Daily Times

Ever since Pakistan has been created, we, as a nation, have never come out of the financial crises. There could be certain times when it got slightly improved, but most of the time, we have been struggling to improve our financial position. The primary causes of this could be political turmoil, war on terrorism, lack of political will to improve, changing of economic directions and strategies with change in government, frustrating foreign exchange regulations, unwillingness to disclose income and pay taxes by taxpayers, and so on. Presently, the situation is not much different, and it can be rightly said that this type of worst economic crisis has never been witnessed. We are worried about paying the debt of even billion-dollar financing. If we look at our tax revenue targets for the fiscal year 2022-23, they have been set at Rs 7.47 trillion, as compared to last year’s target of Rs 6.05 trillion. The composition of tax revenue is quite interesting, where approximately 37 per cent to 41 per cent constitutes income tax. Most of this is collected indirectly through advance tax and withholding tax; 38 per cent to 41 per cent sales tax; 11 per cent to 13 per cent customs duty, and federal excise duty of five per cent to six per cent respectively. However, the question remains how could the set targets be achieved when economic activity is significantly declining and what tax revenue measures could be taken to support this shattered economy?

Before we proceed further and discuss the tax revenue measures, it is essential to understand the reasons for the current decline. The basic reasons would include a reduction in imports due to restrictions, which is one the main source of tax collection; the decrease in consumption of POL products; the decrease in collection of provincial sales tax; the significant increase in the undocumented sector and black economy due to prevailing uncertainty. Besides tax revenue, the non-tax revenue has also gone down due to the absence of surpluses available with the State Bank of Pakistan and the reduction in the gas infrastructure development cess.

To give early resolution to tax disputes, which ultimately impact tax revenue, the number of independent appellate forums should be increased.

Now, to support these declining numbers of tax revenue, to be specific, there could be certain short-term tax-related measures that are required urgently, before we enter a no-recovery zone. Again, bringing political stability to the country and giving some sort of certainty to investors is needed. The drive must be started with identifying the areas, where black money is generally parked and remain out of the tax net, which would commonly include real estate, gold, foreign exchange and bearer securities.

Using the latest information technology, the system of real estate can be digitalised, which means entire details of the transfer, of any sort of immovable property, located in Pakistan should be readily available and accessible. On the other hand, the local trading of gold should be allowed to be done in designated areas, and that too should be regulated. Anyone interested in buying foreign currency locally should be allowed, but only through banking channels, which means dealing in hard cash should not be allowed at all. Even if a person brings foreign currency from another country on travel should be asked to transfer the same to the bank account before leaving the airport. It should also be considered that people also park their black money in bearer securities, so these should only be issued in the name of the person. Besides this, there should be a complete ban on cash cheques, which are circulated in the market for months before being encashed, rather a digital mode of payment should be made applicable in a phased manner. Although it is not very easy to do, considering the volume of the informal sector, this should be done straight away, as when transactions are documented, it would be easier to collect more revenue.

The other short-term measures would include reducing tax expenditures by way of rationalising exemptions and tax credits. As generally, these tax expenditures give the perception of preferential treatment towards one segment of society. For instance, the agricultural sector contributes a lot to the GDP of the country and is not taxed much, which creates resentment amongst those taxpayers, who earn less but pay the tax regularly. Instead of these benefits, the tax rate should be reduced and made uniform. It is sometimes said that the Federal Board of Revenue lacks data, which is contrary to the facts, as the data related to utility connections holders, bank account holders, passport holders, property transferors, and transferee, the unregistered persons reported via withholding agent channels, etc. is already available, but the need of the time is to effectively use the data by synchronising it, to broaden the tax base instead of working on tax depth to bring more and more taxes from the existing taxpayers only, which at present seems the focus.

It is a universal fact that when there is a significant difference between the inter-bank rate of exchange and the open market rate, people use illegal means to transfer the money to get more advantage on conversion or they would delay their remittances for some while to get the best rates, which again results in a shortfall of foreign exchange and the resultant tax that could be collected on it. Therefore, this gap needs to be bridged. Similarly, in a phased manner, the CNIC condition should be made applicable to every segment when dealing with unregistered persons to discourage parallel and the cash economy. In the same way, to have more revenue, issues of exporters, be it goods or services, especially IT services, should be resolved, which would attract more foreign exchange to the country.

In the longer run, the country will have to move towards import substitution as a gradual shift in consumer patterns will have to be done, but again, this can be done if local manufacturing is promoted and supported from the state level. It should also be considered that presently, major tax revenue is collected indirectly, even under income tax, which is a direct tax. This is required to be ended, and direct tax should be restored in its true spirit, which further means that regimes like final and minimum should have no space in the law and only normal tax regimes should be kept. There is also a need to work on regaining the taxpayer’s confidence, especially in dealing with tax administrators, as people prefer to pay double tax and remain non-active taxpayers, instead of becoming a filer due to the subsequent harassment and malpractice, they will have to face once they become registered. The trust in tax administrators can further be gained if practices like attachment of bank accounts are discouraged and if the taxpayers get their due refunds promptly without any human intervention.

It should also be considered that the disputes and disparity between the federal and provincial laws should be removed and there should only be one collector, even in the case of sales tax on services. Moreover, the sales tax rate should be brought down to a single-digit sales tax rate and in that case, it can be considered that input tax should not be allowed which would save both time and effort for the taxpayer and administrator. At present, the Federal Board of Revenue is found to be involved in dual and conflicting roles of tax administrator as well as tax policy maker. This role should be segregated. To give early resolution to tax disputes, which ultimately impact tax revenue, the number of independent appellate forums should be increased. Furthermore, to give preferential treatment to the registered persons certain services like transfer of any property, issuance or renewal of passports, etc. should only be allowed if the person has got the National Tax Numbers (NTNs).

Until and unless the focus is not shifted to an increase in the tax base to bring additional tax, till then we would keep on suffering the way we are right now, which compels us to accept terms and conditions of our lenders, whether they are in our interest. These temporary fixes like borrowings and external aids even though give us some breathing space but are not long-term solutions that in actuality, our economy requires to prosper.

The writer is a tax expert, researcher, and corporate trainer. He has studied International Taxation from the Chartered Institute of Taxation in the UK and is also a member of the Institute of Chartered Accountants of Pakistan (ICAP).
He can be reached at mmuzammil309@gmail.com