Name: Syed Awais Ahmad Akbar

Registration No. 121-FSL/LLB/5Y/S20

Teacher: Shaikh Faraz Bin Fazal

Subject: Law of Taxation
Date of submission: 1st June, 2024
THE EVOLUTION AND IMPACT OF TAX

REFORMS IN PAKISTAN:

Taxation is an important part of any modern economy. It is the way that

governments raise money to fund their operations and provide essential services to
their citizens. In Pakistan, taxation has a long and varied history. The government is
committed to making the tax system more efficient and fair. This will help to ensure
that Pakistan has the resources it needs to develop and prosper.1

Tax collection is one of the major sources of revenue for any state. To maintain a fair
go in this case needs to make the system more convienet, productive and fair.
Tax reforms has a long but steady history in Pakistan. It has evolved over time to get
the present state and the progress is still go on. In this, we will see how it has
evolved to present form and what is its future.

After INDEPENDENCE

 When Pakistan emerged, it has promulgamated Income Tax Act 1922 as existing
law to regularize tax system in pakistan.

Pakistan got independence from British India where they had implemented various
concepts including taxes. Post independence, Pakistan took the system as left by
Britishers which was actually a basic of tax collection. It has include various indirect
and direct taxes. Such income tax, custom duties etc.
It got some air by introduction of sale taxes which marked the beginning of a new
revenue generating system for running of the affairs of state.
Beside all these, it was a complex and insufficent system which appeals for reforms.

After this, there were numarious steps have been taken such as taxation inquiry
committee, abolishment of super taxes etc. The taxation inquiry commettee was
formed in 1958. It has submitted a report of their analysis and recommendations
about the tax system and its due improvements.

Income Tax committee:

In 1961, Income Tax committee was introduced. Its primary objective was to analyze
income tax act 1922 and make recommendations for its implimentation and makes
procedural rules for its enforcement.

Income Tax Ordinance 1979:

The income Tax act 1922 was made subject to various amendments which made it
more difficult and complex,so Govt. Promulgated a new law named as Income Tax
Ordinance 1979 which was enforced from July 1, 1979.2

It was concist of 167 sections, 14 chapters and 8 Schedules.

Under this ordinance, Income tax survey was conducted to analyze its struture of
taxation etc, a lot of Tax amenesty schemes were also introduced in order to
braoden the tax net.

1
www.taxationpk.com/a-brief-history-of-taxation-in-pakistan

2
Income Tax Law by Dr Zulfiqar Bowra, page 4, 2023-24 edition
In 1960. Financial year was re-selected to Ist July to 3oth June of next year instead
of ist April to 31 March of next year.

Structural Adjustment Programs (SAPs) 1980s

1) Structural Adjustment Programs (SAPs) by the International Monetary Fund (IMF)

and the World Bank, and their associated tax reforms, have been implemented in
various developing countries since the 1980s. These programs are designed to
stabilize economies, promote growth, and integrate countries into the global
economy
Their purpose was to promote economic stability by reducing fiscal imbalances and
to address balance of payments deficits.
A notable change during this period was the introduction of the General Sales Tax
(GST) in 1990, replacing the sales tax with a value-added tax to increase
transparency and revenue.

2) Imposition of General Sales Tax(GST)

The introduction of GST in Pakistan represents a crucial step in tax reform aimed at
enhancing revenue collection, promoting economic efficiency, and improving
compliance. Despite challenges in implementation and administration, GST has been
instrumental in broadening the tax base and providing a more robust framework for
revenue generation. Continuous reforms and technological advancements are
essential to address existing issues and optimize the benefits of GST in Pakistan’s
economic landscape.3

The Federal Government of Pakistan (the Pakistani Government) has increased the
general Sales Tax rate to 18% effective 14 February 2023.4

INCOME TAX Ordinance 2001:

It is was promulgated on 13th sept. 2001.

 Income Tax Ordinance(ITO 2001) shall be extended to Whole of Pakistan.(U/S

1)
 Federal govt. Notofied its date of enforcement as 1st Day of July, 2002.

The Income Tax Ordinance 2001 represents a significant milestone in the evolution of
Pakistan's taxation system. Enacted to replace the Income Tax Ordinance 1979, it
aimed to modernize tax administration, broaden the tax base, and simplify the tax
code. This ordinance introduced various reforms and mechanisms designed to
enhance compliance, transparency, and efficiency in tax collection.
3
www.investopedia.com

4
www.ey.com/
The Income Tax Ordinance 2001 was introduced to simplify tax laws and procedures,
aiming to reduce evasion and enhance compliance. Additionally, the adoption of
electronic filing systems and automation played a crucial role in reducing human
intervention and improving efficiency.

The Preamble of the ordinance specifies the object of law. It specifies tgat uit has
promulgated to consolidate and to amend law relating income tax and provide for
matters ancillary and to connect with income tax law.5

The Income Tax Ordinance 2001 (ITO 2001) marked a pivotal shift in Pakistan's
taxation framework, aimed at modernizing tax administration, enhancing
compliance, and broadening the tax base. This ordinance introduced several
significant reforms that simplified the tax system, expanded the scope of taxable
income, and promoted greater transparency and efficiency in tax collection. One of
the primary improvements brought by ITO 2001 was the simplification of the tax
code. By consolidating and clarifying the complex and often ambiguous provisions of
previous tax laws, the ordinance made the tax code more accessible and
understandable for taxpayers. This simplification reduced confusion and errors in tax
filing, making compliance easier for both individuals and businesses.

The ordinance also strengthened the withholding tax mechanism, ensuring that
taxes were collected at the source on various transactions, including salaries,
dividends, interest payments, and contracts. This not only improved the overall tax
collection process but also enhanced compliance by making it harder to evade taxes.
Transparency and accountability were also enhanced under ITO 2001. The ordinance
provided clear definitions of income, deductions, and tax credits, helping taxpayers
understand their obligations and reducing disputes. Furthermore, various tax credits
and exemptions were introduced to encourage investments in key sectors such as
agriculture, industry, and information technology, stimulating economic growth and
development.

The ordinance supported the 18th Amendment, which granted provinces more
autonomy in tax collection, particularly in the services sector. This led to increased
provincial revenues and greater fiscal decentralization. Additionally, clearer
frameworks for dispute resolution were provided, including the establishment of
appellate tribunals and alternative dispute resolution mechanisms. These measures
helped efficiently address taxpayer grievances and reduce litigation.

In conclusion, the Income Tax Ordinance 2001 brought comprehensive

improvements to Pakistan's tax system. By simplifying the tax code, broadening the
tax base, enhancing compliance mechanisms, and promoting transparency and
automation, ITO 2001 significantly modernized tax administration. These reforms
contributed to increased revenue generation, better taxpayer compliance, and a
more equitable and efficient tax system. However, ongoing efforts are required to
address remaining challenges such as tax evasion and administrative inefficiencies.

5
http//hubpages.com/hub/income-tax-law-in-pakistan
ESTABLISHMENT OF FBR:

The Federal Board of Revenue (FBR) in Pakistan, established in 1924, is the central
revenue collection agency of the federal government. Its primary purposes include
revenue collection through various taxes and duties, tax administration and policy
formulation, trade facilitation, combatting tax evasion and fraud, and providing
taxpayer services. The FBR plays a vital role in funding government expenditures,
promoting economic growth, and ensuring fairness and equity in the tax system.

The FBR's primary objectives include revenue collection, tax administration, trade
facilitation, and taxpayer services. It aims to mobilize resources for public services,
formulate tax policies, regulate imports and exports, and promote voluntary
compliance. Through its efforts, the FBR contributes to fiscal stability, economic
growth, and social welfare in Pakistan.

IMPACTS OF THESE REFORMS:

Taxation system has been subject to various modifications and amendments in order
to make its process easy and productive. Starting from Income Tax Act 1922 to
Income Tax ordinnance 2001 has brought various impacts and benefits in its disposal
of duties. This comprehensive reform aimed to modernize tax administration,
enhance compliance, and broaden the tax base.

Some are discussed below:

Increased Revenue Generation: Tax reforms, including the implementation of the

Goods and Services Tax (GST) and withholding taxes, have led to a notable increase
in tax revenue. Automation and improved administration have enhanced tax
collection efficiency, contributing to greater fiscal sustainability.

Enhanced Transparency and Compliance: The adoption of electronic filing systems

and online tax services has fostered transparency and reduced corruption in the tax
administration. Taxpayer education initiatives have also played a crucial role in
improving compliance and encouraging voluntary tax payments.

Broadening the Tax Base: Efforts to expand the formal tax system have yielded
positive results, with more businesses and individuals becoming part of the tax net.
Additionally, tax amnesty schemes have been effective in documenting previously
untaxed wealth and income, further strengthening revenue streams.
Provincial Revenue Generation: Increased provincial autonomy has empowered
provinces to take proactive measures in revenue collection, particularly from
services. This has resulted in a significant boost to provincial revenues, contributing
to fiscal decentralization and economic development at the regional level.

Negative Impacts

Economic Burden: Tax reforms have occasionally imposed a higher tax burden on
middle and lower-income groups, leading to economic strain. Indirect taxes such as
GST can contribute to inflation, thereby reducing consumers' purchasing power and
potentially exacerbating income disparities.

Challenges in Implementation: Despite reforms, tax evasion and corruption persist

as significant challenges. Bureaucratic hurdles and inefficiencies within the tax
administration continue to hinder optimal tax collection and enforcement efforts.

Equity Concerns: The tax system has faced criticism for its regressive nature,
whereby indirect taxes disproportionately affect lower-income groups. Furthermore,
there are ongoing concerns regarding the system's ability to adequately address
income inequality and ensure fairness in tax distribution.

So, The evolution of tax reforms in Pakistan reflects a continuous endeavor to

improve the tax system, bolster revenue streams, and enhance compliance. While
significant strides have been made, challenges such as tax evasion, administrative
inefficiencies, and equity considerations persist. Future reforms should prioritize
addressing these challenges to establish a more effective, equitable, and sustainable
tax framework conducive to economic growth and social development.

CONCLUSION:::

Taxation stands as a cornerstone of any modern economy, providing governments

with the necessary funds to fuel their operations and deliver essential services to
citizens. In Pakistan, the journey of taxation has been long and multifaceted,
reflecting the nation's commitment to crafting a more efficient and equitable tax
system to propel its development and prosperity forward. From its inception post-
independence, Pakistan inherited a taxation framework shaped by colonial legacies,
incorporating both direct and indirect taxes. However, this system proved to be
complex and inadequate, prompting the need for reform.

Over the years, Pakistan has witnessed a steady evolution in its tax regime, marked
by a series of significant reforms aimed at modernization and enhancement. Various
committees and initiatives, such as the Taxation Inquiry Committee and the Income
Tax Ordinance of 1979, laid the groundwork for subsequent reforms by analyzing
existing structures and proposing improvements. The introduction of the General
Sales Tax (GST) in 1990, as part of Structural Adjustment Programs (SAPs) led by
international financial institutions, represented a pivotal moment, ushering in a new
era of transparency and revenue generation.

Further strides were made with the enactment of the Income Tax Ordinance of 2001,
a landmark legislation designed to revolutionize tax administration, broaden the tax
base, and simplify procedures. This ordinance introduced innovative mechanisms
such as electronic filing systems, self-assessment schemes, and stricter penalties for
evasion, bolstering compliance and efficiency. The reforms also aimed at ensuring
fairness and equity, although challenges such as economic burden and
administrative hurdles persist.

The impact of these reforms has been substantial, with positive outcomes including
increased revenue generation, enhanced transparency, and broadening of the tax
base. Provinces have also benefited from greater autonomy in revenue collection,
contributing to fiscal decentralization and regional development. However, negative
impacts such as economic strain on lower-income groups and persistent challenges
in implementation underscore the need for continuous improvement.

In conclusion, Pakistan's journey of tax reform reflects a commitment to

modernization, efficiency, and equity in its taxation system. While significant
progress has been made, ongoing efforts are essential to address remaining
challenges and ensure the tax framework remains conducive to economic growth
and social development. Future reforms must prioritize transparency, compliance,
and fairness to build a stronger, more resilient tax system for the benefit of all
citizens.