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Presentation On
Enhancement Of Tax
Revenues
26th April 2010.
Background
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Pakistan needs additional revenues to meet
the social and infrastructure needs and thereby
grow annually at a reasonable rate. Tax Gap is
more than 50% of what is being collected at
present.
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In order to achieve this there have been
efforts to reform FBR and introduce tax policy
measures.
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In the last 10 years (barring two years) tax to
GDP ratio has almost been stagnant at around
10% .
Why has this been so?
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First of all under WTO and other international commitments
Governments substantially reduced Custom Duty and Excise Duty
rates. The plan was that this reduction would be made up by the
introduction of GST. This did not happen adequately.
Inequitable and inadequate levy of taxation vis a vis their
contribution to GDP. For example Agriculture and large components
of Services sectors.
Temptation of GOP to enhance non-tax revenues at the cost of tax
revenues. Example Petroleum levies, surcharges and profits of SBP.
Clearly the present level of 10% tax to GDP ratio has to be
enhanced and we agree that the target should be to enhance this to
14 to 15% in the next 5 to 7 years.
The question is ----How to do it ?
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Obviously it would require a major effort by FBR and Provincial
governments and the will and commitment of the GOP.
Fortunately a roadmap is already available in the form of Tax
administration reforms programme (TARP}funded by WB and DFID.
We strongly believe that this needs to be religiously followed by
GOP till satisfactory completion. In fact the programme could be
suitably modified if and where required.
Revenue mobilization efforts could be bifurcated in two parts:
1. Tax administration reforms (FBR)
2. Tax Policy Reforms
Tax Administration Reforms
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An effective and efficient tax machinery (FBR) is required to be able to meet
the challenges of revenue collection . In a growing economy the tax
collection machinery has to run fast to standstill.
Fair amount of progress has been made in restructuring through the
creation of LTU’s RTO’s which has put all Internal Revenues under one
roof.
However complete integration of Internal Revenues (Income-tax , GST and
Excise Duty) is still a long way . The proposed policy to create Inland
Revenue Service has been implemented.
Human Resource policy initiatives like career planning, training,
compensation of staff and their working environment also need further
action.
BPR and Automation --- We believe it is the introduction of effective
systems and procedures which can achieve the overall objective of an
efficient and transparent FBR
Tax Administration Reforms
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Introduction of Data Warehouse (NEXUS). We believe this is the key
to achieving expansion of taxpayers base—both existing and
potential. A serious effort is needed to make use of the data already
available and pursue further access to the areas not yet covered.
Both internal data and third party information needs to be collected
and then used for cross-checking returns submitted or not submitted
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With E-filing of returns for income-tax, sales tax and excise duty by
and large in place, there is a need to effectively automate the
processing of these returns which should ensure elimination of
discretion and substantial reduction of human interaction.
Tax Administration Reforms
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Audits--- Systems, manuals and training of staff seem to be in
place. There is now a need to pursue planned and professionally
supervised audits starting from LTU’s and going down to RTO’s.
Care should be taken not to harass genuine tax-payers.
Moreover, audits of W.H. Agents have to be undertaken. In
addition to own staff of FBR, outsourcing of special audits has
been outsourced to practicing Chartered Accountants .
Customs- In the case of customs, PAACS (pilot project) needs to
be enlarged in its scope and rolled out to the entire country
forthwith. This will bring efficiency and transparency badly
needed for international competitiveness of Trade.
FBR should keep the lead role and pursue for the early
implementation of National Trade Corridor project of GOP.
Tax policy
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Three basic principles to be kept in mind:
1. Make base as broad as possible.
2. Keep tax rates as low as possible.
3. Make compliance simple and non-compliance
expensive.
Ideally taxation as a policy has to be levied equitably
across the board on all sectors of the economy so that
contribution of each sector to the GDP is
proportionately reflected in the collection of taxes.
Presently this is totally disproportionate. For example
manufacturing sector contributing 18% to GDP
contributes almost 2/3rd to the taxes whereas
Agriculture and Services Sectors contributing almost
80% to GDP contribute less than 1/3rd to the taxes.
Provincial Governments
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Tax on Services---- Primarily a constitutional issue
as Provinces are authorized to levy and collect.
Present arrangements with Provinces could be
expanded to include more services and FBR collects
taxes on their behalf and the money so collected is
transferred to them, This role could eventually in
Medium to Long-term be passed on to the provinces
after due training.
Provincial Governments
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Capital Gains tax on Property--- There is no reason for the provincial
governments not to levy CGT on Property as per law. Major effort
in this regard is to establish title of ownership and realistic valuation
by Provinces. Once this is achieved then present CVT levied by
GOP can be withdrawn.
Agriculture income-tax---- Some taxation is in place but totally
inadequate. Move should be towards tax on income rather than on
holdings in the long term. In the meantime present thresholds should
be revised downwards so as to improve collections from this
source.
Motor Vehicle tax--- Present system of registeration is cumbersome
and prone to corruption. This needs to be computerized preferably
centrally--- maybe by NADRA. Moreover, annual MV tax should be
collected as a fuel charge on Petrol and Diesel. Oil marketing
companies will collect and disburse to the Provinces. This will be
equitable, efficient and avoid corruption.
Federal taxes
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CGT on securities--- 10% CGT to be levied on short term gains (less
than 12 months). NIL on long term holdings.
Income-tax---- Concept of single rate of tax for all type of income
tax payers to be considered ---- Rates to be between 12 to 18%.
Deduction of 10% for Medical allowance and Mortgage interest to be
allowed.
Individual income tax exemptions to be withdrawn.
Stockbrokers income to be taxed as regular income.
Rationalization of with-holding taxes (long term) so as to achieve
10% rate across the board to be charged on income and nothing on
transactions .
Corporate tax.
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Avoid tax incentives.
Keep tax rates competitive--- Reduce rate from 35% to 30% @ 1%
per annum over 5 years ( except Oil and Gas and Banking sectors)
Withdraw corporate tax exemptions.
Small companies—include old companies falling within the eligibility
criteria --- so as to benefit from lower rate of 20%.
Review and revise WWF and WPPF laws so as to charge tax on the
Salary and Wages paid as opposed to Profits.
WHT---- make this adjustable for formal economy.
Corporate tax to be charged on the profit of the State Bank of
Pakistan .
General Sales Tax (GST).
Now Proposed VAT
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Present GST is proposed to replaced with VAT
w.e.f 1st July 2010.
Threshold limit of Rs. 5 million is being
enhanced to Rs. 7.5 million which is to high and
need curtailment.
Substantial number of exemptions are proposed
to be withdrawn. These would have serious
implications.
Systems need to be improved and enforced for
Smoother implementation of VAT.
Base to be enlarged substantially and gaps in
compliance plugged.
Federal Excise Duty (FED)
Luxury goods to be charged FED @10%
 Petroleum Development Levy (PDL) and
any surcharges to be converted into FED
 FED rates on Cigarettes to be further
enhanced.
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Custom Duty
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Further Regulatory Duty on any item should not be
levied in the present economic scenario.
An exercise needs to be undertaken to know the effect of
substantial reduction in Oil and other commodity prices
to work out potential revenue loss on this account.
Further rationalization of Tariff reductions should
continue to achieve the end objective of 3 Tariff
Bands(other than exceptional items like cars etc.) of:
0%------ raw materials
5%------ intermediary goods
10%---- Finished goods
This may be achieved over the next 5 to 7 years.