Huzaima Bukhari & Dr. Ikramul Haq
Fiscal consolidation should be as growth-friendly as possible. In general, tax base-broadening reforms are identified as growth-oriented reforms. To the extent that they reduce distortions to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare—Choosing a Broad Base–Low Rate Approach to Taxation, OECD Tax Policy Studies No. 19
According to a Press report, Prime Minister Imran Khan, has finally approved “an ambitious three-year plan to conduct nationwide surveys for tax assessment, evaluating wealth parked in real estate and implementing a new value added tax system”. The plan, finalised some days before the government “succumbed to pressures exerted by traders”, includes “setting up the Pakistan Revenue Authority by June next year and restructuring the Federal Board of Revenue (FBR) in interim period”.
Reportedly, the Prime Minister, while taking these decisions in a meeting held on October 3, 2019, accepted some of the recommendations given by Tax Reforms Commission in its final report given in 2016 but which, remained unimplemented. It is worthwhile to mention that in these columns we have been asking time and again to make public, the report of Tax Reforms Commission that was declared confidential by the then Finance Minister, now a fugitive. This report relies on many of our recommendations and suggestions that were presented during the last 20 years in various columns and our books. This fact was duly acknowledged in the Tax Reforms Commission’s report. Since our criticism of Federal Board of Revenue (FBR) was quoted verbatim and political elite was exposed, Ishaq Dar and stalwarts of FBR decided to declare the report confidential. It is open violation of Article 19A. It is high time that the Prime Minster take note of it and order Hafeez Shaikh to make the report public without further delay.
Long before the submission of report of National Tax Reforms Commission, we made out a case for National Tax Authority (NTA) in these columns [Need for NTA, Business Recorder, May 22, 2015] and now the Prime Minister has desired its establishment by June, 2020 which is a very wise action.
The report revealed that “one of the decisions of the meetings was immediate implementation of the fixed tax regime for shopkeepers and real estate sector. But this decision has become redundant after the International Monetary Fund (IMF) opposed the proposal this week”. It is further noted in the report that “the actions that the Prime Minister approved to implement from November 2019 to June 2022 require strong political will and full support from the bureaucracy….by compromising with the traders, the government has already shown signs of weaknesses that will keep haunting it in coming years”.
The salient features of the three-year long tax planning programme, extracted from newspapers’ report are:
- “Nation-wide tax assessment and documentation drive from Nov 30, 2019. The drive has been planned to be completed within two years and detailed proposals will be submitted later on. It will aim at ascertaining untapped segments including businesses, real estate and industries.
- Tax reforms must not create a choking effect for economy and correct taxation measures be taken with prompt implementation instead of entanglement in extended impasses.
- Launching a nation-wide survey of immovable property, starting from Islamabad industrial area this month. The nation-wide survey of immovable properties should be undertaken and completed over the next two years. It has been decided to involve Ministry of Interior and Ministry of Defence for completing the immovable property survey.
- Considering a proposal from a Chinese company for a digital land survey. In order to assess the wealth parked in the real estate sector a nationwide survey along with geo-tagging was imperative. A Chinese firm has offered to conduct the digital land survey but its proposal remains pending for the last two years.
- FBR’s broadening of tax base (BTB) zones have completed mapping of major shopping malls and plazas in the main cities but it was not clear whether the authorities used this information to enhance revenue collection.
- Prime Minister asked to fully implement the value-added tax (VAT) regime for all business segments over next three years. The deadline for the full VAT implementation is June 2022 for the FBR. The VAT will be progressively implemented across various segments commencing with Third Schedule products and gradually absorbing the complex value chain products. During the last stint of Dr Abdul Hafeez Shaikh as Finance Minister (2010-2012), the then government had tried to implement a VAT system under an IMF programme. But the Pakistan Peoples Party (PPP) government had to retreat after opposition from the business community.
- PM approved to enact VAT related legislation and formulate rules on need basis. The FBR will undertake surveys to assess particular business and industrial sectors to know the revenue potential of VAT of particular industrial sectors.
- Adopting the computerized national Identity card (CNIC) as common identifier by June 2020 –a thing that the FBR is trying to implement for the last many years without any success.
- Formulation of comprehensive proposal for establishing the Pakistan Revenue Authority (PRA) by June next year.
- The Ministry was also directed to make plans for centralised collection of General Sales Tax (GST) on goods and services by the PRA—that cannot be implemented without the support of the provinces.
- Restructuring of the FBR including appointing a Deputy Chairman for Inland Revenue and Deputy Chairman Customs. The restructuring and new appointments will be made before end of November, 2019. In the interim period, the FBR headquarters will be restructured on functional lines by segregating Inland Revenue and Custom Operations into North and South Zones.
- On the customs side, there will be two members for customs north and south operations, member transit trade and export and member legal and accounting.
- There will be four director generals in grade-21 looking after exports and transit trade, strategic planning, investigation and prosecution, valuations, input-output coefficients.
- On the Inland Revenue side, there will be member IR operations north and south, member taxpayers’ audit and member legal and accounting.
- There will be six director generals looking after investigations, strategic business analysis, international tax compliance, reforms & automation, VAT and broadening of the tax base and amnesty regime.
- The approved restructuring includes a Tax Policy Board that will be assisted by member human resource management and administration, member strategic planning, chief management information system, and member facilitation and taxpayers’ education.
- There will be six director generals in addition to four members. The PM approved the post of chief management officer and also to initiate the process of total automation of the income tax architecture of the FBR.
- In the Revenue Division, there will be secretary revenue, additional secretary customs policy, additional secretary income tax policy, additional secretary sales tax and federal excise and additional secretary international conventions.
- The prime minister also approved to restructure the existing regional tax offices, large taxpayers units, customs collectorates and district tax facilitation centres on fast track basis.
- It was also conditionally approved to enhance the FBR’s collection charges from 0.65% of the total collection to 1% over a period of three to five years subject to increase in collection. The first review of collection charges will be undertaken after June next year”.
The important question: With the above actions, if implemented successfully, would the country be able to achieve the fiscal consolidation that is one of the daunting challenges faced by Pakistan? Successive governments have failed to end harmful tax policies and reduce wasteful expenses. No serious effort has been made by any government, military and civilian alike, to broaden the tax base through lowering of rates and effective enforcement.
It is an undisputed fact that FBR has perpetually and miserably failed to tap the real tax potential despite imposing all kinds of oppressive taxes, including many introduced by the present government through the Finance Act, 2019 [Taxes, prosperity and welfare, Business Recorder, August 9, 2019, Rationalising tax system, Business Recorder, July 19, 2019 and The Money Bill, Business Recorder, July 5, 2019].
It is strange that in the three-year plan approved by Prime Minister nothing is available about simplification of taxes. Whenever there is a demand or debate about simplification of tax codes, ease of compliance, facilitation of taxpayers and improvement in tax administration, the worst resistance comes from top notches of FBR, who think they are the ultimate wizards and nobody else has a right to talk about tax base-broadening reforms aimed at accelerating economic growth, promoting investment, boosting up savings and to ensure fiscal consolidation. FBR now headed by a renowned chartered accountant must go for these and tell the self-acclaimed wizards to read ‘OECD Tax Policy Studies No. 19’, crux of which is quoted above.
As explained in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018], Pakistan needs a paradigm shift in tax policy and revamping of entire tax administration—establishment of a tax authority that is capable of generating sufficient resources for the federal and provincial governments, It should be the top priority of the government. Through democratic process, all the provincial parliaments can vide Article 144 of the Constitution of Islamic Republic of Pakistan jointly establish autonomous tax agency, comprising specialists in all the required areas. Taxpayers should be facilitated rather than forced to comply at multiple levels and that too at very heavy costs.
For effective running of FBR and other tax agencies at various levels, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with a rational tax policy. Tax reforms or three-year-plan approved by Prime Minister are meaningless without an efficient tax administration and investment-conducive tax policy—see details in ‘PTI and tax reforms’, Business Recorder, August 17, 2018.
The main emphasis of the PTI Government is still not on low-rate taxes on the broadest possible tax base, taxing the rich and mighty through alternate minimum tax and property tax according to the size of the house/office. Along with these measures, it is vital to bridge the monstrous tax gap which according to official claims is not less than 70%, the collection of which is essential as it can wipe out the entire fiscal deficit. This is, however, not possible unless federal government, after consultations with provinces, introduces harmonised sales tax on goods and services and establishes a single agency to monitor all inflows and outflows and document all the transactions relating to acquiring of assets. We have been advocating for it since long but nobody has seriously considered it, not even the PTI Government until recently.
The main challenge before the PTI government is to optimize tax collectionwithout hampering business growth and investment clime. It requires massive structural reforms, abolition of the existing complicated tax laws and procedures. New simple tax codes/procedures should be enacted in English and with versions in Urdu and local languages—details in ‘Need for National Tax Authority’, Business Recorder, October 20, 2017. Tax agencies should be equipped with modern Tax Intelligence System sending quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations. For promoting tax culture, it is equally important that there should be prudent spending of public money for welfare of masses through a transparent process. This perspective is still missing, not even made a part of the long-term planning approved by the Prime Minister.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)