Prime minister Imran Khan is not happy with the performance of Federal Board of Revenue (FBR). In a recent speech, PM even threatened to establish a new tax authority if FBR failed to fulfill its tasks. But any tax authority without serious reforms in tax laws and system doomed to fail. No reforms will succeed without a vision, policy framework and political will.
By constituting task forces and committees – this is the worst one can do as too many cooks spoil the broth – the PTI government has conceded that it had not done its homework as what to do when in power. The Prime Minister and Finance Minister need to be reminded that tax reform is too serious a matter to be left to the economists and bureaucrats. PM Imran Khan can learn from past experiences to reform the tax authorities and tax collection.
General Musharraf after the unconstitutional takeover of October 12, 1999, constituted an expert group to suggest changes in tax system to suit the ‘new economic agenda of the chief executive’. The output was Tax Laws (Amendments) Ordinance, 1999, promulgated on 16 December 1999. It showed the shortsightedness of group members as the only thing they highlighted was revenue targets. They did not bother to consider the plight of the officers and staff that had to administer the laws. This exercise proved counterproductive.
The same thing happened under the six-year long (2000-6) World Bank-funded Tax Administrative Reforms Programme (TARP). The government of Pakistan People’s Party during (2008-2013) and that of Pakistan Muslim League (Nawaz) during 2013-18 constituted many economic advisory committees, task forces for tax reforms and even Tax Reforms Commission in 2014, but all failed miserably. The main reason for failure was that none of the economist consultants had specialization or experience in taxation. They had no idea of the ground realities in Pakistan to offer workable reform action plan.
The so-called experts invited from abroad were not capable of understanding the mundane realities prevailing in Pakistan. They might be very competent and sincere too, but the task of tax reforms in Pakistan could not be successfully carried out by them. The same is true for our IMF-trained economists/experts or the bureaucrats sitting in FBR.
Pakistan continues to face deep fiscal crisis which cannot be resolved easily. Taxes are insufficient to meet Pakistan’s debt servicing and defense needs. The tax-to-GDP ratio does not enable Pakistan to counter inflation or improve governance, deliver quality public services or improve human resource to reach a take-off stage for economic development.
The reforms should address the following problems, overall increase in the revenue collection for achieving fiscal targets; increase in tax to GDP ratio through broadening of the tax base; strengthening audit and enforcement procedures through professional capacity building of FBR officials; ensuring more equitable & transparent application of tax laws through provision of high quality tax services. Pakistan needs progressive tax system based on incomes. Indirect taxes should be reduced to provide much needed relief to the poor masses. More innovative and scientific approach and use of information technology is needed to improve the working of tax authorities.
Today, there are estimated to be five to six million businesses in the country but only around 100,000 (or just 2%) are registered with the sales tax department. If the government really wishes to increase tax revenue, all it has to do is to give a deadline to all these businesses (operating in offices and shops) to get registered with sales tax departments and pay taxes. Again, this will require vision and determination, which unfortunately the finance minister does not appear to have.
Tax collection is one of the biggest problems the Pakistani economy has witnessed since independence. It is unfortunate that only 2% of the people in Pakistan contribute to the national exchequer through direct taxes. Besides, people evading taxes escape away easily. This is because Pakistan does not have an efficient tax collection mechanism, although tax collection has ameliorated over the years, both at the federal and provincial level. Moreover, things need to be improved as far as collection of taxes is concerned.
In fact, the tax-to-GDP ratio remains within a narrow band of 9.8pc (2012-13) and 12.4pc (2016-17). The ratio of non-tax revenue to GDP has also decreased from 3.5pc in 2012-13 to 3pc in 2016-17. In view of the extremely low and dwindling non-tax revenue, tax revenue remains the leading source of funds for the government to balance the budget.
The tax-to-GDP ratio remains low despite an increase in real GDP growth in recent years mainly because of a wide tax gap, which is as large as 9.8pc of GDP or almost Rs3.2 trillion. In other words, potential tax revenue is much more than the actual tax collection.
With this enhanced threshold, about 521,597 income tax return filers will be out of the tax net in the current tax year. That will also cause a reduction of revenue by Rs35.2 billion. Furthermore, a reduction in corporate income tax rates will further decrease tax collection. The income tax rate for companies, excluding banking and small companies, for tax year 2019 has been reduced to 29pc from 30pc. This will be further reduced by one percentage point for each of the following years until tax year 2023.
In view of the increasing trend in the fiscal deficit, it is inevitable to mobilise additional tax revenue. This is possible by reducing the tax gap, which is the difference between anticipated and actual tax revenue. Bring everyone in the tax net who is involved in any sort of industrial and commercial activity. End all exemptions given to different industries, individuals and sectors of economy.
The large shortfall in revenue compels the government to seek loans. In recent years, Pakistan has experienced a significant increase in public debt from 64pc of GDP in 2012-13 to 70pc in 2017-18.
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20 September, 2019