A good tax system is one that raises money with minimal distortion to the economy. In Pakistan an oppressive, unfair and complex tax system is the main source of many distortions in the economy. We need a fresh approach to reverse the negative role of taxation to achieve higher growth in the economy. It is imperative to lower marginal tax rates and broaden the tax base with few or no tax exemptions. The tax system should be simple and must keep the cost of compliance low. Pakistan’s prevalent tax system falls short of this ideal. Existing fragmented tax system is extremely complicated while cost of compliance is very high. In the Finance Supplementary (Amendment) Bill 2018, the new government has not been able to undo fully; the distortions created by the last government just before the elections. In coming days, the government must concentrate on making long-delayed fundamental structural changes. For the fiscal year, 2017-18, the revenue target was Rs. 4,013 billion that was later revised down to Rs. 3,935 billion. Federal Board of Revenue (FBR) collected only Rs. 3,751 billion. It collected income tax of Rs. 1,441 billion against the target of Rs. 1,562 (deficit of Rs. 121 billion). Sales tax collection at Rs. 1,488 billion against the target of Rs. 1541 billion witnessed a shortage of Rs. 53 billion. FBR also faced a shortfall of Rs. 16 billion under the Federal Excise Duty as it collected Rs. 216 billion whereas the target was Rs. 232 billion. Only the collection under customs exceeded the target by Rs. 6 billion against the assigned target of Rs. 600 billion. There was overall shortfall of Rs. 184 billion vis-à-vis the revised target of Rs.3,935 billion and that of Rs. 262 from the original target, which pushed the fiscal deficit to a record Rs. 2.3 trillion (6.6 percent of GDP). Unfortunately, the new government has reduced the target of FBR by Rs.169 billion to Rs. 4.72 trillion—a reduction of 3.5 percent from the original budget! It belies the tall claims of raising revenues of Rs. 8 trillion. FBR never bothers to admit massive leakages in revenues due to sheer inefficiency. It also fails to acknowledge the higher cost of compliance for citizens—90 percent collection comes through withholding or advance tax or tax paid with returns. It is high time that we reduce the cost of doing business and eliminate all unnecessary withholding taxes to boost growth and investment. There is need to amend Finance Supplementary (Amendment) Bill 2018, and bring radical tax reforms. The strategy of raising revenues through a higher rate of taxes, rather than using taxation as a social policy tool, has failed to tap the real potential. Successive governments, military and civilian alike, have never thought of using refundable tax credits as the chief form of income support for the working poor—as is the case in many countries, notably in United States. When American politicians want to encourage home ownership, the purchase of health insurance or attendance at college, or merely to help a favoured industry, they reach for tax breaks as a tool to boost the economy. There is a need to learn a lot from other countries on this front. For example, the introduction of alternate minimum tax (AMT) revolutionised the entire American tax system. It is high time that we reduce the cost of doing business and eliminate all unnecessary withholding taxes to boost growth and investment. There is need to amend Finance Supplementary (Amendment) Bill 2018 and bring radical tax reforms In January 1969, U.S Treasury Secretary informed Congress that 155 taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news created outrage. That year, members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam War. Congress subsequently enacted an “add-on” minimum tax that households paid in addition to regular income tax. It applied to certain income items (“preferences”) that were taxed lightly or not at all under the regular income tax. The largest preference item was the portion of capital gains excluded from the regular income tax. Congress enacted the modern alternative AMT in 1979, to operate in tandem with the add-on minimum tax. The AMT is a little-known back-up to the income tax which is designed to ensure that the rich Americans could not avoid paying income tax entirely by claiming too many deductions. It allows fewer deductions than the normal income tax (mortgage interest, donations to charity and a few other things). It is also less progressive, with two rates of 26 percent and 28 percent, levied on; incomes above certain tax free amount, which in the case of a married couple has long been $ 45,000. Under present American law, U.S citizens (or resident non-US citizens) have to pay either income tax or AMT, whichever is higher. We must also introduce AMT to tax the rich Pakistanis, who at present are not paying any income tax due to excessive deductions, reduced tax rates or exemptions. In the Pakistani scenario where tax base is dismally narrow AMT could be used as a vehicle for tax reforms. The AMT can be made more progressive, retaining the most popular incentives of today’s income tax, without bringing in all the more outrageous exemptions. In 2004, Michael Graetz, a tax expert at Yale University, came up with an innovative way for simplifying the American tax code dramatically. He suggested replacing income tax with AMT, but with an exemption of $ 100,000 per family and a single rate of 25 percent. With US $ 100,000 exemption, only 25 million people were to pay income tax. To make up for the lost revenue, Graetz suggested introducing a value added tax between 10 percent and 15 percent. This could shift the tax base towards consumption rather than their income, and would thus be friendlier to saving. Marginal rates would be low. And the system would be simpler. To retain progressivity and mitigate the impact on the poor, Mr. Graetz suggested that the poor Americans could get tax relief on their contribution to Social Security. We should consider this model for Pakistan. Pakistan certainly needs to clean up its tax system. If Prime Minister, Imran Khan, is really serious about generating revenues and boosting exports, tax reforms are indispensible. He must order his economic team to amend the Finance Supplementary (Amendment) Bill 2018, for immediate withdrawal of all exemptions in tax codes and bring the rich Pakistanis under AMT. The VAT system should be rationalised by reducing its rate to 8 percent with no exemptions. The end consumers should be given a facility to get a refund of 2 percent on the producing evidence of payment of VAT, and no question would be posed about sources of expenses. It would encourage documentation as they will invariably insist for invoices on all their purchases. The middle-class and poor people should be given tax cuts and benefits of Social Security as prevalent in all the democratic countries. More innovative tax measures will be presented in the coming articles. The writer, Advocate Supreme Court, is Adjunct Faculty at LUMS. Email: ikram@huzaimaikram.com; Twitter: @drikramulhaq Published in Daily Times, September 23rd 2018.