The Pakistan Business Council (PBC)- an alliance of about 82 of the largest Pakistani business houses claiming about 18 per cent share in the country’s revenue and GDP — has recommended the federal government and the Economic Advisory Council (EAC) to devise equitable, predictable, pro-growth and pro-formalisation fiscal policy.
According to the PBC, the Pakistan’s taxation regime needs fundamental reforms for sustainable growth both the country and its tax revenues. These reforms are contingent on the political will to pursue those outside the tax base and must address the Federal Board of Revenue (FBR)’s capability and capacity to implement. The reforms will take time to bear the results. In the meantime, any short-term and knee-jerk revenue- generation actions will undermine taxable revenue in the long run.
PBC Chief Executive Ehsan A Malik said, “Taxes should be simple, predictable and supportive of business growth and for the formalisation of the economy.”
He maintained that the aim should be for higher tax revenues to flow from the combination of improved profitability of existing taxpayers and from broadening of the tax base. Industry, which presently contributes taxes disproportionate to its share of Gross Domestic Product (GDP) must be facilitated to create more jobs, boost value-added exports and promote import substitution.
The PBC added that the impact of taxes on manufacturing versus commercial importers should be reviewed to support the former. The FBR and the formal sector should work in partnership to broaden the tax base. It recommended that the earlier tax credit to encourage taxpayers to transact with the formal sector should be revived. The vast amount of information on non-taxpayers provided by withholding agents should be mined.
It further demanded that higher advance taxes should be levied on utility bills of non-tax filers. Corporate entities, especially those listed, which operate to a higher standard of governance and accountability and their shareholders must not be penalised in comparison to unincorporated entities and their owners, otherwise the incentive to incorporate will be undermined. “There should be a level-playing field in the holding periods for capital gains tax on sale of company shares versus real estate,” the PBC maintained.
For some time now, the FBR has been given an unrealistic tax target, which in the absence of resources and capability, forces it to extract more tax from existing taxpayers.
For Fiscal Year ’22, the mooted 27% higher tax target is an example. It is more than twice the expected nominal growth of the economy. Significant changes are required in the structure, resources, and technology of the Federal Board of Revenue before setting targets, it added. For the PBC, separate targets should be set for revenue from existing and new taxpayers. Targets for existing taxpayers should be in line with expected growth in the nominal GDP. Tax targets from new taxpayers should be set in line with the evolving capability and capacity of the FBR. Tax refunds due should be excluded from revenue when assessing performance against either of these targets.
As per PBC recommendations, minimum tax-based on turnover is fundamentally flawed and acts as a barrier to entry of new players as it raises the initial investment required to cover tax payable in early loss years.
“FBR’s reliance on minimum, advance and withholding taxes has grown sharply as this is an easier way than assessing taxable profits. This reliance should be phased out gradually. Levying minimum tax on Special Economic Zone (SEZ) enterprises and others in their tax holiday periods defeats the purpose of the tax holiday,” it recommended.
The PBC was of the opinion that the use of cash in the economy should be discouraged. The Punjab government’s incentive to reduce GST on some card payments is an example to encourage non-cash transactions. Restrictions on use of cash above a certain limit would also assist.
The PBC maintained that the transit treaty with Afghanistan has been misused through diversion of goods to Pakistan. As the treaty has expired, Pakistan can renegotiate to put quantitative and qualitative restrictions on what can transit, insist on letters of credit, charge duty and GST on import which would only be refunded to the Afghan government on exit, track and monitor containers, strengthen inspection of empty containers returning to Pakistan and make physical controls along the border stronger. The PBC stated that the civil and military authorities need to be on the same page to do this. Electronic data Interchange with key trading partners should be deployed to check under-invoicing of imports.
The PBC office- bearer further said that the provinces have little incentive to check smuggling as customs duty and GST evaded are federal taxes and do not hurt their revenues. Provinces may be incentivised to conduct raids on shops that deal in smuggled goods. “Positive lessons from the success of cell phone registration with PTA and Urdu language labelling requirements for imported food items can be applied to other smuggling prone goods,” it recommended.