New budget strategy to cut number of withholding taxes

KARACHI: The government has finalised a medium-term budget strategy paper to reduce number of withholding taxes and slash tax slabs for individual taxpayers, sources said on Thursday.

The sources said the draft of the medium-term budget strategy paper for next three fiscal years (2021/22 to 2023/24) has been finalised, which primarily focuses on tax reforms.

Pakistan’s tax system is plagued with the twin issues of a narrow tax base and huge tax gap in various sectors, according to the draft. A two-pronged approach to address these issues by enhanced enforcement and appropriate policy intervention will be pursued. “The Federal Board of Revenue (FBR) aims at re-designing the tax system on ideal principles of taxation, which includes moving towards taxation of net profits under income tax and subjecting all taxable supplies to a standard sales tax regime,” the draft report said.

The initiative involves removal of tax distortions, unnecessary exemptions, tax reductions, zero rating etc. The sources said the reforms in corporate income tax might include removal of undesirable tax credits, accelerated depreciation, exemptions, reduced rates, exemption from specific provisions.

“This aspect has already been completed by promulgation of Tax Laws (Second Amendment) Ordinance, 2021,” the draft report said. It is further aimed to remove unnecessary exemptions and rationalization of tax rates and reduction of tax slabs. The FBR is contemplating reduction in the number of withholding tax lines without compromising the documentation purposes of these taxes. “Nine withholding taxes have already been abolished and further reduction is under consideration.”

Regarding rationalisation of minimum taxes, the paper highlighted that the ideal principles of taxation envisage simple, low rate and broad-based taxation structure. “In order to achieve this goal, FBR is rationalising presumptive and minimum tax regimes.

It is also aimed at the present taxation structure and presents an anomalous situation for various tax payers, which are required to be removed.

General sales tax on goods involves removal of unnecessary exemptions, reduced rates, zero rating and special tax regimes. “The broad guideline is that exemptions and concessions available to all goods except essential food items, health and education related goods are to be reviewed.”

The FBR is pursuing sales tax harmonization with the provincial revenue authorities, which includes common definition of goods and services, common minimum threshold, harmonized tax rates, single portal and single sales tax return. The initiative is expected to complete in the medium term. “The FBR is further aiming at reducing the difficulties of taxpayers. The CNIC is being made as a unique identifier for all taxes administered by FBR. Further valuation table for immovable properties being harmonized with provinces,” it said.