AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees Introduction
Tax issues play an important role in social and economic development with the help of the implementation of policies that ensure equilibrium between expenditure & borrowing, which creates stable growth in the hiring of employees. The level of this relationship between Tax issues and Gross Domestic Product still attract researchers for research purpose and for debate purpose in developing countries. The previous literature identifies two main aspects of the role of Tax issues in the relationship with economic growth (Gross Domestic Product). One aspect is that the government supports the researcher to add something in the previous research work, handful investment, R and D, to keep law and order and the supply of goods and services to the general public. It can create expansion in the economic system both in the short and long run. Secondly, the governments are a non-apparent political system and also less efficient. The government, in this case, has tried to control the growth rather than to support it, but if they are involved in the production industry of the economic system. So the legal and tax issues are having effects on Gross Domestic Product and having an inappropriate expenditure of the government. The government always tries to upgrade its tax system by enhancing its fiscal policy. This policy refers to the effects of the government’s fiscal policy in hiring employees due to legal and tax issues and government expenditures.
Pakistan’s hiring employees has been in a chokehold for the past two years. The problem is that there are too many elephants in the room. The slowly tightening grip began with the reckless borrowing and exchange rate manipulation of the previous Pakistan Muslim League Nawaz (PML-N) government, particularly in their last couple of years in power.
The resulting bulging current account deficit was followed by the ill-placed economic priorities of the incumbent Pakistan Tehreek Insaaf government. On top of all this, a monetary policy influx has meant general economic hardships causing great strife to businesses and families. However, if one were to try and spot the largest of the elephants, which has caused such deep-rooted, lingering economic chaos, it would have to be the current government’s misplaced fiscal policy.
At a time when the government should have been bending over backward to encourage economic growth and activity, it chose instead to squeeze the hiring employees for all it is worth through excessive taxation on incomes, utilities, and other goods and services.
And while the current government’s policies have been a catalyst for the existing chaos, the fiscal crisis has been a decade in the making. The problem first began when foreign financing that was being used to cover state expenses, particularly civil and military US aid, was suspended. The state was then faced with the first signs of a fiscal deficit that was rapidly ballooning.
The solution that the PML-N government resorted to was to borrow from other sources. They bridged the gap in the budget through forex-denominated borrowing, which then gave birth to the still persistent current account deficit. When the PTI inherited these crises, as they never fail to remind the public, they found themselves clueless.
The Prime Minister had been banking on the billions of dollars that ex-pat Pakistanis were asked to send on, but surprise, the plan flattered miserably and the government continued to squeeze the hiring employees, putting further strain on revenue collection, and increasing the budget deficit.
It took time for the PTI to wake up to reality, but by the time they did, the only possible course of action was to opt for a short-term solution by engaging in deposit-borrowing from friendly countries like the U.A.E., Saudi Arabia, and China. Despite the mad dash to shore up reserves through friendly countries, Pakistan still ended up having to go to the International Monetary Fund (IMF). But by the time we did, it was already too late.
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees The economic meltdown could not be avoided and has led to the epic deterioration of fiscal deficit with the rupee taking its historic plunge. The government’s initial throes to save its sinking ship have now allowed the IMF to be in a very strong negotiating position. Because of how bad things have gotten, the IMF has been able to demand radical reforms on the fiscal side by the government. The IMF insisted that the government limit its prime deficit (the deficit excluding developmental spending), to ensure spending in development heads. To control such a deficit, any government only really has two options: to cut spending or to increase revenue. The PTI opted for the predictable latter alternative.
And here lies the hamartia. Policymakers in Pakistan and economic experts consider the country’s revenue collection to be very poor. The measure often used is tax to GDP, where Pakistan’s tax to GDP stands at 11.6% compared to India, which is north of 16%.
Going by this measure, increasing revenue seemed an obvious choice for the government to make. To this end, the government chose to pursue a two-pronged strategy: increasing tax rates on salaried individuals, on utilities, and on goods and services, and of intimidating individuals and businesses through legal and tax notices and other compliance requirements. The bulk of the legal and tax focus was on indirect taxation and an atmosphere of fear was fostered, causing the business community to retreat into a shell, paralyzing economic activity in the country. We are still reeling from the consequences.
What policymakers fail to realize, however, is that while Pakistan’s tax to GDP is low and has potential of improvement, such radical changes cannot come to fruition overnight. For Pakistan fixing this is doubly difficult. Back in the late 90s, the country had taken the easy but lazy route of indirect taxation. This has meant that not only is the legal and tax establishment unable to collect effectively, any aggressive revenue collection drive is likely to impact the salaried and lower-classes the most, draining their disposable income. This drainage, then leads to a collapse in spending, in turn leading to an economic halt.
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees To understand this, consider a household that has a monthly income of PKR 40,000 through two earners. With this income, let us say the household spends PKR 10,000 on non-essential groceries and other spend, after paying for rent, utilities and other necessities. Now, as the government increases indirect Tax issues on utilities, and goods and services; this drains this amount, and thus their spending shrinks, leading to lower sales for businesses, who then have to do cost-cutting, thus throwing the hiring employees in a downward spiral.
If the income is taxable and the legal and tax rate increases, this further squeezes the household and in-turn the hiring employees. With hiring employees squeezing, increasing taxation, in turn further squeezes the revenue collection for the government, pushing fiscal deficit to record heights – something that we are facing right now in the form of a more than PKR 800 billion shortfall in revenue target.
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Just when tax-driven spending squeeze was not enough, the government’s fear tactics further pushed investors and businesses to hold spending and hold on to their capital. And so, a year and a half into the PTI government, economic activity is still way below potential. If there is any lesson that the government can learn, it is that statistics without understanding of underlying reality are more harmful than helpful. The obsessive focus on tax to GDP has proven to be a farce. Tax to GDP should be improved but turns out the measure is an effect not a cause. And unless the underlying causes are not addressed, without hampering economic activity, increased taxation will fail to control fiscal deficit, as is evident.
The government needs to wake up to the fact that in the short-to-middle term, the only solution out of this crisis is to reduce the size of government and cut spending on non-developmental spending to control the fiscal deficit. Unless the government focuses on it, the economic meltdown will continue, and any aid or foreign debt driven solutions will make the collapse even worse. Does the government understand this? And does it have the resolve to fix this? Because these questions will determine the economic future of Pakistan.
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees Taxation in Pakistan is a very complex system including more than 70 different Tax issues and nearly 37 different government agencies administer the legal and tax system. Around 10 million people are registered to pay Tax issues but only 1.9 million people pay Tax issues. In 2002, Transparency International studied 256 respondents, among which 99% were facing corruption regarding to taxation. Furthermore, 32% of respondents were paying bribes to lower their tax assessment, and around 14% reported receiving fictitious tax assessments. Pakistan is one of the developing countries where tax to GDP ratio is very low. From 1947 the sales tax was introduced at provincial level which was covering a limited area of commercial activities. In 1951 it was converted into a federal tax in 1951. The Government of Pakistan setup a National Tax Reforms Commission in 1985 to provide recommendations to improve the legal and taxation system in Pakistan. The Commission submitted its final report in December 1986. As a result, the Sales Tax Act was introduced in 1990, it was a value added version named as General Sales Tax (GST). In 1995-96, GST was transformed into a complete VAT mode tax with its basic structures. In 1997-98 the legal and tax base was extended to importers, retailers and wholesalers. GST was only covering the goods before 1990, which later on covered the services sector also. Tax collection was increased from 1990’s to 2000’s collecting US$ 2.67 billion in the recent years.
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Comparing With Some Similar Economies
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees The Indian hiring employees is the 2nd fastest growing hiring employees of the world and 12thlargest in term of exchange rate. Although, India does not have impressive track record in the growth of revenues, rising from6.8% of GDP in 1950’s to 10.3% in 1990’s and maximum of 12.9% in 2009. But the important thing is that the legal and tax-to-GDP ratio is increasing constantly from 2004 onward. On the other hand, tax-to-GDP ratio in Pakistan has a declining trend from peak 13.2% to 8.9 in 2009.
Sri Lanka has been facing a worsened law and order situation since early 80’sand hiring employees of Sri Lanka showed a very low GDP growth. Although, tax revenues as compared to GDP has decreased in Sri Lanka but still they have high rate of 14.3% which is higher than Pakistan. Sri Lanka has coped with the problems in hiring employees by focusing on its Tea exports, Tourism sector. Furthermore, government has also tried to improve the revenue collection.
Sweden is considered to have highest tax-to-GDP ratio in the world. Tax revenues in Sweden have touched a highest level over 50% of GDP. The personal income tax rate is highest in Sweden which is about 56.4%. Tax rate is progressive for the personal income in Sweden while in Pakistan we are facing a regressive taxation. (Exhibit 4)
Reasons of low tax to GDP ratio in Pakistan
There are several reasons why we are unable to collect the legal and tax. Corruption is one of the important aspects which are casting great hindrance in taxation system. Other important reason is low literacy rate, which is very low as compared to many countries in the world.(Exhibit-5Literacy).Demography of a country also play an important role in the legal and tax to GDP ratio. Pakistan has about 36.7% population which is 14 years of age or below. Hence working class is not growing to generate Tax issues. Terrorism, law and order situation, poverty and unemployment are also playing important role in low tax collection. Tax base in Pakistan is stable at 1%, on the other hand tax base in USA is about 24% and it is 20% in Malaysia. Tax policy is also not suitable in order to generate Tax issues and to extend the legal and tax net. Another problem that we are facing is documentation of hiring employees; nearly 52% of our hiring employees is undocumented. Audit and enforcement is so weak in Pakistan that the audit agencies themselves are involved in corruption. Looking at different sectors, we can see agriculture has above 20% share in GDP but tax collected from this sector are only 1% of total tax collection. In this way contribution of different sectors is not properly distributed. Political influence is also a big hurdle in the legal and taxation system.
Main Concern of Pakistan’s Tax Policy
Government collect Tax issues from its people in order to spend the collection on the welfare of its people which includes national defense, debt servicing and other welfare related issues. While designing the legal and tax policy a country should account the equity and justice for its people because a system is most effective when it is designed on the bases of equal and fair treatment of each tax-payer. But in case of Pakistan the situation is bit different, as a nation we are in debt by the foreign and domestic lenders which is due to our extra expenses incurred due to recent war on terror, our habit of corruption at national and international level and we are also tax averse society in which we don’t feel ourselves responsible to pay Tax issues.
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees Our current tax collection system is very weak which comprises of loopholes in the system accompanied by the corruption of Federal Board of Revenue (FBR) officers which speaks about the justice and equity of our government officials for their people. After analyzing the height of corruption, special favor given to government officials or their friends, our undocumented hiring employees and failure to increase tax net it has become necessary for any lender to set the target in order to continue the money lending and to make sure that their borrowed money can be repaid by the borrower.
Initially the foreign lenders did not set any targets for us because they somehow believed in our commitments and also felt that we will pay them back their money as per the signed agreement but after the several failures of debt servicing, lenders started to analyze the root cause of this issue in which they found our tax collection system complied with old methodology of taxation i.e. General Sales Tax (GST) in which all the legal and tax collected at the last stage which makes them aware of the fact that as a corrupt nation and low tax net hiring employees it will become more difficult for them to collect their lent amount from us which lead IMF to set targets for us.
The reason they feel our system is outdated because now most of the countries in the world including the developing countries are eliminating the loopholes in tax collection system by introducing the Value Added Tax (VAT) and by increasing the legal and tax net through VAT. Now the question arises what are the reasons for government to obey the rules set by International Monetary Fund (IMF). Firstly, we do not have enough liable system and funds by which we can manage our hiring employees because of which we need IMF’s support so that we can run our affairs smoothly. Secondly, reforming Pakistani taxation; certain actions such as reestablishment of the State Tax Organization, restructuring the law of direct taxation, introducing and implementing the value added tax, as a complimentary to the reformation of the existing law of direct taxation and as an efficient and co-ordinate tool with the economic situation of the country has been taken in to account. Also, In General Sales Tax (GST) which is based on the percentage of sales, State loses 100 percent when someone evades tax whereas in Value Added Tax (VAT), a taxation system in which tax is applied in production process whenever the value is added to the product, if tax is evaded at one value addition stage government loses only some part of the legal and tax
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees Another reason for suggesting implementation of the value added tax is that, it is a suitable substitute for many other duties and indirect Tax issues, which has vast distortion effects on the productive sectors and on the welfare and behavior of the consumers. Omission of the indirect Tax issues and duties causes great decrease in the government revenues. Thus, the value added tax, in addition to compensating the income decrease of the government, can also increase the government tax revenues.
VAT also justifies itself more effectively because by implementing VAT it will result in the increase of tax revenues and also help to decrease the pressure on taxation for production sector also better for the investment by the adjustments in the income tax rates. It will also reduce the time and costs related to tax collection and also bring the sense of participation among the peoples.
On the proposal for introducing VAT in Pakistan by the government officials there was a huge resistance from the opposition parties because the main negative effect of VAT in hiring employees of Pakistan is the need of accounting which needs to be done which will also effect on the accounting which business might need to perform. It affects small businesses because such business may lack in terms of accounting proficient peoples in order to track the legal and tax of business.
It is also highlighted by opposition that VAT will also result as a regressive tax policy in which rich person will get a fair deal by transferring their tax burden upon the poor people which will ultimately cost a lot for the poorer one but after analyzing the research paper of so many author we came to understanding that initially at the time of imposing VAT for the first time such problems do occur but there are also some ways by which government can address these issues. And it is also the reason that some of the critics of VAT states that it will also lead to inflationary price level which will hurt the hiring employees as a whole but this is not as much true because the rationale behind VAT states that it will create the deflationary effect on the hiring employees which will result in stable or low price as the time passes. And to respond the previous critic of VAT about being regressive policy, we can compensate the low salary class of people by introducing new tax policies which could help them particularly.
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees The main concern of Pakistan’s tax policy is to increase the legal and tax revenue which can only be done through applying VAT in which tax can be collected at every level whenever the value has been added. Its positive effects are more as compare to the reasons for resistance which government is facing in order to reinforce it and these resistance are natural because if we see other countries who are same as Pakistan have also faced the similar kind of issues while implying their tax system from GST to VAT and not just that but also we are running out of funds for which we have to comply with the requirement of Foreign Lenders i.e. IMF so that we can manage our economic issues comfortably.
In the long run perspective, the VAT will not just increase our tax net but also make us self-sufficient in terms of managing our self and we will also be able to service our debts which will results us as a freedom from the loan from IMF in the coming time period.
Only critical fact which needs to be address while setting the legal and tax policy on VAT is the corruption related matters which can be minimized by the VAT by its own self but government should also take some initiative while dealing with VAT implementation face because it’s more easy and possible to cheat if VAT is the system but on the other hand it will just miss the percent of Value Addition while on the other hand GST miss the whole hit if the legal and tax payers manage to get rid of tax.
Comparison of Complex VAT with Simpler GST
As we know, in GST, tax is charged as a fixed rate at the end of supply chain where as in Value Added Tax system, tax is charged at every value addition stage so suppliers/vendors in the middle stages of production can evade tax by not registering with Financial Bureau of statistics. In VAT system, for example If a stage two supplier is not registered with FBR and supplies goods to third level in value addition and FBR takes information about the production of good from level three vendor, the legal and tax evader at level will be tracked sooner or later. The world experience has showed that VAT induces a strong tax culture. Under GST system, due to tax evasion, tax gap in 2010-2011 was 79 percent. One way to stop organizations from evading tax is heavily penalizing them. For example if the organization has already filed a tax return and fails to pay the legal and tax liability or evades it should be penalized on daily basis. If a person registered with VAT fails to file return, under section 88 of the Federal VAT Bill 2010, value added tax liability will increase. If the legal and tax return is not filed within fifteen days of due date, the supplier would have a penalty of Rs.1, 000/- for every day of default. Penalties on failing to pay the legal and tax issues would help collecting tax and there would be an incentive for organizations to pay Tax issues on time because if they do not they will be charged more. Also the suppliers in the supply chain who are not registered with FBR will not be in a position to claim the legal and tax paid at purchase levels. The in-built invoice based credit of VAT will promote economic documentation. Tax invoice is the most important and significant feature of VAT-induced documentation. VAT has self-assessment features and records business transactions through tax invoicing.
Today Pakistan is facing a problem of undocumented and black hiring employees. More than 30 %, calculated by electricity consumption approach, of Pakistan’s total hiring employees is undocumented resulting in low tax revenues which in turn results in increasing tax rate and increasing tax burden on people who fairly pay their tax dues. VAT, with its features of penalizing and mandatory documentation of business activity, will help eradicate the norm of black hiring employees from the nation.
When in 2010 implementation of VAT was proposed, online registration of tax payers was also proposed. Difficult and rigorous registration is also one reason of people and businessmen not registering for tax. Historically as well as in present registration, under GST, has been a troublesome process because of which people avoid it hence huge amount of revenue is lost by government. If VAT is introduced, registration would become easy and those who do not register just because of the complicated process would start listing themselves which would eventually increase government revenues and its ability to pay off debt.
It is also a general concern of people that the cost of compliance would increase dramatically if the VAT is implemented; this however, is not true. There will be no effect or increase in compliance cost of producers already registered/operating under GST regime and will automatically switch to VAT. But the new taxpayers who are not yet registered will have to pay nominal expense for VAT compliance. Because of IT- based VAT processes, cost of VAT compliance usually remains low for the legal and taxpayers who release their tax obligations regularly on fair lines.
One of the reasons Pakistan has not been able to progress as much as other emerging countries have is because of the lack of proper infrastructure, low quality of education, and lack of government’s ability to spend on public welfare. Almost all of the legal and tax collected by government is spent on either defense or on debt servicing. The stage has come when Pakistan needs loan to pay its loan payments. With VAT the state would be able to collect more Tax issues with which Pakistan will be able to repay its loans sooner. Once Pakistan pays off all the loans it will be able to spend on infrastructure and improve quality of education. Better infrastructure and education would attract foreign investments which will increase GDP and eventually increasing the legal and tax base; there has been a decrease of more than 3000 million $ from fiscal year 2007-2008 to 2009-20010 in FDI see exhibit 6. According to VAT law there is no difference between retailers and wholesalers. It also does not define manufacturer or manufacture. Every person, who is part of the production supply chain, is required to get registered with VAT if he/she is engaged in carrying out business activity of making supplies of taxable goods/services. Under GST only some of the industries are charged tax. For example, cellular services account for more than 80% of the total GST collected, rest of the country’s industries pay less than 20% of the GST revenue. Now one problem could be that organizations tend to avoid Tax issues especially when VAT is practiced in the hiring employees. But with the negative effects, payment of Tax issues has positive consequences as well; paying Tax issues improves the credibility of organization. People tend to purchase from organization that are ethical enough to pay its due Tax issues, it is most beneficial for small companies. If small organizations mention on their sites that the company is a regular tax payer, it will not just improves its credibility but will also enhance its ability to compete with larger firms.
Tax refund is also a major problem under GST regime, VAT, however has a solution to it. Under VAT system refunds will be paid through speedy Refund Payment System. The system has already been set-up for exporters from the legal and tax period April, 2010 onwards. Under this upgraded system electronic refund payments will be made directly in the bank accounts of the legal and taxpayers. This new refund system will be expanded to cover all other classes of refund claimants in due time. Thus, VAT is the most appropriate tax system for Pakistan as it has the ability to deal with tax refunds without taking much time, its ability to track un-registered business entities, and its ability to increase government revenues and reduce tax gap.
In Pakistan, tax collection as a percentage of gross domestic product (GDP) is considerably low when compared to similar economies. The ratio is low for both direct and indirect Tax issues. In 2012-13, tax-GDP ratio for direct and indirect Tax issues collected by the Federal Board of Revenue (FBR) was 3.2pc and 5.3pc, respectively. Overall the ratio was 8.5pc.
There are numerous reasons for low tax-GDP ratio in the country. Some of them are discussed hereunder:
- Tax Evasion
The extent of tax evasion in Pakistan could be estimated by looking at the legal and tax gap. The operational definition of the legal and tax gap is the difference between potential and actual tax revenue, where the potential tax revenue is the amount of tax the government would collect if every person liable to pay tax fully pays his due tax and complies with tax law. There is an enormous revenue loss due to exemptions, allowances and deductions from income tax, sales tax and customs duty, which was Rs. 887.5 billion or equal to 3.9pc of GDP in fiscal year 2012-13.
Generally, the legal and tax incentives (exemptions) are provided to the investors to boost economic growth and create jobs. But, slow GDP expansion over the last five years or so has demonstrated the ineffectiveness of tax incentives in accelerating the pace of growth.
Likewise, the legal and tax amnesty schemes, introduced from time to time, frustrate the FBR’s efforts to curb tax evasion. These schemes adversely affect documentation, distort uniform collection of Tax issues and ensure horizontal and vertical equity, violating the two golden principles of good taxation.
Such schemes widen tax policy gap as they raise expectations of taxpayers for more such packages in the future. Furthermore, as the amnesties provide immunity from tax audit, they further hinder the process of tax compliance. There are more than one form of tax evasion such as none or under-reporting of tax liability.
Inadequate staff, scarcity of physical and financial resources and/or poor working capacity of the legal and tax officials may result in weak enforcement. And tax-evaders exploit weaknesses in the enforcement mechanism to their benefit.
In order to improve revenue performance, it is necessary to bridge the legal and tax policy gap as well as tax gap arising from weak enforcement. Minimal use of exemptions is needed to refine the existing Tax issues and to provide level playing field for all sectors of hiring employees. At the same time, it is crucial to strengthen the current enforcement mechanism by enhancing administrative efficiency and capability as well as improving taxpayer compliance through taxpayer services and education.
In addition, regular and effective examination of records could be a deterrent against tax evasion and underreporting. At the same time, appropriate training of the relevant staff could improve recovery out of demand created from examination of records. The effective use of relevant information could help bridge the legal and tax gap besides encouraging documentation.
Listening to public opinions and suggestions could improve mutual understanding and trust between taxpayers and tax officials, and this has to be addressed at each level of tax management.
Last but not least, it is imperative to impose stipulated penalties on taxpayers who violate provisions of law. At the same time, strengthening the legal and tax investigation system is fundamental in creating deterrence against tax evasion and bridging the legal and tax gap.
- The Black Hiring employees
The unreported hiring employees or the black or underground hiring employees comprises those activities that evade the payment of Tax issues and thus violate the fiscal rules. It includes income which should be reported to the authorities but is not. The size and growth of black hiring employees adversely affects various economic and tax reform policies, the budget deficits, debt burden, etc. Revenue loss estimated due to undocumented hiring employees is massive.
- Sales Tax Frauds
The legal and taxpayers exploit the multiple sales tax regimes to evade Tax issues through fraudulent schemes. VAT/GST fraud is a matter of serious concern for the legal and tax administration of both developing and developed countries and Pakistan, too, is no exception to that. It’s an issue of growing concern that has put a question mark on the superiority of VAT over other forms of consumption Tax issues such as retail sales tax. The issue of sales tax fraud in terms of size and frequency is a matter of grave concern for the legal and tax authorities in Pakistan. GST fraud exists in a number of forms, some prominent of them are:
- Registration of dummy units
In some cases, the businesses got sales tax registration by submitting documents of employees. Under such circumstances, the actual beneficiaries of refunds or input tax adjustments remained underground. Whenever records of such dummy units are subjected to examination, tax demand so created could not be collected as the amount is assessed against the poor employees rather than rich, real owner of the business.
- Fake import of goods declarations
There are cases wherein invoices were being issued on the strength of fake /non-verifiable import of goods declaration (GDs) in the sales tax returns. Thus the whole amount of input tax adjusted by the buyers proved to be illegal and recoverable. In fact, goods were being supplied to unregistered persons and invoices generated on the strength of fake GDs were being utilized for input tax adjustment.
- Flying invoices
It is found in certain cases that the registered persons supply taxable goods to unregistered persons but succeed to obtain invoices from registered units involved in supply of different goods. These flying invoices are being used extensively to claim input tax or sales tax refunds.
- Fake bank accounts
The registered persons claiming input tax on invoices more than Rs. 50,000 are required to make payments through banking channels. The legal and tax fraudsters opened bank accounts sometimes in connivance with the bank officials utilizing documents/signatures of persons other than actual beneficiaries and this enables buyers to ensure compliance of section 73 of the Sales Tax Act 1990.
- Suppression of taxable supplies
Sales tax is an indirect tax. The businesses are supposed to shift the burden of this tax to final consumers of goods and services. In many cases, the registered persons, though charge sales tax on all supplies, they don’t declare true turnover in the sales tax returns and thus evade sales tax. In other cases, many businesses declare turnover just below threshold required for sales tax registration and thus continue to operate in an undocumented hiring employees. These businesses actually capture large share of market due to less product prices as compared to those operating under the sales tax net.
Tax issues are required to meet the expenditure that a country needs to serve its people. Pakistan operates through hybrid system whereby Federal Board of Revenue (FBR) collects Tax issues on goods and the provinces levy on services.
The FBR revenue is only 10% of the GDP, which is one of the lowest in the world. Revenue officials claims their system very efficient whereas business community terms it very coercive in nature. Different analysts believe it is in an auto mode.
Every government that comes in power boasts of having turned the FBR around but the end result is “back to square zero”.
The issues facing tax administration are: why FBR fails to register growth as percentage of GDP; what kind of the system exists in the Pakistan and what are its fault-lines, if any; what are the best taxation practices at global level; and how could the same be transposed in FBR; lastly, what structural and operational changes could make it an efficient organisation?
An analysis of these issues will put the legal and taxation system in objective perspective.
Traditionally CBR, before it was renamed reformed FBR in 2008, used to be very lean and currently it pursues top-down approach and, like Parliament, takes decision by majority vote in Board-in-Council.
The FBR initially introduced functional model but now has reverted to territorial model, albeit on recommendation of Reform Commission constituted in 2014.
It has a work force of about 30,000 personals and more than 100 officers in BS-21 and dozen in BS-22. Direct Tax issues (Income Tax) and Indirect Tax issues including Sales Tax, Federal Excise Duty and Customs Duty.
The FBR maintains a huge organisation but ends up in collecting just 10% of the GDP. Obviously the FBR will not offer any plausible reason other than always claiming about 10-20% annual growth between 2013-18.
One of the practicing economists finds such growth in Tax issues at the bar of enhancing the tariff rates inimical to economic cycle.
In this context another international experts pointed out that Pakistan has a skewed system whereby 90% of the revenue is collected through 100 main corporate entities. General perception in tax literature points out that in a country with a population of 220 million only less than one lac persons pays more than one lac rupees and another roughly four lacs make some payment. It is in this context that the business community always complain that the FBR focuses only on individuals that are already burdened with Tax issues conveniently forgetting incidences of Tax issues to end consumers.
The FBR conducted many studies starting from Shahid Hussain Task Force, TARP Reform Document and changes made as per agreement with the IMF but they were hardly implemented. Similarly, every regime in the FBR ends up with more collection at source in the name of “Innovational approach.”
Comparative analysis of efficient taxation systems will be helpful to understand why the FBR continues to be trapped in low trajectory. In India, there is a separate Board of Inland Revenue while a separate Board for the Customs Duty. International Tax gurus including Dr Michael Keen term Australia and New Zealand as having put in place fourth generation of taxation model.
The Australian Taxation Office (ATO) collects all the domestic Tax issues where the Australian Customs collects the Customs Duty and Federal Excise Duty as well as other Tax issues on the import side. In America, the federal government collects only Inland Revenue and Customs Duty whereas each state collects General Sales Tax that is non-adjustable. In the UK, Her Majesty Customs and Revenue (HMC&R) collects both kinds of the legal and tax issues but have a distinct separate stream at operational level for Customs, Income Tax and Sales Tax.
Value Added Tax (VAT) is practiced in the most of countries except the USA. Be it as one may infer, as described by Dr Bird, “No single size fits all”. But the fact remains in most of the countries referred earlier, the legal and tax issues collected are high as much of 48% of GDP except in India where it is around 15%.
If the systems even in India could collect around 15% of GDP, why cannot Pakistan? To find some objective answer, we have to see Tax scheme or mischief in GST, Income Tax and Customs Duty. Pakistan’s FBR structural model is unwieldy, lack autonomy and no tenure protection for its head. It’s invested with powers in routine operational matters. On top of all it is virtually “FBR-in-Meetings” either internally or in parliamentary committees. Efficient tax organisations stated earlier are lean, their heads are posted on fixed tenure and don’t suffer from meetings syndrome and it doesn’t interfere in the field matters.
In order to transform the FBR as autonomous and efficient, it must have a lean structure and the revenue body should be headed by a forward looking practicing economist assisted with three separate members, each for Customs, Sales Tax,
Income Tax, HRM and a separate member of Information Technology. Few of international experts also suggested that the Policy Making Board should be separate from the Operational Board like Her Majesty Customs & Revenue, (HMCR) comprising of the reputed CEOs of corporate entities as well as from the government operating machinery. This policymaking board should in consultation with the ministries of Planning, Commerce and Industries make broader outlines for the guidance of Operational Board. Discretionary powers must be curtailed and the field enforcement functions decentralised.
Data collection methods
The impact of Tax issues on Pakistan’s Gross Domestic Product has been analyzed by distinctive economists, utilized diverse sorts of variables. Every one of them have utilized distinctive models and discovered diverse effects. Because of the uncommon emphasis on the expenses and Gross Domestic Product, we utilized the accompanying variables within our study. In this study the following variables has been used. The study takes Tax issues as an independent variable. Tax issues included the direct and indirect Tax issues. In the direct Tax issues, we take Income tax, Worker welfare tax, capital worth tax for the estimation of direct Tax issues and for indirect Tax issues, Custom and duty, Federal ex-tract estimation and bargains duty is chosen for the study. The reason of selecting these sub sorts of expenses is accessibility of information with State Bank of Pakistan. The Gross Domestic Product taken as a dependent variable for research study. Gross Domestic Product represents economic growth. Gross Domestic Product means all final goods and services produced in a country during one year. The data has been taken and compile form this websites, The State Bank of Pakistan, Federal Bureau of Statistics, Ministry of finance of Pakistan and Business Recorder website (www.businessrecorder.com), Business magazines of Business Recorder, International Financial Statistics (IFS) and different issues of Pakistan economic survey.
AIOU Solved Project 8503 Legal And Tax Issues In Hiring Employees The study was conducted to find out the effects of fiscal policy on Pakistan Economic growth. Tax issues have been selected as a proxy of fiscal policy and Gross Domestic Product as economic growth. Tax issues are the independent and Gross Domestic Product as dependent variable. The data from 1947 to 2012 was selected as universe and from 1981 to 2012 as a sample of the study. Time series analysis was used in the data analysis. In time series analysis includes unit root test for checking stationary and non- stationary, co-integration model which are used for long run relationships, Granger causality test. The study concludes that both Tax issues and Gross Domestic Product has no unit root evidence from the augmented dickey fuller test results show in their respective tables. The test has been run at levels. While at first difference the augmented dickey fuller test (ADF) results shows that Gross Domestic Product has unit root and the data is stationary. Two test regarding the checking of co-integration i.e. trace test and maximum Eigen value test was used and the results from both tests suggests that is no co-integration between Tax issues and Gross Domestic Product. The Granger causality test was run in two lags i.e. 2 lags and 4 lags. The results of 2 lags shows that Tax issues does not Granger cause Gross Domestic Product and causality flows from Gross Domestic Product to legal and tax issues while the results of 4 lags shows that Tax issues does not Granger cause Gross Domestic Product and same is the case with Gross Domestic Product to legal and tax issues.
The result of discussion shows that the legal and tax issues and Gross Domestic Product has strong positive relationship. So this study recommended that the legal and tax rate should increases but a constant rate. The legal and tax issues affect Gross Domestic Product 98% if 1% increases in taxation, then 1.016 has increases in Gross Domestic Product from this study we find out that Tax issues has a lots of contribution in Gross Domestic Product of Pakistan. So the Government should totally focus on Fiscal Policy and the Fiscal Policy should make according to the economic situation of Pakistan and it should be properly implementing. So the unit root test result shows that the data of Gross Domestic Product and Tax issues are not stationary, it should be stationary. The study recommended that the Government should not change the legal and tax rate again and again.
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