The State Bank of Pakistan (SBP) in its annual report 2020/2021 on State of Pakistan’s Economy released a day earlier said there was a need to expand revenue by aligning the property values with market prices.
In this regard, FBR has revised the valuation of immovable property rates in July 2019 for various cities. “There is a need to ensure continuity in this exercise to remove the disparity between the property values and market rates,” the SBP said.
The issues of widening fiscal imbalance and declining tax-to-GDP ratio Pakistan, the government has initiated tax policy reforms in past few years. These efforts were further streamlined under the IMF-Extended Fund Facility (EFF) program in 2019/2020.
In overall terms, the ongoing tax policy reforms in the country, like the elimination of preferential general sales tax rates, phasing out income tax exemptions, using third party data sources, etc., are in line with the best practices identified in the literature. However, there is a need to widen the scope of these efforts to ensure a sustained increase in tax base,.
Corporate incomes tax reforms. To improve the base for direct taxes, Pakistan introduced wide-ranging reforms in CIT in March 2021. These included: (i) withdrawal of tax exemptions on 36 categories; (ii) reversal of reduced tax rates to normal rates on various categories; and (iii) conversion of investment and income tax exemptions to tax credits, for instance, persons engaged in coal mining, start-ups certified by Pakistan Software Export Board, export of computer software or IT exports etc. These measures are likely to add around Rs 140 billion in the overall FBR taxes in 2021/2022. To give further support to revenues, excess profit taxes may be imposed on selected sectors on the basis of profitability.
Personal income taxes: PITs in Pakistan are collected through progressive rates on various income slabs. The tax rates on salaried and non-salaried individuals were also increased in FY20 and were kept unchanged in 2020/2021. The revenue in this category may be propped up by increasing the tax rates on the highest slabs or by the introduction of a temporary surcharge.
Consumption taxes: FBR has introduced various reforms aiming at Simplification of GST, and elimination of preferential rates including (i) replacing GST zero-rating regime on five export-oriented sectors (textile, leather, carpets, sports goods, and surgical goods) with normal tax rates in 2019/2020; (ii) eliminating preferential GST rates for sectors like sugar and steel in 2019/2020; (iii) extending GST to e-commerce sales transactions through Finance Act 2021. This step was taken after the surge in sales through e-commerce platforms during the lockdowns. Although currently, the contribution of this head in the total collection is negligible, this is expected to grow with expanding size of digital transactions. The tax base can be further enhanced by curtailing exemptions and improving tax design. Specifically, the tax incentives given during Covid can be gradually rolled back once the economic recovery takes hold.
Capital income taxes: To minimize tax evasion, FBR has initiated the use of third-party data sources through Maloomat Tax-Ray from September 2020. This system collects third-party information (such as banks) for individuals’ assets and withholding deductions, which help in determining accurate tax liabilities. Moreover, it also facilitates the tax-payer in evaluating the accurate tax liability while filing the tax returns.