Economic reforms: Part-XXI

When the PML-N won the 2013 elections and formed government, approaching the Fund again for a new programme was a foregone conclusion.

The government wasted no time in putting the programme together which, not surprisingly, had a fairly extensive tax reforms agenda. At the close of 2012-13, the tax-to-GDP ratio had fallen to only 10 percent, two percent lower than the 2000-2008 period, and a far cry from the early 1990s when it was 14 percent.

A large number of tax measures were stipulated in the IMF programme with the aim to increase the tax effort from 10 to 12 percent of GDP. The reforms included: (a) elimination of statutory regulatory orders (SROs) as an instrument of tax policy and requiring tax changes only through parliamentary approval; (b) issuance of notices to 300,000 potential taxpayers identified as non-filers of tax; (c) elimination of exemptions from all taxes; (d) further strengthening of risk-based audits with a higher selection percentage; (e) undertaking necessary efforts to integrate GST with income tax; and (f) reducing the number of customs duty rates from six to four (besides zero).

Tax administration reforms gradually deliver further improvements in revenue collection. An initiative to incorporate 300,000 new taxpayers into the income tax net was launched in July. The 2013 Finance Bill granted the FBR access to bank information, enhancing the scope and quality of information in its databases. The first step was taken with the issuance of 10,000 notices based on large potential fiscal liabilities by end-July (prior action), and was followed by a provisional assessment, collection procedures, and penal and prosecution proceedings.

The income tax initiative was to be complemented with initiatives to enhance revenue administration for sales, excise and customs – to be developed and launched by end-December 2013 (structural benchmark). These efforts were to be further assisted by increasing the number of risk-based tax audits to 4.2 percent of declarations (from 2.2 percent). Pakistan was also to continue seeking technical assistance on tax administration from our international partners.

Tax reforms were implemented with considerable focus, even though there were slippages and revenue collections would sometime lag behind the targets. It is useful to highlight a few reforms and reflect on the depth of the work they entailed in bringing about the required increase in tax revenues.

The SRO reform had been demanded by development partners for a long time. What the SRO does is that it alters the statutory duty that is otherwise imposed under the basic law. The SRO frequently served as a duty or tax-relief for a person, group of people, industry or a class of organisations passing certain test of qualification. Some analysts had estimated that as much as Rs500 billion worth of duties and taxes were sacrificed due to SROs. This was an exaggerated number in the sense that some of the exemptions (like no import duty on petroleum products) are primarily taxed during their movement on shore.

The reform was phenomenal and required extensive consultation before SROs were removed and taxes and duties brought in line with the statutory rates. It was agreed that the reform would be implemented in phases over a three-year period. During this period regular consultations were held with concerned ministries, trade bodies and representatives of the industries which were affected with the elimination of SROs. Pakistan successfully accomplished this reform, which contributed to about 1 percent of GDP to the tax effort.

This reform has blunted the SRO culture. However, a narrow window has been allowed to meet unforeseen exigencies and only the cabinet is authorised to approve temporary SROs, until they expire during the year or the National Assembly approves them under a money bill.

The reform regarding the issuance of notices was successful to the extent of meeting the target of 300,000 notices. It was reported that the combined effect of differential taxation for filers or non-filers and issuance of notices and other measures has resulted in a 30 percent increase in the number of taxpayers filing returns. However, it may be noted that continued presence of differential taxation for filers and non-filers is inducing a culture of escape, as after paying a higher tax a non-filer faces no pressure to become a filer. Furthermore, a key feature of the reform reported to the Fund was replacement of the NTN with CNIC. The effects of this reform are unknown. It was curious to note that the incumbent prime minister announced this as part of the amnesty scheme to prevent future accumulation of black economy. Risk-based audit is now part of the tax regime but integration of GST and income tax has remained weak. Customs duty slabs were cut to four.

It was disappointing to see that the commitment to reforms terminated soon after the programme was completed in June 2016. The year 2016-17 saw a major drop in tax effort as the nominal growth in revenues was only 8 percent, less than the nominal growth in GDP, and significantly below the 18 to 20 percent obtained in the previous three years. This year, the FBR’s performance is relatively better. However, against a budget target of 19 percent, the year, from July 2017 to Apr 2018, has seen a growth of 16 percent. Overall, the tax-to-GDP during the period of the programme improved to 12 percent, but it remained below the 14 percent we had in the early 1990s when reforms had started underlying the need for much concerted efforts to improve tax compliance in the country.

The story of tax reforms is depressing. Despite assurances provided to development partners, we have again offered an amnesty scheme, a reflection of the failure of past reform efforts. In the meanwhile, complexities in tax system have amplified with the establishment of full-fledged revenue authorities in the provinces. Businesses are complaining that their compliance costs have increased and inter-provincial tax disputes are on the rise. Clearly, any future tax reforms have to tackle a much larger set of issues when they attempt to raise more revenues to meet the growing development needs of the country.

To be continued

The writer is a former finance secretary. Email: waqarmkn@gmail.com