Taxation is an essential source of revenue for the government of Pakistan. The government collects taxes from individuals and businesses to finance its activities, including providing public services, defence, and infrastructure. There are two main types of taxes in Pakistan: direct and indirect. In this article, we will explore the differences between these two types of taxes and provide a list of the different types of direct and indirect taxes in Pakistan.
Direct and Indirect Taxes:
Direct taxes are levied on the income and wealth of individuals and businesses. Examples of direct taxes in Pakistan include income, wealth, and corporate taxes. These taxes are paid directly by the taxpayer to the government. The government uses a progressive tax system, which means that the more an individual or business earns, the higher its tax rate.
Indirect taxes, on the other hand, are levied on goods and services. These taxes are paid by consumers when they purchase goods or services. Examples of indirect taxes in Pakistan include sales tax, value-added tax (VAT), excise duty, and customs duty. Indirect taxes are generally regressive, meaning that they disproportionately affect lower-income individuals. Several tax calculators are available online, and you can use them to save time and effort.
Direct and Indirect Tax Ratio in Pakistan:
In Pakistan, the tax system is heavily reliant on indirect taxes. According to the State Bank of Pakistan, in the fiscal year 2020, indirect taxes accounted for 63.7% of total tax revenue, while direct taxes accounted for only 36.3%. This ratio has remained relatively stable over the past decade, with indirect taxes consistently accounting for a larger share of total tax revenue.
List of Direct and Indirect Taxes in Pakistan:
Here is a list of the different types of direct and indirect taxes in Pakistan:
- Income Tax
- Corporate Tax
- Wealth Tax
- Capital Value Tax
- Property Tax
- Agricultural Income Tax
- Federal Excise Duty (FED) on Services
- Sales Tax
- Value-Added Tax (VAT)
- Excise Duty
- Customs Duty
- Federal Excise Duty (FED) on Goods
- Withholding Tax
- Stamp Duty
As mentioned earlier, indirect taxes account for a larger share of total tax revenue in Pakistan. This is due to several reasons, including a large informal economy, low tax compliance, and a narrow tax base. The government has been trying to increase the share of direct taxes in total tax revenue through tax reforms and other measures, but progress has been slow.
Difference Between Direct and Indirect Taxes in Pakistan:
The main difference between direct and indirect taxes in Pakistan is who pays the tax. Individuals or businesses pay Direct taxes, while indirect taxes are paid by consumers when they purchase goods or services. Direct taxes are generally progressive, meaning they have a higher tax rate for higher-income individuals, while indirect taxes are regressive, disproportionately affecting lower-income individuals.
Types of Indirect Taxes in Pakistan:
Pakistan has several indirect taxes, including sales tax, value-added tax (VAT), excise duty, customs duty, federal excise duty (FED) on goods, withholding tax, and stamp duty. Sales tax and VAT are the essential indirect taxes in revenue generation, accounting for around 70% of total indirect tax revenue.
In conclusion, the tax system in Pakistan is heavily reliant on indirect taxes, with indirect taxes accounting for a larger share of total tax revenue than direct taxes. The government has been trying to increase the share of direct taxes in total tax revenue through tax reforms and other measures, but progress has been slow. Pakistan has several types of direct and indirect taxes, each with its unique characteristics and impact on taxpayers. Individuals and businesses in Pakistan need to understand the different types of taxes and how they are levied to comply with tax laws and regulations.
Overall, the government of Pakistan faces significant challenges in collecting taxes and increasing the share of direct taxes in total tax revenue. These challenges include a large informal economy, low tax compliance, and a narrow tax base. The government has taken several measures to address these challenges, such as expanding the tax base, improving tax administration, and implementing tax reforms.
The tax system in Pakistan is complex and has unique characteristics. The government must collect taxes and increase direct tax share in total tax revenue. Understanding the different types of direct and indirect taxes in Pakistan is essential for individuals and businesses to comply with tax laws and regulations and for the government to collect taxes to finance its activities effectively.