Dr Ikramul Haq directly interacted with the top management of the FBR and highlighted serious issues in the taxation system of the FBR and suggested policy measures to address such issues. Addressing the FBR chairman, members and all officers (BS-17 and above) here at the FBR House, Dr Haq gave a detailed presentation on resource mobilisation challenges.
In his lecture, he informed tax authorities about the reasons which resulted in making FBR dysfunctional over a period of time. He raised question what the outcome was of cases of parliamentarians selected for audit through random balloting last year. "What was the result of the audit of parliamentarians including Prime Minister Imran Khan whose case was selected for audit in the past? Parliamentarians were selected for audit for Tax Year 2015-16 by the FBR by employing a parametric selection mechanism through a computer ballot. If audit has been completed, whether assessment orders of the parliamentarians have been issued and served on them," he questioned.
"Even after levying various oppressive taxes, revenues are still below the real potential which is not less than Rs 8 trillion. The claimed collection of Rs 3.3 trillion by the Federal Board of Revenue (FBR) last year was after blocking refunds of billions of rupees and taking advances of coming tax years. The government must go for fundamental reforms to replace the outdated and complex system with a simple, certain and low-rate taxation," top tax expert said.
The second major issue is the complexity of the tax codes and amendments made through SROs have not been made part of the federal tax laws, creating problems for the taxpayers.
Thirdly, disputes between FBR and provincial revenue collecting agencies on input tax adjustments, etc, have resulted in problems for the taxpayers like telecom sector.
Fourthly, the FBR needs to address the serious capacity issues within the tax machinery. He proposed establishment of National Revenue Authority (NRA), which can facilitate people to deal with a single revenue authority rather than multiple agencies at national, provincial and local levels. The mode and working of NRA can be discussed and finalised under the Council of Common Interests and its control can be placed under National Economic Council.
It is proposed that all tax collection agencies in Pakistan may be merged into a single entity called National Tax Authority (NTA), to ensure effective enforcement of tax laws both at federal and provincial levels. It would facilitate taxpayers to deal with a single agency and taxes can be collected efficiently by pooling resources at one place, having centralised data warehouse and avoiding multiplication of expenses.
He strongly proposed that there is an urgent need to reconsider equitable distribution of taxing powers between federation and the provinces. Provincial autonomy without taxation rights and equitable distribution of income and wealth amongst all the federating units is meaningless. "We cannot come out of perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenues and exclusive right to utilise them for the welfare of their inhabitants," he said.
He also raised question why the Income Support Levy (ISL) has not been recovered despite passage of over 4-5 years. He said the government must go for lower taxes with broader tax base. "Unless it is done, collection will remain far below the potential. The entire business climate is destroyed by imposing over 65 withholding tax provisions, easy collection through exorbitant sales tax on petroleum products and taking advances from big companies."
One of the major factors behind non-corporatisation and documentation of economy is extremely high corporate income tax rate and exorbitant sales tax rate. Till May 31, 2018, total companies registered with Security & Exchange Commission of Pakistan (SECP) rose to 86,876 whereas corporate income tax returns were filed by less than from 35,000. According to the latest report of the SBP, active taxpayers increased from 0.76 million as on June 30, 2013 to 1.2 million as on March 31, 2018. This number is extremely low. The latest figure of 1.55 million is still very low. Some 196,000 entities are enrolled in the sales tax system but only 35,000 actually pay any tax, Dr Ikramul Haq shared data.
Dr Haq highlighted that key challenges being face by the FBR included revenue inadequacy, lack of capacity and skill-based training, preferential treatment of certain sectors, horizontal inequity and higher tax incidence on some sectors, complicated tax codes, out-dated structures resulting from ad hoc decisions, excessive use of withholding taxes, unjustified exemptions and low compliance and weak enforcement.
He said the target for FBR for the current fiscal year was originally fixed at Rs 4.45 trillion which is now reduced by 3.5 percent. It was not be able to collect Rs 4 trillion in 2017-18 and shortfall forced the government to resort to borrowing more and more from commercial banks. In the past, the governments have been resorting to levy more tax on POL products and that too without going to the Parliament. The regressive taxation is affecting businesses and retarding growth. The administrative burden of tax compliance is one of the highest in Pakistan where firms have to make 47 payments and spend 594 hours (or 74 man days per year) dealing with tax regulations compared to 12 payments and 175 hours in high income OECD countries.
He said the success parameters for reforms included administrative capability, demonstrable revenue gains, early winners, piecemeal or comprehensive and coordinated reforms in tax policy and tax administration and political support. He raised a number of questions, "What are the three most serious challenges for generating adequate resources? Why is tax collection inadequate and procedures cumbersome? What should be the central strategy to raise required resources in the coming decade? What should be priorities of any tax reform agenda? Who should make policy taking all stakeholders on board? Would an external advisory committee/ task force on tax policy also help? What would be the right sequencing of tax policy reforms? If so, what would be a reasonable roadmap for successful reform on each major tax?"
He said the prevailing tax system is unjust, outmoded and unproductive with high taxes, yielding low revenues and operationally complex, time-consuming and costly. It is not taxing the people according to their ability to pay but relies mainly on indirect taxes that are regressive, as these take a much larger percentage of income from low-income families than from high-income earners.
For implementation of reforms, there is a need for administratively feasible political consensus, three-core stakeholders (tax administration, taxpayer and policymaker) to be on board, parliamentary commission to evolve broad national consensus and need to strengthen fiscal analysis capacity at FBR and Revenue Division of Ministry of Finance and there should be twin track reforms of tax policy and tax administration, he added.