As a per cent of GDP, the share of tax revenue in overall revenue receipts was 11.5pc as compared to only 3pc of non-tax revenue during 2014-15.

With income tax around 40pc of the tax revenue collected, the present income tax regime is broadly divided into normal and presumptive taxation.

A presumptive tax is adopted in an economy that is either largely un-documented or wherein the propensity to evade or avoid taxes is considerably high and the capacity of the tax administration to enforce legal provisions of the tax code is limited.

The Income Tax Code of Pakistan contains various provisions of presumptive taxes that ultimately become indirect taxes

The income tax code of Pakistan contains various provisions of presumptive taxes that ultimately become indirect taxes. Some forms of presumptive taxation are quite explicit, whereas others are implied.

The most explicit form of presumptive taxation is the ‘turnover tax’ that applies to turnover or gross receipts; i.e. it requires businesses including corporations, association of persons and individuals having a turnover of Rs50m or more to pay a minimum tax on the annual declared turnover or gross receipts.

The implied forms of presumptive taxation include the adoption of notional values for imposing income tax.

As opposed to the fundamental premise that income tax is imposed on the taxable or net income after deduction of statutory business expenses, the country has adopted a number of measures to assess income tax on the basis of the presumed or notional value of transactions such as purchase price, gas and electricity consumption, import receipts, export proceeds, brokerage and commission, etc. There is a long list of presumptive taxes in the Income Tax Code.

Final or presumptive taxes being collected under the Income Tax Ordinance, 2001, which ultimately become part of prices of goods or services, include:

Tax on the gross amount of dividends; tax on undistributed reserves; tax on return on investment in sukuk; tax on gross royalty or fee for technical services received by non-residents; tax on shipping and air transport income of non-residents; tax on shipping of a resident person; tax on profit on debt received other than by a company; tax on the profits and gains of builders deriving income from the business of construction and sale of residential, commercial or other buildings; tax on the profits and gains of developers deriving income from the business of development and sale of residential, commercial or other plots; advance tax collected from every importer on the value of the imported goods with certain exception; tax on the amount of gas bill of a Compressed Natural Gas station; and tax sale of petroleum products.

Similarly, advance tax collected on supply of goods and execution of contacts; tax on the export proceeds or on realisation of proceeds on account of commission to non-export indenting agent and export indenting agent/export buying house; tax withheld on brokerage and commission income of advertising agents and in other cases is also a final discharge of tax liability.

Tax withheld on gross payments made on account of winnings from a raffle, lottery, prize offered by companies for promotion of sale and crossword puzzles is also a final tax.

Corporations quoted or not quoted on the stock exchange, require, under the income tax law, to withhold tax on the value of bonus shares to be issued to a shareholder. Issuance of these shares shall be deemed to be the income of the shareholder. Tax paid under this section shall be a final tax on their income.

Every person while making a payment to a non-resident person on execution of contracts or sub-contracts for construction, services including advertisement services is required to withhold final tax on the gross amount.

Tax to be withheld on payment to a non-resident media person for any advertising services will also be a final tax.

Every steel-melter, steel re-roller, composite steel units, registered has to pay a fixed and final tax per unit of electricity consumed for the production of steel billets, ingots and mild steel (MS products) excluding stainless steel.

The presumptive mode of taxation is comparatively less successful in achieving desired objectives.

The country still has sizeable un-documented sector economy as envisaged in the Federal Board of Revenue Quarterly Review April-June 2011/12 and in the State Bank of Pakistan’s Third Quarterly Report 2011/12.

It is estimated that the un-documented economy is three times the size of the regular economy. If it is accounted for, the actual tax-GDP ratio is much lower than the officially cited tax-GDP ratio of 11.5pc against the potential of around 22.5pc.

Another objective linked to presumptive taxation was to get revenue from taxpayers who evade or avoid due incidence of income tax.

However, the contribution of presumptive taxes in increasing income tax collection is not appreciable as income tax-GDP ratio has been more or less similar from the last decade or so.

The International Monetary Fund expressed dissatisfaction with fiscal federalism reforms as tax revenue is still very low at 11pc of GDP.

As a role in broadening the tax base, the presumptive mode of taxation is not very successful as the number of income tax return filers has declined from 1.8m in FY2007 to just 0.75m and 0.85m in FY2014 and FY2015, respectively.

Therefore, the presumptive income tax regime needs a revisit to bring the income tax regime more in line with international practices.

Published in Dawn, Business & Finance weekly, December 26th, 2016