ISLAMABAD: As paying taxes has become easier for small and medium enterprises (SMEs) around the world, a report of World Bank Group and a multinational professional services finds that tax filing time has increased by 17 hours in Pakistan due to the introduction of a new provincial VAT (value-added tax) system.

In 189 nations Pakistan is ranked 172 with an average of 44.46 in terms of ‘distance to frontier’, according to the ‘Paying taxes 2015 study’, jointly released by the World Bank and PwC.

In the current report, for the first time, ranking on the ease of paying taxes is based on the distance to frontier score rather than on the percentile rank.

The distance to frontier score benchmarks economies with respect to a measure of regulatory best practice, showing the gap between each economy’s performance and the best performance on each indicator.

In 2010, Pakistan increased the VAT rate from 16 per cent to 17pc and raised the minimum tax rate from 0.5pc to 1pc levied on turnover.

‘Paying Taxes 2015’ measures all mandatory taxes and contributions that a medium-size company must pay in a given year.

Taxes and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and other small taxes or fees.

For the first time since the ‘Doing Business’ publication was introduced, a second city is measured in the 11 economies — Bangladesh, Brazil, China, India, Indonesia, Japan, Mexico, Nigeria, Pakistan, the Russian Federation, and the United States — with more than 100 million inhabitants.

The study notes that the average total tax rate for Asia and the Pacific is largely unchanged though this is the net result of the total tax rate reducing in some economies.

For the total tax rate the threshold is defined as the highest rate among the top 15pc of economies in the distribution of the total tax rate for all economies since 2006.

This year’s threshold is 26.1pc.

The study finds that on average, the standard company studied has a total tax rate of 40.9pc of profits. It makes 25.9 tax payments per year and takes 264 hours to comply with its tax requirements. Over the ten years of the study, 78pc of the 189 economies covered in the report have made significant changes to their tax regimes at least once.

Time and no. of payments required to comply with tax obligations have fallen over the ten-year period, as has the average total tax rate. The fastest rate of decline for the total tax rate occurred during the financial crisis 2008-2010 with an average of 1.8 percentage points per year during that period.

The rate of decline then started slowing in 2011.

The average time it takes a medium size company to deal with its tax submissions has fallen by nearly a week and a half over the ten years of the study; reflecting the increased use of electronic filing and payment systems around the world. Of the 379 tax reforms recorded in the reports since 2004, 105 relate to electronic filing.

In its conclusion, the study says that financial crisis had a substantial impact on national tax revenue, leading in many economies to larger government deficits and higher levels of public debt.

This may have helped trigger efforts to redesign tax systems, with governments aiming to strike the right balance between raising additional revenue and avoiding a greater tax burden on businesses.

The study says: “It is time for a new era of tax reform across the key regions of the world economy.

“The success will depend on addressing four key challenges: supporting losers as well as rewarding winners; avoiding the temptation to put off change; looking at the tax system as a whole; and fighting the temptation to make tax system more complicated for very understandable economic and political reasons.”

Published in Dawn, November 23rd, 2014

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