The year of TAX REFORMS

A lot was said, enough was heard and supposedly adequate was also done in 2019to introduce a paradigm shift in the existing inefficient tax system of the country. Government seemed to roll its sleeves to bring a capable tax system which could generate sufficient resources for the federal and provincial governments. Beyond doubt, exertions by government to revamp entire tax administration-establishment was one of the main feature of the year. As anxiously witnessed by the masses, on one side government exhibited a determination to introduce a strict regime of taxation while on the other side pressures exerted by traders and business community was seen mounting the government’s determination. It was clearly visible to common people that during the row, government continuously kept its foot in the door, making an effort to further widen its taxation space. Prime Minister Imran Khan approved a resolute three-year plan to carry out nationwide surveys to evaluate the hidden potential of real estate while implementing a new value added tax system. While the government showed its complete seriousness in optimizing tax collection. However the main challenge for the government was to do so without impeding business and shackling the corporate growth. While Federal Board of Revenue continuously fell short of harvesting the real tax potential despite imposing taxes through the Finance Act, 2019, the government decided to establish Pakistan Revenue Authority by June 2020 while restructuring the less effective Federal Board of Revenue. It was also witnessed that despite the substantial tax reforms approved by the government, it could not achieve the estimated target of Rs. 8 trillion in taxes. The federal government approved a World Bank funded 400 million USD worth tax reforms project with a good hope to support the taxation restructuring process while introducing centralized collection of general sales tax (GST) on services and goods. Federal government established a seven-member Steering Committee under the management of Chairman of Federal Board of Revenue. This committee will be assisted by four sub-committees which have been formed to scrutinize and suggest the administrative status of the new tax authority under the Federal Government. For the present government in Pakistan, taxation reforms seems to be the top priority. However, despite this importance, no institutional mechanism was seen endeavoring for the same. After depriving the Economic Advisory Council with any relevance in the exercise, no formal mechanism was available for the government to obtain take policy suggestions. Entire planning and execution of the most sensitive task was left to informal advisors, close confederates and members of financial kitchen cabinet. Little importance was given to recommendations of previously established Tax Reforms Commission as its proposals remained unrealized. Tax collection challenges are immense in Pakistan. One can imagine the difficulties if the 20% of Pakistan population is below the poverty line, nearly 40% of population comprises of non-earning dependents and only 30% is the labour force. Out of this 30% labour force which is around 70 million, 42% of this earns below the taxable limits. Meanwhile the agricultural income falls outside the ambit of Income Tax Ordinance, 2001. Besides these figures the government has to overcome the issues related to large number of tax exemptions, narrow tax base, limited capacity to collect taxes, low national rate of tax compliance, inflation, less exports, mounting fiscal deficit, growing inter-corporate debt in the power sector and a broadened current accounts gap. According to World Bank Pakistan’s tax gap is estimated at 10% of the GDP. Performance of provincial governments on tax collection is miserable. A poor and complex tax system of nearly six dozens of unique taxes are being administered by more than three dozen government agencies. The services sector accounts for 56% of GDP while it contributes only 0.5% of the GDP in taxes and about 11% in sales tax collection. Prime Minister Imran Khan approved a resolute three-year plan to carry out nationwide surveys to evaluate the hidden potential of real estate while implementing a new value added tax system For sure some of these difficulties are the inherited ones thus the present PTI led government cannot be blamed alone for these in entirety. However it also needs to be noted that in order to overcome many of the above mentioned issues, government had to arrange much-needed loans from the Gulf States, China and IMF. Pakistan’s tax generation potential is immense but needs to be harvested through a proper mechanism. A manuscript prepared by World Bank (WB) for ‘Pakistan Revenue Mobilization Project’ has calculated Pakistan’s potential around Rs.10 trillion revenue annually. This figure equals 26 percent of Pakistan’s GDP. How the government should go about to achieve it, is no rocket science. The success formula is simple. Government should facilitate the taxpayers rather coercing or forcing them to comply. Tax reforms of any kind must not create a choking effect for economy. Taxes on agriculture, capital gains, and real property must be improved which are at present negligible. Mapping of major business including shopping malls and plazas in the main cities is a step in correct direction. Government must avoid shifting of taxpaying burden to low-income groups through withholding taxes and the sales tax, which frustrate the people since it affects their income. Exemptions and tax credits should be discouraged. Focus should be on expanding the coverage of the Value Added Tax (VAT), commonly called sales tax in Pakistan which is a major source of revenue. Tax authority must plan for centralized collection of General Sales Tax (GST) on goods and services. However, same would require a synergetic cooperation and support by all the provinces. Government tax bosses must also study the applicability of earlier floated set of reforms, implemented from under Tax Administration Reform Project of the World Bank. The 400 million USD lending by the World Bank would definitely help Pakistan if it is spent judiciously on developing a long-term tax policy. There has been an unhealthy tendency in the governments to spend grants and loans on buying cars, building new offices and furnishing these extravagantly as it was seen in the past support programs. It would be required to spend the entire fund on raising the organizational structure and removing the inefficiencies in the tax collection system. Let the coming year witness the fruit of prosperity from the seeds sowed in “the year of tax reforms”. Writer is a versatile analyst and a speaker on contemporary issues. He tweets @sabbahuddin.