The coalition government of Tehreek-i-Insaf (PTI) in its first 100 days has to address a number of daunting challenges on many fronts (internal and external) e.g. countering aggressive policy of the USA and its allies, neutralising a strong and hostile Opposition, uprooting terrorism, improving law and order situation, countering extremism, eliminating corruption, cleaning economic mess, reforming judiciary and civil service, providing education and healthcare to all and empowering local bodies etc. The biggest challenge, however, is to reform the oppressive and outmoded tax system that is at the root of the prevalent fiscal mess as well as responsible for widening the rich-poor divide and economic disparities.
All efforts in the name of tax reforms (so-called) undertaken in Pakistan till today have miserably failed. These were nothing but mere patchworks here and there. Restructuring and redesigning of tax system has not been given any serious thought by any government. For reforming the outdated tax machinery, we need comprehensive structural reforms.
The Federal Board of Revenue (FBR) needs to be run by a competent board as a short-term reform measure before it is finally merged into National Tax Authority [NTA]. In the long-term, Pakistan must have a single tax agency that collects taxes as well disburses benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitisation) will be a great step towards e-government model for the country that is presently non-existent. The model of Canadian Revenue Authority (CRA) is worth adopting after modifications suiting our peculiar requirements.
Unfortunately, the present tax collection by the federal and provincial governments is highly unsatisfactory. The real potential at federal level alone is not less than Rs8 trillion, whereas FBR is not collecting even half of it. The same is the position of provincial tax authorities. All broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is only seven per cent — in overall national revenue base (tax and non-tax revenue) it is around eight per cent. This has made them totally dependent on the federal government for transfers from divisible pool or/and direct grants.
The performance of provinces in collecting agricultural income tax is extremely pathetic. This is a common issue both at the federal and provincial level arising from sheer absence of political will to collect income tax from the rich and mighty — meagre collection of agricultural income tax that is less than Rs2 billion by all provinces together in fiscal year 2017-18 — is highly lamentable.
Pakistan will have to increase collection at all levels of governments to bridge monstrous fiscal deficit that has reached 6.6 per cent of GDP (Rs2.3 trillion) for the fiscal year 2017-18. The new federal and provincial governments must immediately prepare finance bills to tax the rich and mighty through alternate minimum tax of 2.5 per cent of net worth and property tax according to the size of the house/office. Along with these two measures, bridging tax gap of nearly 70 per cent in collection of income tax, sales tax, customs and agricultural income tax can wipe out the entire fiscal deficit in 2018-19. This is, however, not possible unless the federal government, after consultations with provinces, introduces harmonised sales tax on goods and services and establishes NTA.
All existing tax authorities at the federal and provincial levels should merge into NTA. The NTA should be modern, automated and efficient, manned by competent personnel and run by an independent board of management comprising government officials, business representatives and professionals. The autonomous status of the NTA can be ensured like that of CRA (its board of management is directly accountable to Parliament through Canadian Minister of National Revenue).
In the coming months, the following tasks should be assigned to FBR by Finance Minister Asad Umar:
n Filing of returns/assessment of all the persons who paid substantial tax in advance through withholding mechanism but have not filed returns.
n Registered companies as per SECP’s record are 84,000 whereas income tax returns are filed by less than 30,000. All companies that have not filed returns should be issued notices and assessments should be finalised before 20-06-2019.
n Retrieval of tax loss by taking action against the beneficiaries of the loan write-offs under the law [Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001].
n Recoupment of tax loss by transfer pricing of three sectors namely: pharmaceutical, telecommunication and beverages.
n On the basis of following withholding tax information, all the persons who did not file income tax returns should be brought to tax net by the respective LTUs/RTOs:
— Tax deducted on mobile bills [section 236] exceeding Rs36,000 annually.
— Tax deducted on commercial electricity bills [section 235] exceeding Rs36,000 annually.
— Tax deducted on domestic electricity bills [section 235B] exceeding Rs60,000 annually.
— Tax deducted on banking transactions [sections 231A, 231AA and 236P] exceeding Rs25,000 annually.
— Tax deducted on profit on debt [section 151] exceeding Rs36,000 so that we can know the amount of investment wherefrom this profit on debt was earned.
— Tax deducted on purchase and sale of immovable properties [section 236C, 236K and 236W] to know the amount of investment in immovable property exceeding Rs10 million.
— Tax deducted on purchase/registration of car [section 231B(1), (2) and (3)] to know the source of amount invested in purchase of car.
— Tax deducted on lease of car [section 231B(1A)] to ascertain the source of investment made and sources wherefrom monthly installments are paid.
n Assessments/amended assessments in the case of all non-filers positively by 30-04-2018.
n Scanning and X-raying of each and every incoming and outgoing container.
n Recouping of loss of custom duty by tracking down under-invoicing through data/information matching
n Crackdown on smuggled goods.
FBR should not have any role in framing tax policy. Tax policy should be under Policy Board as envisaged under 6 of Federal Board of Revenue Act, 2007. On national level, a permanent tax policy board should be established in terms of Article 156(2) of the Constitution of Pakistan as economic and financial planning is no more a federal subject alone. The policy board should have a permanent secretariat and its role should be that of a think tank [it can be housed in Pakistan Institute of Developmental Economics (PIDE)] to recommend to the federal and provincial governments and assemblies the tax policies for growth and meeting the needs of the country.
Pakistan needs a paradigm shift in tax policy by revamping of entire tax administration. Establishment of NTA capable of generating sufficient resources for the federal and provincial governments must be the top priority. Through consensus and democratic process, all the parliaments can enact laws for establishing autonomous NTA, comprising specialists and professionals that would facilitate people to deal with single body rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
Tax collection and compliance at national level cannot be improved without establishing NTA and introducing an integrated Tax Intelligence System that can correlate sales tax collections on goods and services with income tax returns and monitor all transactions. A fully automated, professional and efficient NTA would alone be in a position to improve capacity by detecting tax avoidance and evasion through Tax Intelligence System.
Before establishing NTA, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with development-oriented tax policy. Tax reforms are meaningless without an effective tax administration and rational tax policy. As a medium-term reform measure we must concentrate on debating and finalising the structure of NTA for achieving the goal of a functional, efficient and integrated tax administration. The model of Canadian Revenue Agency (http://www.cra-arc.gc.ca/ menu-eng.html) is worth-studying. Further details can be seen in Towards Flat, Low-rate, Broad and Predictable Taxes, available at http://primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf
If PTI government wants optimum collection of taxes fairly and without hampering growth, it is imperative to abolish the present tax laws and enact new ones. Collection of taxes should be through a single national authority, NTA, as suggested above. NTA 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 necessary that there should be prudent spending of public money for welfare of masses through a transparent process.