‘Direct taxation measures to generate significant revenue’

LAHORE: The government can generate significant revenue by taxing income resident Pakistanis earn abroad and through other direct taxation measures, experts said on Wednesday.
They said tax officials are well aware of these untapped avenues but are reluctance to confront the most influential segments of the society. Tax evasion is not only limited to small traders, elitists too are openly evading taxes and the tax officials lack the courage to nab them.
“A number of Pakistanis, living in the country, have huge assets, properties and businesses outside Pakistan,” said Canada-based economist Asif Ali Shahid.
Shahid said the host countries cannot tax the incomes under agreement on double taxation treaties with Pakistan. The incomes must be taxed in Pakistan, he added.
However, the Federal Board of Revenue (FBR) has no clue about the incomes generated by these Pakistanis abroad other than what a few of them declare in their tax returns, he said.
The economist said the government of Pakistan has so far signed agreements with over 47 countries, including almost all the developed countries, to avoid double taxation.
These agreements lay down the ceilings on tax rates applicable to different types of income arising in Pakistan. They also cover some basic principles of taxation, which cannot be modified unilaterally. Some of these countries include Canada, China, Denmark, France, Germany, Italy, Singapore, Switzerland, Thailand, United Kingdom, UAE, and USA.
Pakistanis have huge assets and businesses in the United States, UK, Canada, France, Dubai and many other countries.
The FBR can ask the governments of these countries to give information of income generated by Pakistanis in any given year. These countries under the avoidance of double taxation treaties are bound to furnish this information to the FBR.
This practice would expose many influential tax defaulters or under filers as they are liable to pay taxes on income generated anywhere in the world in Pakistan.
Shahid said past governments signed agreements with the independent power producers, granting them immunity from income tax during the life of the power generation project. On this count alone, the country is losing Rs70 billion income tax/month.
An IPP established 20 years back has generated a cumulative tax free income of Rs600 billion, nearly five times the project cost.
The government can impose asset accumulation tax on the entire corporate sector. By levying 2-3 percent asset accumulation tax, the government could generate some taxes from IPPs. At the same time, the government should reduce the corporate income tax by 2-3 percent. This will save the corporate sector already paying income tax. India has done the same thing.
Another Canada-based economist Amina Usman said a transfer pricing law is need of the hour in Pakistan.
Amina said there are many multination pharmaceutical and automobile companies operating in Pakistan that import large quantity of raw materials from their principal offices or their affiliates. There is a possibility that some of these companies might be transferring prices in one way or the other. Through price transfer law based on global best practices, authorities in Pakistan could stop this price transfer.
Transfer pricing law could be enacted in line with a similar Indian law. Amina warned of stiff resistance from all developed countries as their companies would be affected by this law.
In 1997, the envoys of developed economies thwarted a similar move, threatening to stop all loan programmes and airline operation if price transfer law was promulgated, she said.
Besides, banks are making profit through government open market operation. Interest income on government bonds should be taxed.