The present coalition government, led by Pakistan Muslim League (Nawaz), is charged with the uphill task of preparing one of the most difficult and critical financial budget for the next fiscal year. Pakistan will be moving into the next budget with the economic mess left by the Pakistan Tehreek-i-Insaaf (PTI), including historic high inflation rates, highest deficits and stratospheric debt levels. The buffers are already exhausted and the biggest challenge would be to facilitate common man whose hopes for a better lifestyle are already fast draining. The aphorism approach adopted by PTI incurred a heavy cost and it failed to address the recurrent problem of a low revenue base and high debt levels, which ultimately squeezes space for growth and social protection based spending on education, healthcare, and infrastructure.
At the time when, Pakistan is facing risk of default, its external liabilities coupled with increasing import bill are cannibalizing its reserves and current account deficit is sliding southwards, the budget must be inspired by the vision of economic stability with taking cognizance of the fact that without adding new taxpayers to the books and removing undue preferential tax treatments, the goal of sustainable growth can’t be achieved.
The targets given to revenue collecting agencies must be realistic and in cohesion with the resources and capability of the system. In the past, it has been observed that on account of tax broadening, the authorities pass the load to existing or compliant taxpayers in shape of new taxes and withholding provisions. Such knee-jerk revenue generating actions compromise profitability of businesses in the formal sector, hence, this approach ultimately creates a vicious circle where at first the law abiding and complainant corporate and non-corporate taxpayers due to these regressive measures resort to find ways of tax avoidance and exploitation of anomalies in the system, eventually parting ways from formal system of economy and then when government starts facing challenges of revenue collection and growth, it starts offering tax amnesty schemes at regular intervals. The frequent amnesties lead to the protection and promotion of informal economy and wrong practices which gives encouragement to informal sector as they become confident that after a short span of time, they will be given yet another opportunity by the government to formalize their undocumented funds.
Based on the latest available Tax Expenditure Report for 2021 for federal taxes, based on data pertaining to fiscal year (FY) 2019-20, the value of exemptions and concessions was estimated at Rs. 1,314.27 billion. Tax expenditure in sales tax amounted highest at Rs. 578.46 billion (44% of the total), while income tax related amounted to Rs. 448.05 billion (34%), and for Customs it is estimated at Rs. 287.77 billion (22%). In FY 2019-20, FBR’s tax collection was Rs. 3,997.4 billion. Hence, tax expenditure to total collection ratio comes to about 33%. In order to generate fiscal space for developmental and social spending, government must ensure transparency and fairness in sales tax, income tax and provincial taxes. There are certain provisions in income tax and sales tax laws which provide preferential treatment for various sectors, such concessions and exemptions should be carefully reviewed and should be restricted to those sectors only which genuinely require government support in order to flourish. The uncalled for exemptions extended to income and the perquisites of the military, judges and key position holders must be revoked, with current economic situation where common taxpayer is squeezed to the last drop such exemptions are unwarranted and un-ethical.
Another key example is of income from construction and housing sector, where government has offered reduced rate of borrowing and banks have been given targets to doll out money. Due to this, there is a risk of misallocation of credit lending where a particular sector is enjoying certain benefits at the cost of all others. For taxation purposes, the value of property needs to be aligned with prevalent market rates — this gap between notified rates and market rates is already causing a huge loss to treasury. Though, the regulator revised the tax slabs, however, they surrendered to the pressure from property business representatives and market rates have been reduced. This reflects badly on governments resolve and ability to implement its power, where a pressure group can maneuver to overturn the revenue generating step.
Presumptive tax measures like minimum tax which is based on turnover or taxes withheld is a blemished approach which acts as a barrier for businesses in general, small and medium enterprises in specific as it disturbs their cash flows and they have to rely on borrowing subject to high interest rates. However, the dependence of Federal Board of Revenue (FBR) on minimum tax, withholding and advance taxes is increasing by every passing day as it is an easier way to generate revenue with less effort. The most withholding agents/taxpayers are entrusted with this responsibility which originally belongs to FBR and that too without any special incentive or return. Ideally, government should devise a mechanism where companies and sectors who are collecting/withholding taxes and depositing taxes to government should be facilitated in shape of tax reduction or incentives.
Technology has changed the global landscape where local and international systems can be closely knitted together. However, unfortunately the taxpayers in Pakistani are facing a situation where they have to deal with multiple revenue authorities at national, inter provincial and intra-provincial levels, with conflicting tax rates and treatments. Their compliance becomes complicated and costly. In Pakistan, sales tax on goods is collected by the FBR while sales tax on services is collected by each of the four provinces in their respective territory. Sales tax on services in the Federal Capital Territory in Islamabad is also collected by FBR, while Azad Jammu and Kashmir and Gilgit-Baltistan have their own tax authorities. To address this challenge, the FBR has introduced the concept of “National Sales Tax Return”. However in parallel, the legislature must ensure synchronization between federal and provincial tax laws to ensure ease of doing business and to help establish effective business eco-systems.
Pakistan’s taxation system needs paradigm reforms in order to achieve sustainable taxation and economic growth. Implementation of these reforms is subject to political will to chase non-taxpayers who are evading tax due to legal gaps. The current government must continue to make efforts towards broadening of the tax base and developing the tax system in a more simplified and technology friendly way.
The revenue collection agencies can source help through artificial intelligence and data analytics of various databases. The systems must be designed to corroborate and analyze the tax returns and withholding tax statements data with information available at databases of provincial tax authorities, import stage tax collection database, property sale and purchase data (through duties and transfer), data of utility providing companies, travel records, excise and taxation records, as it will help to identify mis-declarations.
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. Dr. Ikramul Haq, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions, with Huzaima Bukhari.