A working paper was issued by IMF in late August by the fiscal affairs department, 2016 describing research in progress, titled as “Unlocking Pakistan’s Revenue Potential”.
The paper emphasized that despite the significant progress in recent years, Pakistan’s tax revenue remains low relative to comparative countries and the tax effort expected for the country’s level of development. The paper summarizes that unlocking revenue potential is dependent on broadening the tax base, strengthening administration, and rationalizing tax policy across all levels of the general government.
The paper, among other things, placed some recommendations to curb the inefficiencies of taxation system in Pakistan and to enhance the revenue generation. The recommendations were majorly categorized into two subcategories: strengthening tax administration and aiming tax policy reforms to increase revenue yield.
Under first Subcategory, the paper submitted that the FBR and provincial revenue administrations should fully implement a risk-based auditing system focusing on taxpayer noncompliance risks, defined as the likelihood of yielding large amounts of audit adjustments and penalties, and increase tax fraud penalties and make tax evasion a criminal offence. The Tax Reform Commission (“TRC”) report, issued a year ago, also made a similar recommendation and proposed severe accountability for FBR officials and non-compliant Taxpayers.
The paper further proposed that a comprehensive list of high net worth individuals, and the corporations under their control, should be focused to prohibit “benami” transactions which are commonly being used for tax avoidance and evasion. TRC also made recommendations on similar lines in their report and further suggested to implement Benami Transaction (Prohibition) Act 2015.
The third recommendation, in the first category, was for the Ministry of Finance to enhance analytical capacity by establishing a tax policy research and analysis unit— outside the FBR—to improve revenue forecasting and upgrade the quality of fiscal policymaking. The relevant extract is reproduced below:
“It is also important for the Ministry of Finance to enhance analytical capacity by establishing a tax policy research and analysis unit—outside the FBR—to improve revenue forecasting and upgrade the quality of fiscal policymaking.”
In, the TRC report, research in tax administration was proposed to be introduced and its importance was highlighted. It was further proposed that FBR needs to employ specialists, such as economists, tax law experts, statisticians, operations researchers and social researchers, to form a multidisciplinary team which should be given this task of revenue forecasting. The relevant extract from TRC report is reproduced hereunder:
“TRC recommends research collaborations with external research institutions and Universities in the country in carrying out these suggested research as is being done by the Tax Administrations in advance countries. Research work requires certain special and critical skills. At present there is no focused training in FBR for imparting research skills in its staff. TRC recommends that FBR should invest in this very important area and impart research skills in its staff. In the interim FBR should on contract recruit, if need be, specialist staff for this purpose. FBR should allocate adequate resources and sufficient funds for this very important area of research.
FBR needs to employ specialists, such as economists, tax law experts, statisticians, operations researchers and social researchers, to form a multidisciplinary team which should be given this task of revenue forecasting. This team should be trained in this area of revenue forecasting. FBR should also adopt a bouquet of methods and not rely on only one method for revenue forecasting.”
Under the second category of recommendations – aiming of policy reforms to increase revenue yield – first recommendation was to simplify the CIT regime and reduce concessions and exemptions as necessary steps to pave the way for lower rates. The TRC report also suggested to minimize tax expenditure by rationalizing tax exemptions and concessions.
The second recommendation was to introduce taxes on agricultural land at rates adjusted according to productivity characteristics of land. The recommendation was penned in the following words:
“Introducing presumptive taxes on agricultural turnover and land-based tax rates adjusted according to productivity characteristics of agricultural land can facilitate better taxation of the agricultural sector on a progressive scale with an appropriate threshold to protect low income farm households.”
TRC report also proposed as follows:
“With Provincial Revenue Board having been constituted, the provinces should seriously consider assigning the task of collection of agriculture taxes to these boards. Collection of labor welfare taxes should similarly be assigned to the Provincial Boards.”
Thirdly, the paper underscored the need for establishing a central fiscal cadaster and a central valuation agency and also proposed to adopt a market-based valuation methodology to tax properties. TRC report, on the other hand, emphasized that FBR should put in place an effective law for property investments and speculations. TRC further suggested that the federal government in coordination with the provincial governments need to agree to a valuation mechanism for properties in various categories which need to be revised at least every year through independent credible valuers.
The fourth recommendation of the paper was to integrate the GST regime (goods and services) with a single statutory rate under one collection agent. It also underscored the need for eliminating GST exemptions, zero-ratings, and special schemes to attain greater efficiency in indirect taxes. Whereas, the TRC report proposed that Federal and Provincial Sales Tax Authorities should form a fully empowered commission to bring harmony in the sales tax laws dealing with services.
The last recommendation of the paper was to change the structure of federal and provincial excises to ad valorem rates in a unified manner for domestically produced and imported goods. However, the TRC report did not recommended any such change in the structure, since its mandate was to recommend reforms of Federal Taxes only.