PBC proposes ‘out-of-box’ solutions to broaden tax base

KARACHI: The Pakistan Business Council (PBC) has proposed "out of box" solutions to increase the contribution of the undocumented sector to tax collection in the country, including including revising property values and relaunching a prize scheme to encourage retailers to issue sales tax invoices.

"At present, There is a wide difference between the actual values of land/immovable properties and the values fixed by the FBR," PBC said in a letter to the finance minister. FBR values should be revisited to reflect the actual market value to discourage the parking of black money in the real estate sector, it added.

The council said since around one year ago, the FBR has discontinued the POS prize scheme, though a fee of Re1 per invoice is still being collected by the FBR from retail customers."The POS prize scheme should be re-launched. At a time when this scheme was in place, many retailers were forced to issue QR code-based sales tax invoices due to pressure from customers as well as fear of online complaints to the FBR by customers."

The PBC said that retailers/wholesalers, who are not in the tax net, are afraid of unfair proceedings by FBR officials and suggested that the law should be amended to encourage new taxpayers to get themselves registered with POS.

The council pointed out that, as per section 7E, the tax on deemed rental income on land and property has been imposed. "But surprisingly, the same will be collected from filers only through their income tax returns; however, non-filers are only required to pay tax under section 7E."

It recommended that rules need to be framed by the FBR to make it clear that this 1 percent will also accrue for every year of holding for non-filers in urban and semi-urban areas and to ensure that this accrued 1 percent tax on land is collected from non-filers.

The PBC said that the majority of retailers/street vendors are not accepting payment through debit/credit cards and recommended steps similar to those taken by the Indian government for the documentation of the economy, which include digital wallets, mobile wallet apps like Paytm, PhonePe, Google Pay, and others that are widely used for digital payments, including transactions with street vendors.

In 2022, agriculture contributed around 22.35 percent to the GDP of Pakistan, 20.42 percent came from the industry, and over half of the economy’s contribution to GDP came from the services sector. Despite being the largest contributor to GDP, the agriculture sector is not contributing its due tax collection.

The PBC proposed that tax rates on the agriculture sector, under the provincial laws, on the basis of land area, must be revisited to reflect changes in the income potential from land due to efficiencies/output growth in the Agriculture sector. "Even though agriculture income is not subject to income tax, filing an income tax return and wealth statement under the Federal Income tax law must be made mandatory."

The council noted that the tax base is very narrow and only 1.6 percent (4 million) from the entire population of 250 plus million is registered for income tax. As of March 2022, there are 66 million plus registered bank accounts in Pakistan; however, this figure does not correlate with the number of filers in Pakistan.

It suggested that the government leverage the NADRA database, which holds the identification data of all Pakistanis. "The FBR should coordinate with concerned departments like banks, the registrar of properties, car registration authorities, airlines to trace the ownership of vehicles, properties, and bank accounts by non-filers as well as the frequency of air travel by non-filers."

In additional tax measures, the PBC proposed taxing real estate — of the estimated RS500 billion untaxed potential, a 10 percent realization would amount to Rs50 billion.

It council suggested that the government check and enforce the law. "If tax is not paid to provincial authorities, then the federal government must be allowed to collect it. If paid to provincial authorities, a federal tax return must be filed along with wealth reconciliation. At present, a wealth statement is necessary, but the FBR is not enforcing it—it should enforce it. Publicizing the sales tax payment of famous restaurants on the net is necessary to make sure compliance is visible."

In order to avoid benami purchase of cars by non-filers in the name of filers, the maximum cap on ownership of cars by filers should be fixed at 10 cars per individual, the PBC said.

"Many persons register for income tax just to avail a one-time reduction in income tax withholding on the purchase/sale of property/vehicles. After availing reduced income tax withholding rates, they usually get themselves deregistered. To avoid this practice, deregistration should not be allowed within 5 years of registration, except in genuine cases like death/bankruptcy, etc. In case a person, despite being registered for income tax, does not file an income tax return for consecutive 3 years, his passport should be blocked to disentitle him from foreign travel."