Govt urged to reduce tax rate to generate more revenue

ISLAMABAD: The Tax Reform Commission (TRC) jointly constituted by the Pakistan Institute of Development Economics (PIDE) and the Policy Research Institute of Market Economy (PRIME) has asked the government to reduce tax rates of all major taxes and bring down the GST rate to 10 percent with Value Added Tax (VAT) mode, jacked up the ceiling of taxable income up to Rs0.8 million and reduce the number of slabs for income tax.

With the introduction of this rationalisation of all major taxes, the TRC has estimated that it could generate additional revenues of Rs4 trillion in three years over and above nominal growth in revenues.

It also recommends introducing constitutional amendments and bringing agriculture income under the domain of the federal government. In income tax slabs for salaried, AOPs, and for businesses, the number of slabs should be reduced.

Taxing all incomes equally and facilitating corporatization is crucial. There should be no new exemptions in the income tax system, and all sources of income need to be taxed. For equity reasons, the marginal income tax should increase. However, the effective income tax of AOPs and individuals should be lower than the corporate income tax to incentivize corporatization.

The commission proposes new income tax slabs while suggesting decreased effective tax rates. For example, on an annual income of Rs3.6 million, the effective tax rate should be reduced from 12% to 6.38 percent. Other recommendations include uniformity of the tax regime on all sources of personal and non-corporate incomes, including agricultural income; decreasing the corporate tax rate to 25 percent; withdrawal of deemed rental income tax, CVT, super tax, turnover tax, and presumptive/final tax; and restoration of investment credits

for plant and machinery.

The Pakistan Institute of Development Economics (PIDE) and the Policy Research Institute of Market Economy (PRIME) have collaborated to form a Tax Reforms Commission, comprising several eminent thinkers. These statements were made during a press conference at the National Press Club in Islamabad, where Dr. Nadeemul Haque, Vice Chancellor of PIDE, Dr. Ali Salman, Founder of PRIME, and Dr. Mahmood Khalid, Senior Research Economist at PIDE, addressed the audience.

Key problems and recommendations highlighted by the Commission include: reliance on tariffs is outdated. Pakistan has become increasingly isolated due to a closed economy. Strong policy commitment to openness is necessary to benefit from global trade. Decreasing tariffs has shown positive impacts on revenues and substantial reductions in smuggling and mis-invoicing. Zero-rated import of plant and machinery, industrial raw materials, and intermediate goods should be implemented. Withdrawal of regulatory duty (RD), additional custom duties (ACD), and withholding income tax on imports is also recommended. The decades-old GST/VAT agenda needs to be firmly implemented.

Problems with sales tax registration, harmonization, digitization, and the refund system should be resolved this year. Key reforms include harmonization of GST/VAT and no new exemptions on GST except in areas such as education and health. A fully functional GST/VAT system must be a performance goal for FBR with consequences. With a good GST in place, we should consider lowering the rate. Existing literature indicates that countries like India, Georgia, and Mexico, which shifted from high GST (17 to 19%) to VAT with a low rate (7 to 10%), have experienced an immediate positive impact on the tax-to-GDP ratio by 3 to 4%. PIDE research shows that in the short run, on average, a 1% increase in GST increases revenues by 2%, while in the long run, FBR revenues tend to decrease by 4% rates. Over the long run, the goal should be a gradual reduction of VAT to 10 percent.

The withholding regime needs to be replaced with an advanced income tax regime. Excessive withholding taxation should be withdrawn, as it operates like an indirect tax and burdens businesses. Withholding should only apply to salaried individuals, while others should pay advanced tax based on 75% of the previous year’s tax. Long-term reforms include reducing the number of withholding taxes and rolling back the WHT regime, except on payroll, interest, dividends, and payments to non-residents. Simplifying and lowering capital gains tax is necessary. Current collection is Rs10 billion only. Lowering the rate and improving collection can allow capital building. Tax exemptions should be removed, as they create distortions and uncertainty. Removing all exemptions, including those related to income tax, could increase FBR revenues by 37% and raise the tax-to-GDP ratio by 3.36%.

Tax administration reforms are long overdue. These reforms could increase tax revenues by 2-3 percent of GDP, as seen in countries like Jamaica, Rwanda, and Senegal. The commission recommends mandatory GST registration starting with commercial importers, wholesalers, and tier-1 retailers. Automation and digitization should reduce interaction between taxpayers and tax authorities. The non-filer category should be abolished. Enhancing the capacity of PRAL is also necessary. A Pakistan Fiscal Policy Institute/Budget Office for budgetary and reform with teeth is needed. PIDE, PRIME, and other think tanks should be involved, ensuring that proposals and analyses reach the cabinet and parliament, playing a central role in policy, including international negotiations. The current whimsical approach must end.