Direct taxes ratio in 2010-11: share of income tax rises significantly

The share of income tax has risen significantly from around 31 percent in 1999-2000 to 39 percent in 2010-11, says Economic Survey (2010-11) issued here on Thursday. According to the Survey, the internal structure of taxation has undergone substantial changes as the share of income tax has risen significantly and indirect taxes are paving the way for direct taxes.
The main culprit is the falling share of customs and excise duties mainly because of tax and tariff reforms. Trade related taxes or customs duty has lowered its share in indirect taxes from 24 percent at the start of the decade and 20 percent at the end of the decade.
Similarly, excise duty is being replaced by sales taxes and thus its share in the indirect taxes has declined. Sales tax has becoming very important consumption tax and it accounts for two-third of indirect taxes. Going forward, this level of taxation has to be increased through major overhaul of the taxation system and administration. The reforms are needed to increase the tax to GDP ratio 13-15 percent during the next five years, a number of additional Tax Policy and Administrative Reforms initiatives have been announced.
On the issue of reformed GST, the Survey said that it is evident by international experience that adoption of a VAT is associated with a long run increase in the overall tax-to-GDP ratio of about 3-5 percent. For Pakistan, R-GST/VAT is envisaged to be a key structural reform in documenting the economy, broadening of the tax base and improving the overall efficiency of the tax system. The proposed Federal Reformed GST (RGST) Bill was tabled in the National Assembly and provincial R-GST bills were also tabled in the provincial assemblies. It has been recommended by the Senate and National Assemblies Standing Committees. Extensive negotiations are underway to develop a consensus with the political parties, the provinces as well as the major stakeholders to ensure smooth implementation of RGST.
Under the new audit strategy, the audit policy and risk criteria have been developed for the financial year 2010-11 (for returns of 2010). Salient features of the policy would expand audit coverage of large and medium taxpayers gradually. It would devise risk-based selection criteria rather than random method for audit of major sectors of the economy.
It would be instrumental in increasing professional capacity by creating sectors' specialists in textile sector, hotel services, transport sector, private construction, IT-based forensic audit and petroleum exploration & refining, banking Sector, insurance sector and include with-holding agents and post-refund Sales Tax audit in the next Audit Plan.