2 percent over the previous year. The revenue realization from beverages during the same period stood at Rs1.056 billion against Rs0.997 billion over the same period which indicates an increase of 5.9 percent.

Total collection of Central Excise Duty from all the 11 items was estimated at Rs19.4 billion during the first half of the year of the current financial year which in a way shows that the whole year may yield Rs40 billion this year. Those items which are being considered for withdrawal of central excise duty contributed around Rs2 billion during the whole year which means that the impact of the withdrawal would be insignificant as compared to the production level in these items which would ultimately help enhance revenue under GST from those items.

In fact the government is withdrawing the central excuse on items as a policy matter to merge completely the tax with GST gradually in line with the restructuring of the taxation system in the country.



The governments, present as well as the past, have recognized that with the number of taxes the number of tax collecting agencies also grows which is one of the causes for corruption in the tax regime. Earlier the government had abolished the Wealth Tax and sooner or later, the Central Excise Duty may also go to cut down the number of taxes which psychologically discourages the investors.

The fundamental taxes such as Customs Duty, Income Tax, GST may survive in future while the remaining ones may merge into each other to give an easy look to the investors.

Another gray area which calls for corrective measures was Withholding Tax pointed out by prominent tax practitioner and the former president of Pakistan Tax Bar Association Zammurd Hussain Jaffery. He said that almost 70 percent of the total income tax collected under withholding tax. The withholding tax is refundable for those having a taxable income. But a large number of people who have to pay withholding tax cannot claim refunds such as widows, house wives and segment below taxable income. That means that a huge chunk goes to the kitty without refund claims. That situation calls for corrective measures, Jaffery said.

The total revenue collection for the current financial year which about to mature was estimated at Rs500 billion plus which according to reports have already been achieved.

This collection of revenue has been made from comparatively a narrow base of tax payers which indicates higher tax rates and limited tax base. Salaries class is also a major source of the revenue as their tax is deducted at source hence there is no hanky panky in that segment of the tax payers. However, as far as the business sector was concerned they are not the willing tax payers mainly because of high rate of taxes. There is a need to create a tax culture in our society by making the tax rate affordable and easy to pay by simplifying the procedures and reducing the contact between the tax payers and the tax collectors. Tax provides fuel for running the engine of the growth, economy as well as the machinery of the state. To achieve the real target, all concepts of privileges would have to be done away with and every income irrespective of the source whether it is agriculture, provincial or federal has to be brought under the tax net but at an affordable rate.