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    Tax System of Pakistan: How Does It Work?

    October 12, 2022

October 12, 2022

Tax System of Pakistan: How Does It Work?

The enforcement of the tax system helps run and support every government. There are several types of taxes and a specific percentage of how much of it is liable on a certain product or a citizen’s salary.

Every responsible citizen is responsible for paying taxes because it generates a government’s revenue. The government then uses these taxes in public service by building roads, railways, hospitals, schools, etc. No matter what type of government it is or how rich the country is, the tax system is an obligation. It does not matter if it is a monarchy or a republic. The citizens of that country have to pay taxes to help the leaders run the country.

Taxes are liable on almost every product and service. Not a single citizen is allowed to run away from the obligation of paying taxes. The government utilizes each penny a citizen pays as a tax in the public interest. The tax system has been in practice since the ancient Roman Republic as far as one can remember.

The salaries of the government employees, including all ministers, the budget for the army and defense, and every other major governmental business depend on the taxes the citizens pay. The country may face financial and social crises if the tax system is flawed. Pakistan’s tax system is flawed; hence, the country has been surrounded by many financial problems.

Introduction

Tax collection is a very effort-demanding task that you should do with your utmost honesty and loyalty to the state. Almost every tax system is flawed to some extent, and Pakistan’s tax system is among the most flawed tax systems. To help understand the problems that it faces and to provide solutions to these problems, you need to understand taxation and the process of tax collection first. We have made it easier for you to do so.

In this article, we will elaborate on everything about Pakistan’s tax system. We will provide its literal definition, how it works, and the difference between direct and indirect taxes. Furthermore, we will discuss all the types of taxes, the flaws and problems that the tax system of Pakistan faces, and everything else that you should be aware of as a responsible citizen. So, to ensure that you understand the tax collection process and make your fellows aware of taxation, let’s get started.

Basics of Taxation

Tax is the cost of living in a civilized and developed society that everyone is liable to pay. Every citizen must pay taxes for the overall growth and development of the country. The government’s treasury comprises all the taxes paid by the citizens.

Every government imposes taxes on almost every product, service, good, firm, income, and business. The federal tax system of Pakistan is simplified into two types: direct tax and indirect tax. The agencies automatically cut down some taxes on behalf of the government, such as income tax. On the other hand, the total price of anything we buy already includes other taxes.

Even the candy that one buys is inclusive of tax. A tax system free of flaws contributes to a society or country’s development and civilization. Moreover, a healthy tax system also helps the country accelerate toward success.

How many types of taxation are there in Pakistan?

The tax system of Pakistan is pretty complex. It requires more than three dozen agencies to administer the payment of taxes by the citizens. About 37 agencies in Pakistan overlook all the businesses related to taxation. They try to ensure that no citizen is left regarding taxation.

Now, not everyone is liable to pay taxes. For example, kids not involved in any business or shopping are free from paying taxes. Instead, their parents, who do a job or business, and buy services and products, pay taxes to the government. There are 70 different types of taxes that these agencies administer.

Income tax contributes a big part of the total taxation of Pakistan. Income tax obligates every working citizen to pay a specific percentage of their total income as a tax to the government.

How does the Tax System of Pakistan work?

Every country has some organization that oversees and imposes taxes. There’s also one for Pakistan, which goes by the Federal Board of Revenue (FBR). FBR is responsible for all the major processes in the tax system. FBR has different responsibilities, such as mailing tax bills to the citizens, confirming their clearance, etc. It collects taxes from taxpayers through different tax practitioners.

The Federal Board of Revenue then approves the tax bills as “paid” and hands them over to the government. The government then uses these taxes for the development of infrastructure, the strengthening of defense, the provision of basic services, and the building of roads, motorways, etc. The salaries of the government employees, including the president and all the ministers, are also given from the taxes.

Is the Tax System of Pakistan fair?

The tax system of Pakistan is not unfair. Some people pay the taxes, while others, who are already privileged, try as hard as they can to escape the payment of taxes from their businesses. By estimation, we can conclude that only 5% of the total population of Pakistan pays direct taxes.

This flawed system is one of the reasons why Pakistan’s economy is unstable. The remaining 95% of the population tries to hide their total income or benefits from their friends or relatives who are tax practitioners or senior officers and successfully avoid paying taxes. It is flawed not only at the individual level but also at the organizational level.

Few tax practitioners report the actual amount of taxes, while the rest try to get a percentage for themselves. Tax collection is one of the major problems in Pakistan due to ambiguous tax laws and a lack of public awareness. Some other problems include poor management of taxes, dishonesty, and unprofessional behavior of tax practitioners.

Many people in Pakistan are unaware of the drastic impact the collection of taxes has on their lives and their country. Lack of education further contributes to this problem.

Problems in the Tax System of Pakistan

The state is accountable for many of Pakistan’s tax system problems. The lack of ability to handle taxpayers causes these problems. Due to hikes in prices, middle-class citizens are sometimes barely able to afford their monthly expenses.

Continuous increase in prices causes them to hide their salaries from the government and not pay taxes. A decrease in the payment of taxes further adds to this problem and causes another increase in prices, and this cycle continues. To overcome such a scenario, taxpayers should be aware of the consequences of their lack of tax payment, and the government should also give them some relief.

Working on a direct taxation system would also be helpful. Now comes the question, what are direct tax and indirect tax? We have answered that below.

Direct Taxes and Indirect Taxes

Taxation is divided into two major types: direct taxes and indirect taxes. Direct taxes can be differentiated from indirect taxes as the taxpayers directly pay them to the government. On the other hand, indirect taxes allow the involvement of tax collectors or practitioners. Direct tax is progressive as it depends on the ability of the taxpayers.

In this way, the rich pay more taxes than the poor. On the contrary, indirect taxes are regressive. Every citizen has to pay the same taxes regardless of their financial conditions. In this type, the poor get poorer while the rich stay rich.

In direct taxes, the tax burden is put on the one who has to pay it and not recover from someone else. In indirect taxes, the tax burden can be shifted to another person if someone fails to bear it.

Conclusion

In conclusion to everything that we have stated so far, we firmly believe that you are now well aware of the tax system of Pakistan and how it works. Taxation is the backbone of a government. The more fair the taxation is, the more the chances for the country to take great leaps of success.

The tax system of Pakistan is pretty unfair and struggling financially. We have mentioned everything about the tax system of Pakistan above, including how it works, the problems it faces, and the solutions to it. Pakistani individuals pursuing degrees with majors in business and finance are well aware of this situation and contribute to helping it in many ways.