ISLAMABAD: The government has decided to establish a high-powered Tax Commission to get back powers from the provinces to collect GST on services, tax the agri income and place a unified valuation rates for real estate.
The government has also decided to place Medium Term Tax Policy Framework (MTTPF) for three years.
The medium term strategy paper envisaged by the government and exclusively available with The News disclosed on Sunday that for tackling fragmentation of taxes, the Ministry of Finance had proposed a high-powered Tax Commission that would define parameters for a tax system, which is well-integrated across levels of government. The commission would comprise area experts and federal and provincial representatives.
The approval of parameters would be a responsibility of the committee comprising federal and four provincial finance ministers.
There may be a merit in reverting to the pre-18th Amendment arrangement on collection of GST on services, where the provinces agree (in writing) that tax may be collected by the federal government but the revenue is transferred directly to the province from where it is collected. The process could start with services in sectors that generally operate in multiple.
Taxing agri income: The solution to this might lie in handing over the job of collecting income tax on agriculture to the federation. The resultant tax collected in respect of each province should not form part of the divisible pool and can be directly transferred to the respective province.
Real estate sector: Since the federal government collects tax on income from property and provincial and local governments collect property and transaction tax on immovable property, all parties have an interest in proper documentation and valuation of property.
There is a need to develop a coordinated approach to coordinate taxation and valuation of the sector in a way to collect optimum revenue from it without discouraging investment.
The government proposed law to ensure that no tax exemption was allowed through a law or notification without an estimate of its cost independently by the tax department as well as the ministry concerned. Such cost will be made public before notification of exemption, review of all existing exemptions with the purpose of eliminating as many of those as possible.
Even if an exemption is to be retained, its cost should be determined and made public.
The Ministry of Finance to publish annually a statement of tax expenditures to show how much revenue is being foregone due to exemptions, ensure that all exemptions, existing or newly proposed and should have a sunset clause (ideally not more than 5 years).
In case an exemption is required beyond a 5 year period, it is proposed to be reenacted with redetermination of the costs. It will also publish a list of all government owned enterprises availing exemption/concession in any way along with quantification of the tax expenditure.
In addition, a plan be prepared for phasing out of these exemptions, withdraw FBR powers to issue SROs to grant exemptions. This power should vest only with Parliament. Progress towards this was made in the last budget and ensure that all non-procedural existing SROs should expire at the end of the fiscal year. Steps taken over the last two years to incorporate all exemptions granted through SROs to be made part of the body of law.
Tax policy should have a medium to long term horizon and should not be changed every year as it creates uncertainty for businesses.
The annual budget exercise that announces changes in tax policy for the next year is not an appropriate document to provide guideline for medium to long term tax policy direction.
The long-term objectives of the tax policy would be too broad and general to provide useful immediate guidance.
The appropriate solution to the need for guiding principles for tax policy guide line is a Medium-Term Tax Policy Framework, that should be updated every year and should indicate the direction of tax policy over the next few years A Medium-Term Budget Framework is prepared each year, but it does not contain details of tax policy
A Medium-Term Tax Policy Framework (MTTPF) would provide an opportunity for the government to delineate its tax policy over the three-year period.
It would also convey to the businesses the direction of tax policy thus providing certainty about government’s tax policy direction and thereby helping them in planning their activities better.
More importantly it would provide a platform for elaborating the principles and objectives of tax policy at a more granular level providing guidance about priorities in different areas of tax policy planning and administration.
The annual budgetary proposals, currently formulated more or less in an ad hoc manner, would have to be consistent with the more medium-term direction of the tax policy.
This will allow pre-budget vetting of proposals to ensure consistency between the two. For that the medium-term tax policy document should be in place. This is an important recommendation. The government will suggest the institutional framework (FBR not make tax policy; setting up a tax policy board/Commission) for this up front rather than later in the document.
Aligning tax policy with economic policy: Tax policy has to balance the revenue objective with equity and growth objectives. Presently, tax policy has a predominant revenue focus and as such is likely to create distortions in the economy which can adversely affect the growth and equity objectives.
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