Direct Tax Policy Principles

First of all, I would like to applaud the efforts of UN awarded and world’s leading accounting body ACCA for utilizing its notable expertise owing to its presence in 160 countries by providing us an opportunity to share our expectations and thoughts on prospective budget for the fiscal year 2007-2008.

Minimization of compliance costs not only for businesses but also for the collectors and maximization of revenue for Pakistan seems to be the core issue of this seminar. When I use the word direct taxation, I would mean to include income tax (Federal and Provincial) and Capital Value Tax broadly speaking and in one sense can be effectively categorized as direct taxes.

TAXES – a source of Public Finance

Taxes are essential to finance public services but there are good and bad ways to collect them. The design of the tax system can have significant economic impacts and can influence residents of a country and multinationals in deciding where to invest.

Tax collection has long been a despised activity. But taxes are essential. Without them there would be no money to build schools, hospitals, courts, roads, airports or other public infrastructure that helps business and society to be more productive and better off.


There are two types of tax regimes – complex and simple as there is no third type.

Complex tax regimes
Tax regimes with relatively high marginal rates and which include a number of exemptions and allowances tend to be less economically efficient in relation to encouraging employment, saving and investment. Such regimes generally also impose higher tax compliance and administration cost which is evident from Income Tax Ordinance, 2001.

We have experienced Acts of 1918 and 1922 which have lead the basis of creation of Income Tax Ordinance, 1979, however, Income Tax Ordinance, 2001 was created to make the things simple. We know from our experiences about acts and ordinances, burdensome tax systems served as a deterrent and normally lead to tax evasion. According to a World Bank survey, Companies in 90% of surveyed countries [175 Countries including Pakistan] rank tax administration among the top five obstacles to doing business. The main factors contributing to this are

  1. The large number of business taxes to pay
  2. Lengthy and complex tax administration
  3. Complex tax legislation
  4. High tax rates

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