SIFC okays plan to jack up tax-to-GDP ratio to 18pc by 2029

ISLAMABAD: The Apex Committee of the Special Investment Facilitation Council (SIFC) Friday approved the plan that aims to increase the country’s tax-to-GDP ratio to 18 percent by 2029 from the current 8.5 percent which is at present lowest in the region.

In its 9th meeting, the committee discussed the core issue of how to increase the tax-to-GDP on a sustainable basis with an annual increase of 1.8 percent to jack up to 18 percent by 2029.

Research by the World Bank shows that a 10% import duty in Pakistan increases profits from selling domestically relative to exporting by 40% on average. This feeds into Pakistan’s structural challenge of low exports which are the core of its recurring balance of payment crises.

These imbalances are worsened by the under-taxation of agricultural income, urban properties, and retailers. By under-taxing properties, Pakistan’s tax system incentivizes firms and households to invest in urban property as opposed to sectors that may generate exportable goods or services.

As the IGC research has shown, the Punjab province, with a population of over 127 million, collects less urban property tax than the city of Chennai in India, which is home to about 10 million people. The agriculture sector is also undertaxed. While agriculture contributes to nearly one-fifth of the GDP, it accounts for less than 1% of national tax revenue.

Currently, the tax system is also deeply fragmented. Value-added tax is split between the federal and provincial governments, opening up avenues for fraudulent refund claims.

A large chunk of this is through overlain of refunds based on spurious invoices. For firms that are to comply with this fragmented tax structure, it adds an enormous administrative burden. A firm that operates nationwide is exposed to five tax jurisdictions and has to submit a total of 62 tax returns.

Pakistan’s tax code is also plugged with a range of exemptions that cost the country over Rs1.7 trillion in forgone tax revenue in the past year alone.

Most of these exemptions are applied at the discretion of the federal government to provide preferential treatment to certain sectors. They also risk creating distortions to the tax system by undermining the information trail that is instrumental to expanding the tax system.

Keeping in view the above challenges the SIFC was told, the federal cabinet also approved the restructuring of FBR on 30 January 2024 and advised all legal and regulatory work to be completed and enactment to be prepared for the newly elected government.

The Federal Policy Board (FPB) would be reconstituted to be chaired by the finance minister who will be assisted by the secretary Revenue Division with a new mandate for formulation of tax policy, assignment of targets & coordinating all strategic issues.

The FPB will have members from academic professionals nominated by the finance minister on predetermined fit and proper criteria, with no conflict of interest, and approved by the federal government.

Customs and lnland Revenue Organizations are to be separated, with each organization headed by a director general, appointed by the federal government from the respective service cadres, for a fixed tenure and will exercise administrative, financial & and operational autonomy.

The policy functions would be separated from operations/ tax collection.

Two oversight boards would be established, one each for the Inland Revenue and customs organizations, and will be headed by the finance minister.

All members of the board will be selected based on fit and proper criteria and will be responsible for effective policy and governance of customs and Inland Revenue organizations as well as setting up KPIs and monitoring their performance.

The tax policy office in the Revenue Division will support the tax policy formulation. The finance minister will constitute an implementation committee to prepare the amendments in the legal and regulatory framework, enactment of new laws, and transfer of assets to the customs and Inland Revenue Organizations.

Under the FBR digitalization plan, the documentation law, digital invoicing and leveraging the technological prowess of Nadra, and bringing in Karandaaz will be ensured. Transformation of PRAL with a better governance structure will also facilitate data exchange with organizations holding the data of assets, transactions, and payments.