KARACHI: Separate targets should be set for revenue from existing and new taxpayers, this was recommended Pakistan Business Council (PBC) in its recent letter sent to Khusro Bakhtiar, Federal Minister of Industries and Production.
It said that the targets for existing taxpayers should be in line with expected growth in the nominal GDP. “Tax target from new taxpayers should be set in line with the evolving capability and capacity of the FBR.”
The PBC said that Pakistan’s taxation regime needs fundamental reforms for sustainable growth of both the country and its tax revenues.
These reforms are contingent on the political will to pursue those outside the tax base and must address the FBR’s capability and capacity to implement. The reforms will take time to bear results.
In the meantime, any short-term, knee-jerk revenue seeking actions will undermine taxable revenue and hence, tax revenues in the long run.
Taxes should be simple, predictable and supportive of business growth and for the formalization of the economy. The aim should be for higher tax revenues to flow from the combination of improved profitability of existing taxpayers and from broadening of the tax base.
Industry, which presently contributes taxes disproportionate to its share of GDP must be facilitated to create more jobs, boost value-added exports and promote import substitution.
The impact of taxes on manufacturing vs. commercial importers should be reviewed to support the former. FBR and the formal sector should work in partnership to broaden the tax base.
The earlier tax credit to encourage taxpayers to transact with the formal sector should be revived. The vast amount of information on non-taxpayers provided by withholding agents should be mined. Higher advance taxes should be levied on utility bills of non-tax filers.
Corporate entities, especially those listed, which operate to a higher standard of governance and accountability and their shareholders must not be penalized in comparison to unincorporated entities and their owners, otherwise the incentive to incorporate will be undermined.
There should be a level playing field in the holding periods for capital gains tax on sale of company shares vs. real estate.
For some time now, FBR is given an unrealistic tax target, which in the absence of resources and capability, force it to extract more tax from existing taxpayers. For FY 2022, the mooted 27 percent higher tax target is an example.
It is more than twice the expected nominal growth of the economy.
Significant changes are required in the structure, resources, and technology of the Federal Board of Revenue (FBR) before setting targets.
Tax refunds due should be excluded from revenue when assessing performance against either of these targets.
Minimum tax based on turnover is fundamentally flawed and acts as a barrier to entry of new players as it raises the initial investment required to cover tax payable in early loss years.
FBR’s reliance on minimum, advance and withholding taxes has grown sharply as this is an easier way than assessing taxable profits. This reliance should be phased out gradually.
Levying minimum tax on SEZ enterprises and others in their tax holiday periods defeats the purpose of the tax holiday.
The use of cash in the economy should be discouraged. The Punjab Government’s incentive to reduce GST on some card payments is an example to encourage non-cash transactions.
Restrictions on use of cash above a certain limit would also assist.
The transit treaty with Afghanistan has been misused through diversion of goods to Pakistan. As the treaty has expired, Pakistan can renegotiate to put quantitative and qualitative restrictions on what can transit, insist on letters of credit, charge duty and GST on import which would only be refunded to the Afghan government on exit, track and monitor containers, strengthen inspection of empty containers returning to Pakistan and make physical controls along the border stronger.
The civil and military authorities need to be on the same page to do this.
Electronic Data Interchange with key trading partners should be deployed to check under-invoicing of imports.
The provinces have little incentive to check smuggling as customs duty and GST evaded are federal taxes and do not hurt their revenues. Provinces may be incentivized to conduct raids on shops that deal in smuggled goods.
Positive lessons from the success of cell phone registration with PTA and Urdu language labelling requirement for imported food items can be applied to other smuggling prone goods.
