REPORT
ROLE OF
TAXATION
Business Law and
Taxation
September 27
Fajal Tanveer
2022-bba-015
Submitted to: Sir Umar Zaka
Table of Contents
Introduction.................................................................................................................................. 4
Revenue Generation ...................................................................................................................... 4
Key Sources of Revenue ................................................................................................................ 4
Redistribution of Wealth ............................................................................................................... 4
Mechanisms of Redistribution ........................................................................................................ 5
Economic Regulation .................................................................................................................... 5
Regulatory Instruments ................................................................................................................. 5
Types of Taxes .............................................................................................................................. 5
Direct Taxes .............................................................................................................................. 5
Indirect Taxes ............................................................................................................................ 6
Government Levels in the Taxation System ..................................................................................... 6
Federal Government Taxes .......................................................................................................... 6
Provincial Government Taxes ....................................................................................................... 7
Local Government Taxes ............................................................................................................. 7
Conclusion ................................................................................................................................... 8
Review
This report provides a comprehensive overview of the taxation system in Pakistan,
highlighting its significance in revenue generation, wealth redistribution, and
economic regulation. It delves into the various types of taxes imposed at federal,
provincial, and local levels, offering insights into how these taxes contribute to the
overall fiscal health of the country. The report examines key federal taxes such as
income tax, sales tax, customs duties, Federal Excise Duty (FED), and Capital Value
Tax (CVT), alongside provincial and local government taxes like agricultural income
tax, property tax, and local services tax. By presenting this information, the report
aims to enhance understanding of the complex taxation landscape in Pakistan and
underscore the importance of effective tax policies for sustainable economic
development.
Introduction
Taxation is a crucial mechanism for funding government operations and
fostering economic stability in any country. In Pakistan, the taxation system
plays a vital role in revenue generation, wealth redistribution, and economic
regulation. This report outlines these roles, discusses the types of taxes, and
examines the different government levels involved in the taxation system.
Revenue Generation
Taxation is a primary source of revenue for the Pakistani government,
facilitating public spending on infrastructure, education, healthcare, and
security. The Federal Board of Revenue (FBR) collects various taxes,
contributing significantly to the national budget. In recent years, efforts
have been made to broaden the tax base, enhance compliance, and reduce
evasion, which remains a challenge due to informal economic activities.
Key Sources of Revenue
Income Tax: A major contributor to federal revenues, it taxes individual
and corporate income.
Sales Tax: Collected at the federal and provincial levels, it represents a
significant source of revenue.
Customs Duties: Important for regulating imports and generating
revenue, especially in an economy reliant on imports.
Redistribution of Wealth
Taxation also plays a critical role in reducing income inequality and
redistributing wealth. By implementing progressive tax rates, the
government can ensure that higher earners contribute a larger share of
their income, which can then be used for social programs and public
services benefiting lower-income groups.
Mechanisms of Redistribution
Social Welfare Programs: Funded by tax revenues, these programs aim
to uplift marginalized communities.
Subsidies and Grants: These are aimed at essential sectors such as
agriculture and education, helping to balance disparities.
Economic Regulation
Tax policy in Pakistan serves as a tool for economic regulation, influencing
behavior and resource allocation. Through taxation, the government can
incentivize certain industries while discouraging others, thereby steering
economic activity in desired directions.
Regulatory Instruments
Excise Taxes: Applied on specific goods like tobacco and alcohol,
aimed at curbing consumption.
Environmental Taxes: Encourage sustainable practices by taxing
activities that harm the environment.
Types of Taxes
Taxation in Pakistan is broadly categorized into two main types: direct taxes
and indirect taxes.
Direct Taxes
Direct taxes are levied directly on the income or wealth of individuals and
corporations. Key examples include:
Income Tax: Progressive tax on individual and corporate income.
Wealth Tax: Although less prominent, it targets the net wealth of
individuals.
Indirect Taxes
Indirect taxes are imposed on goods and services, affecting consumers
indirectly. Important forms include:
Sales Tax: A key component of revenue collection, levied on the sale of
goods and services.
Value Added Tax (VAT): A type of sales tax collected at every stage of
production or distribution.
Government Levels in the Taxation
System
Taxation in Pakistan is structured across three levels of government: federal,
provincial, and local. Each level has distinct responsibilities and tax types,
contributing to the overall fiscal framework.
Federal Government Taxes
The federal government is responsible for several key taxes, which include:
Income Tax:
Levied on the income of individuals and corporations. It operates on a
progressive rate system, where higher incomes are taxed at higher
rates. This tax is crucial for funding national projects and services.
Sales Tax:
A comprehensive indirect tax levied on the sale of goods and services
across the country, typically set at 17%. It is collected at both federal
and provincial levels, providing substantial revenue.
Customs Duties:
Imposed on imported goods, customs duties protect domestic
industries by making foreign products more expensive. They are vital
for regulating trade and generating revenue.
Federal Excise Duty (FED):
A form of indirect tax on specific goods produced or manufactured in
Pakistan, such as tobacco, alcohol, and petroleum products. FED
aims to regulate consumption and raise revenue.
Capital Value Tax (CVT):
Imposed on the transfer of property, CVT is charged on the value of
properties and is collected by the federal government, adding to its
revenue from property transactions.
Provincial Government Taxes
Provincial governments in Pakistan also have their own taxation powers,
which include:
Agricultural Income Tax:
Levied on income generated from agricultural activities. The tax rate
varies by province, reflecting the local agricultural economy.
Sales Tax on Services:
A provincial tax on services provided within the province, reflecting
the shift towards service-oriented economies. Rates vary by province.
Property Tax:
Collected on real estate properties within the province. This tax is a
significant source of revenue for provincial governments.
Profession Tax:
A tax levied on professionals and businesses operating within the
province, varying based on income brackets and professional
categories.
Toll Tax:
Charged for the use of toll roads and bridges, which is essential for
maintaining and developing transport infrastructure.
Local Government Taxes
Local governments are responsible for several taxes aimed at funding
community services and infrastructure. These include:
Local Services Tax:
A tax on services provided at the local level, funding municipal
services such as waste management and public health.
Public Utility Tax:
Levied on utility services (like water and electricity), supporting local
government operations and service delivery.
Vehicle Transport Tax:
Collected from vehicle owners, this tax is essential for maintaining
local transport infrastructure.
Animal and Livestock Tax:
Imposed on livestock ownership, reflecting the agricultural nature of
many local economies.
Local Market and Hawker Tax:
Levied on local businesses and street vendors, contributing to local
revenue while regulating informal trade.
Conclusion
Taxation in Pakistan is a fundamental aspect of the economy, serving critical
roles in revenue generation, wealth redistribution, and economic regulation.
Understanding the types of taxes and the government levels involved helps
to appreciate the complexities and challenges of the taxation system.
Continued reforms and efforts to enhance compliance and broaden the tax
base are essential for sustainable economic growth and equitable
development.
