The tax era

The Federal Board of Revenue (FBR) has announced a raft of new measures aimed at targeting non-filers to enhance tax compliance and broaden the tax base by abolishing the non-filer category. This includes restrictions on purchasing property, buying cars, investing in mutual funds, opening current accounts and engaging in international travel, except religious travel. The abolition of the non-filer category means that individuals who previously paid a small fee to avoid taxes on these transactions will no longer be able to evade tax obligations. The range of activities those who fail to file their tax returns will be prohibited from will expand beyond the five already mentioned above to a total of 15 activities. Non-filers will be barred from opening traditional bank accounts, with the exception of basic accounts for low-income individuals.

These restrictions will not be implemented all at once and will be phased in over the next few months. The FBR chairman has claimed that non-filers will be identified with the aid of machine learning and algorithms while criticizing the concept of non-filers, asserting that such classifications do not exist globally and should be abolished. Manpower and automation at critical entry points will also be enhanced to combat smuggling and the FBR will cooperate with the State Bank to monitor individuals whose income and transaction levels do not match. These measures, if indeed implemented over the coming months, arguably represent the most serious attempt to make Pakistan a tax compliant nation thus far. However, though the tax net might be getting bigger, will it be enough to catch the biggest fish?

While the minister of state for finance has stated that the FBR is implementing digitization initiatives aimed at formalizing untaxed sectors and encouraging compliance, sectors like retail, agriculture and real estate have proven to be notoriously tax averse in the past. This is among the reasons that the tax-to-GDP ratio has remained stagnant for several years despite increasing pressure from institutions like the IMF to expand revenue collection. If this continues to be the case, the new measures may simply result in an increased burden on the salaried classes. It should be noted that this demographic usually has its income deducted at source, meaning that many individuals are paying tax without going through the trouble of actually filing them. The new restrictions on non-filers may thus not necessarily change the revenue picture significantly. In order for that to happen, taming the vast untaxed sector is unavoidable. This would have been a formidable enough challenge on its own. That it comes at a time when the government might have to withdraw or limit various forms of support only complicates the picture. Power tariffs might still go up and the government will refrain from determining support prices for good grains and limit subsidies for the energy sector to one per cent of GDP to remain in compliance with stringent IMF conditions. Underscoring the necessity of such measures will not change the fact that they are likely to be deeply unpopular. It also goes without saying that raising revenues is also not the only imperative for the government, it also has to find ways to create a better business environment at a time when the tariff and tax pressures on both businesses and consumers are going up. This will be an unenviable task, to say the least.