Covid-19 crisis: agenda for survival & revival   

Tax proposals for budget 2020-21

Huzaima Bukhari & Dr. Ikramul Haq

This year’s budget for fiscal year 2020-21 is expected in the first week of June, will be in extraordinary circumstances, where like other nations we have to strive hard to ensure survival and revival of businesses adversely affected by Covid-19 pandemic that employ millions having no other source of income. Overwhelming majority of businesses in the wake of lockdown necessitated due to Covid-19 epidemic is on the verge of closure. These were already suffering due to sluggish economic activities, high utility bills and markup rate. Big to small and medium enterprises (SMEs) are demanding a comprehensive bailout, including tax reliefs. They are complaining of facing difficulties in securing loan facility announced by State Bank of Pakistan to pay salaries/wages. Those on rent are demanding remission/deferment/loan to pay the same. Their demand is of interest-free loan and/or grant to employees to avoid lay-offs as after opening of businesses, they argue it will require many months to recoup losses and achieve break-even position. Amid this bleak scenario, they claim, markup would be an additional burden. There is demand of massive tax reduction, deferment of old and forthcoming liabilities, tax amnesty, and zero taxation for employees earning up to Rs. 100,000 per month, waiver of advance income tax and over 70 withholding tax provisions contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services.    

In this article, we are presenting a plan that can help to overcome the prevailing challenge through Finance Bill 2020. It is a golden opportunity for the Government of Pakistan Tehreek-i-Insaf (PTI) to take some bold measures to not only help the needy but also ensure return to a more vibrant economy post pandemic. The most essential step is simplification of the tax system, guaranteeing ease of doing business, reducing cost of doing business and focused on improving human capital, tapping resources and generating employment. For all these, dismantling and reconstructing of the oppressive, inefficient and unproductive tax system is a prerequisite. It imposes high taxes, but yields low revenues. A withholding tax system that is operationally inefficient, anti-business, complex, time-consuming and costly must be abolished except for payroll and payment of dividends, interest and payment to non-residents.

The government of PTI must be reminded that no agenda for rationalisation of tax codes or simplification of tax system can improve tax compliance, unless there is substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools. The present functional structure of the Inland Revenue Service (IRS) has failed to achieve these objectives.

The fundamental challenge is providing a simple tax system that is manned by an efficient and competent administration, which is presently non-existent. Tax administrations, both at federal and provincial levels, lack the requisite level of digitization, professionalism and human skills. Tax reforms certainly do not mean mere alteration of tax laws or making cosmetic changes here and there. 

The prime Minister earnestly desires tax reforms, but needs to realise that it is not possible without first establishing an efficient, workable structure. The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverket that maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish National Tax Authority (NTA) more or less on the same lines.

The PTI in its forthcoming budget must provide a fair and transparent tax system for which complete model is available in a study [Towards Flat, Low-rate, Broad and Predictable Taxes, PRIME Institute, 2016]. The PTI government must not spend on ill-designed programmes to collect votes but make investments in creating human capital (e.g. education, training and health), and necessary public infrastructure to increase productivity of the economy. These can be funded along with comprehensive social security coverage for all citizens—its absence has made millions vulnerable to extraordinary financial hardships for the poor, under-privileged and the downtrodden.

The following measures/steps are necessary to counter damage already inflicted by lockdowns and other global factors resulting into demand contraction and absence of reliable national socio-economic registry:

1. All individuals, whatever the level of income may be, should be facilitated to file simple and easy tax returns made available both in English and Urdu—incentive for filing return should be Rs. 2,000 cash payback in the bank account of the filer. It would enable the process of documentation about households and their earning levels at national level. Individuals earning below Rs. 400,000 should be paid Income support (negative tax) till the time the State provides them employment and not keep them beggars for life.
2. For individuals, tax rate up to Rs. 1.2 million should be 0%. Where taxable income exceeds 1.2m but not 2.4 million it should be 5%. For taxable income exceeding 2.4 million but not 4.8 million Rs. 120,000 plus 10% of amount exceeding 2.4 million and for taxable income exceeding 4.8 million, Rs. 240,000 plus 15% of amount exceeding 4.8 million. Corporate income tax rate should be reduced to 20%. Income Support Levy on the rich @1% of net wealth exceeding Rs. 20 million.
3. All citizens should be given a chance pay any past unpaid liability due to non-reporting or under-reporting by just paying 10% tax latest by June 30, 2021. After the deadline, stringent action including confiscation and imprisonment should be provided. 
4. Under a self-assessment scheme if any taxpayer pays more than 25% tax over the last year’s liability, no audit or inquiry should be conducted. In the next three years, while businessmen concentrate on revival/growth, the government should prepare their tax profiles by data integration.
5. Simplified and harmonised sales tax on goods and services at a low rate of 5% by taking recourse to Article 144 of the Constitution.
6. Simplify Customs tariff with ‘One-Chapter One-rate’.
7. Radiographic scanning of all inbound and outbound containers to plug revenue leakages.
8. Effective mechanism to counter unfair practices on the part of tax administrators—subjected to punitive actions and pecuniary damages after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
9. Taxpayers’ rights must be safeguarded and strengthened by giving adequate rights under Taxpayers’ Bill of Rights ensuring quality of treatment, guaranteeing privacy and confidentiality of their declarations, providing right to assistance by the State in tax matters, ensuring unfettered right of appeal through an independent tax appellate system and providing facilities for independent review of disputes with tax authorities.

1. In Pakistan under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz.
2. Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;
3. Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and
4. 6% mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.

The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001 which will help in ascertaining collection for the current tax year without accumulation of refunds after abolishing all regressive withholding provisions.

1. Recovery of tax demand should be made only after decision of Tax Tribunal.
2. An efficient tax judiciary to help in removing impediments in the way of collection of genuine tax demands by the State and settling tax dispute within 12 months. For this we need to make the Tribunal a truly independent forum. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Court (NTA). Appeals against the orders of the NTA should lie with the Supreme Court alone. Members for NTA should be recruited in the same manner as judges of High Court.  The pay, perquisites and salary structure of NTA judges and staff should be at par with High Courts.

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The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).