The World Bank has recommended the CBR to use National Identification Card (NIC) number for individual taxpayers


June 07 - 13, 2004



Without imposing any new tax, reduction in some of existing taxes and levies and to relief some taxpayers, the Central Board of Revenue (CBR) is expected to increase revenue generation by over Rs. 65 billion in the fiscal year 2004-05. The target for revenues during the coming budget is believed to have been set at Rs. 575 billion against Rs.510 billion in the current fiscal year, which is likely to be achieved by the close of the financial year on June 30, 2004.

Apparently it is a different task. The CBR is mostly depending to achieve this target on the result of its on-going tax reforms mainly aimed at increasing the number of tax payers, the CBR has designed a comprehensive administrative reforms process and modernize the tax machinery. The budget 2004-05 is expected to push this process forward, as some of the measures are expected to become part of it. The key focus of the tax administration reform programme, to be financed by the World Bank, is on enhancing efficiency, reducing corruption, simplifying the system to further tax compliance and maximizing revenue collection.

According to the estimates, there are about 2.14 million taxpayers in the country, about 5.59 percent of the approximately 39.41 million employed men and women. This ratio is quite low especially when compared with that of the US (46 percent), the UK (48 percent) and Australia (53 percent). The tax to GDP ratio has remained in narrow band, between 11 to 13 percent since the 1990. The tax revenue as a percentage of GDP in developed countries ranges from around 30 to 50 percent, with an average of 38 percent, while the average in the developing countries is about 18 percent.

Pakistan's current ratio of 11.5 percent, well below the developing country average, is comparable with other countries of the region, like Bangladesh and India. In Sri Lanka, it is on the higher side. According to study of the bank, the inefficient tax administration, a narrow tax base, skewed tax structure, a complex and non-transparent tax system and corruption and tax evasion are some of the reasons for keeping taxes low. Despite previous reform efforts, many of the long-standing deficiencies in tax administration have not been rectified, the bank says.

"The tax department has suffered from profound institutional weakness related to poor management, weak human resources, low pay, lack of adequate systems of financial and physical control, low quality and quantity of tax auditors, unduly bureaucratic processes with excessive scope for discretion and rent seeking by individual staff, deteriorating physical infrastructure, lack of transparency in the collection of import duties, and resistance to change."

The tax system provides CBR employee's opportunities to accept and/or demand bribes and fostered extortion. There are broadly two levels of corruption: firstly, a smaller proportion of corrupt officers that export the level of payments that no reward system can address: secondly, a larger proportion of officers involved in corrupt practices are doing so in order to feed, clothe and house their families. The main reason for tax evasion cited is the belief of the people that they do not get anything in return of the taxes paid.

Pakistan, generally, relied heavily on indirect taxes to meet fiscal needs. Indirect taxation still constitutes nearly 68 percent of government's total tax revenue, including 66 percent sales tax and 19 percent through the central excise duty.



To overcome these challenges, the government plans to make the tax policy more equipable, bring more taxpayers into the net, reduce the number of taxes, streamline the tax laws to make them taxpayer friendly, improve tax enforcement, and put in place a tax administration system which is efficient and responsive. In recent years, the government has cut the number of tax exemptions significantly as a move towards an SRO free culture. In the last three budgets, over 75 exemptions were withdrawn under income tax and GST while the GST coverage was also expanded to include 14 additional categories. Most of the remaining exemptions correspond to core policy objectives or international agreements and are estimated to cost nearly 0.5 percent of GDP.

"The long term vision of CBR provides for a functionally integrated tax administration system; moving to such a structure will avoid the present duplication of functions such as audit, collection and enforcement across departments. The integration will provide taxpayers with a single point of access, enabling them to easily obtain all the information required to assess their tax liabilities." The proposed reform programme plans to reform the direct taxes by flattening the organization structure, improving the identification and registration process, specializing the handling of large and medium taxpayers affairs, establishing a taxpayers self-declaration approach, maintaining a taxpayer database containing all assessment and payment data, establishing capability to quickly detect taxpayer non-filing and non-payment.

The World Bank has recommended the CBR to use National Identification Card (NIC) number for individual taxpayers, to make it easier, and continue to use NTN for business taxpayers. The most processing issue with Sales Tax and excise duties that the reform would address is the limited number of ST registrants and their poor compliance. There are 150,000 units registered for ST out of a total potential of between 800,000 to 1.5 million. The bank has also proposed the establishment of a corporate National Intelligence Division (NID) with a co-located Risk Management Unit (RMU). NID will primarily be responsible for identifying and preparing cases for investigation where serious evasion of tax or prohibition is suspected, and RMU would analyse and report on the overall taxpayer environment, and individual taxpayer performance and level of risk. In the customs, the bank proposes the setting up of the Customs and Tax Fraud Division (CTFD). Major tax evasion and smuggling are international crimes that require international solutions. CTFD will be responsible to bring responsible of such offences into custody and for prosecution under the relevant legislation.

Pakistani markets are flushed with smuggled goods. Smuggling of tea, toiletries, cloth, cigarettes, etc. in the country does not only speak loudly about government's inefficiency and corruption but is a huge drain on the budget and harmful for the local industry. The Tribal Areas and the Afghanistan route provide a safe haven to such activity. The local industry, instead of merely complaining, must step forward and help in identifying the smuggling supply chain. And, the Pakistan government must approach the headquarters of the producers of smuggled goods as well as their governments to halt this menace. The European Union only last month penalized Phillip Morris for their role in the smuggling of cigarettes into EU member states. We also need to have our embassies in South Korea, Malaysia, Turkey, and China etc. to be more pro-active on the smuggling of well-known branded products.