- Key taxation trends in Pak in need of reform
With the ongoing budget debate, there is increased focus on the need for fiscal reforms to be achieved chiefly by a turnaround in the taxation system. Taxation laws are a set of laws to derive revenues for the Government to function and service the citizens with the aim of improving their quality of life while continuously improving the facilities and infrastructure provided.
Winning the confidence of the masses, removing the fear of harassment and changing the ill-repute of the FBR are the biggest challenges. Without these, no reforms can work to achieve the full potential of our taxation system
Pakistan has a complex taxation system with a focus on indirect taxes with over 70 different taxes. This has led to several sets of laws dealing with specific taxation areas. Below are some major issues in dire need of major reforms to achieve our taxation potential:
Extremely Few Income Tax Return Filers: From approximately 3.5 million filers to just above 1.4 million for the tax year 2017 with a filing deadline ending in 2018, this is an area of major concern. The filing for tax year 2018 is still ongoing. In a country of over 220 million, this amounts to just 0.6 per cent of the population.
Some steps have been proposed in the budget to address this challenge including requirement to register for tax after undertaking some transactions and the duty of the FBR to register those who paid withholding taxes, but are not registered for an NTN, using the data to compute the imputed income.
Undocumented Black economy: This builds up from the above issue. A larger proportion of the economy, some estimates put the number close to 100 per cent of the GDP, is believed to be undocumented. This by any standard is massive and a major concern. Low literacy rate, FBR’s fearsome reputation, low public service delivery and rampant corruption are amongst the major reasons for this massive level.
The steps proposed in the budget to counter this include requiring any property transaction over Rs 5 million to be done through banking channels, otherwise hefty penalty and tax losses would be incurred.
Taxation Complexities and Ease of Doing Business: Pakistan has a very complex taxation system and as per the data of the World Bank, is placed on 136th which though an improvement from the ranking of 147 out of 190 countries, is still worrying. The complex, non-harmonised and multi-layered laws in operation not only make it more expensive but also time-consuming for businesses.
Registering a business for taxation, particularly sales tax, is a very complicated and HR-driven in this age of technology and when we already have databases and systems like IRIS and STRIVE in operation by the FBR. Steps needs to be taken to automate and facilitate these processes.
Harmonisation Issues: The issue of lack of harmonisation among various taxation laws has increased manifold after the devolution of Sales Tax on Services regulation and administration to the provinces and each Province setting up its own Revenue Authority for the same, as a result of the 18th Amendment. In an era, when countries are agreeing to facilitating arrangements like the European Economic Area, making borders irrelevant in terms of economic activities, Pakistani businesses are facing the challenges of a bygone era while expanding in other provinces within the same country. The regulations are as if these are not provinces of one country but different countries sans economic treaties.
There needs to be harmonisation between various provincial taxation bodies among themselves as well as with the FBR on various issues particularly that of jurisdiction and tax adjustments.
High Costs of taxation: In addition to having one of the most complex taxation systems in the world, Pakistan also has higher taxation rates than other countries in the region. This adversely impacts the investment climate.
Furthermore the taxation rates are also several times that of the cost of tax avoidance, making it an attractive proposition for some businesses to keep operating beyond the radar.
Moreover, the highly complex nature and high-handedness of the taxation regimes also translates into further costs for taxpayers in terms of the time and administration required to ensure compliance. From a pure business perspective, this makes tax avoidance an attractive proposition keeping in view the weak and slow judicial system.
Structural Issues: These including confusing and highly subjective taxation laws, focus on indirect taxes, ancient systems, malpractices, singular focus on revenue collection, and harassment of existing taxpayers rather than using the same resources to focus on expanding the tax base and a general ill-perception have all contributed to the current state of affairs and needs to be reformed if the situation is to improve.
Winning the confidence of the masses, removing the fear of harassment and changing the ill-repute of the FBR are the biggest challenges. Without these, no reforms can work to achieve the full potential of our taxation system.
The above issues require serious efforts to address them. With CPEC and its associated possibilities materialising, now is a good time to ensure these reforms are made to achieve the full potential of not only the existing economy but also the developments accruing.