The failure of successive governments to simplify tax laws and tax administration is the greatest hurdle to increasing revenues
“No government can exist without taxation. This money must necessarily be levied on the people, and the grand art consists of levying so as not to oppress” — Frederick the Great
Governments around the world operate with the responsibility to provide necessities to their citizen. These include food, healthcare, housing, education and functioning infrastructure. The fulfillment of this duty is directly dependent on generating revenue through an efficient taxation framework.
In Pakistan, the Federal Board of Revenue (FBR), the apex tax authority at the federal level, collects revenue for the Federation. The two major components of federal receipts are direct and indirect taxes. The main components of direct taxes are income tax collected from both corporate persons and individuals and capital value tax, whereas indirect taxes include general sales tax, federal excise and custom duties.
In an economy with an equitable taxation system, the share of direct taxes is always greater than indirect taxes. In underdeveloped and developing economies the reliance on indirect taxes is greater. According to the data available in FBR’s Year Book for fiscal year 2020-21, so is the case with Pakistan.
Advanced industrial countries like the United States, Belgium, Sweden, Japan, Austria, Germany, the Netherlands, France, Norway and Switzerland are examples of economies where the share of direct taxes is more than 60 percent of the total tax revenues. In emerging economies like Turkey, Mexico, Brazil and Korea, the contribution of direct taxes is increasing gradually. It is currently around 45 percent.
However, in Pakistan, according to official data, the share of direct taxation is around 39 percent. It has increased from 18 percent in the early 1990s to around 38 percent in 2019-20.
Successive governments in Pakistan have been striving to improve tax collection. However, none of the governments has introduced simplified tax laws and improved tax administration. These are the main hurdles to efficient tax collection. These steps alone can make the tax system progressive and create a business-friendly environment leading to an increased tax-to-GDP ratio.
In recent years, the FBR has undertaken multiple steps to meet the objective of maximising tax revenues and safeguarding economic activities. The focus remained on documentation of the economy by engaging the real estate, wholesale and retail sectors to increase the share of direct taxes.
To ease operations, the FBR is working hard on automation of the processes starting from registration to self-assessment. Digitisation and transparency-related measures like track and trace, point of sale (POS) integration of retailers with FBR’s system and electronic appeal filing are major steps in this regard. Currently, the FBR is working towards personal income tax reforms, reducing dependence on withholding taxes, removal of anomalies, preferential treatment and exemptions and sales tax harmonisation so that revenue mobilisation is achieved at a faster pace.
The first two years of the Pakistan Tehreek-i-Insaf (PTI) government, i.e. fiscal years (FY) 2019 and 2020, showed revenue growth of -0.4 percent and 4.4 percent. However, revenue collection recorded an 18.4 percent growth during FY 2021.
The figures for eight months of the current fiscal year show substantial growth in tax collection that can be attributed to multiple factors including a depreciated exchange rate and a larger volume of imports than the previous year.
In the current financial year, the FBR has successfully maintained the momentum of its growth trajectory and achieved collection beyond its assigned targets. The FBR collected Rs 444 billion in February 2022. Net revenue collection from July 2021 to February 2022 is Rs 3,800 billion. Compared to corresponding months of the previous year, increase in net revenue is Rs 883 billion, showing a strong growth of 30.3 percent. The performance was recently praised by Prime Minister Imran Khan.
The figures for eight months of the current fiscal year show substantial growth in tax collection that can be attributed to multiple factors including a depreciated exchange rate and a larger volume of imports than the previous year. Most analysts continue to criticise the government for what they call its unfriendly taxation policies. They argue that the government has managed to collect more taxes by taking away various exemptions available under the Sales Tax Act, 1990.
The recent staff report released by the International Monetary Fund (IMF) while approving a $1 billion loan tranche highlights that the government, under the plan, should step up tax revenue collection efforts; avoid new preferential tax treatments or exemptions; and reform tax policy. In a recent mini-budget introduced through Finance (Supplementary) Act 2022, the PTI government has introduced taxation measures of about Rs 375 billion, including uniform sales tax rates of 17 percent for different items.
However, the significant increase in tax collection by the FBR, on the one hand, will offset the shortfall under non-tax revenues, mainly due to lower petroleum development levy, and increased spending, including on subsidies and grants to mitigate pandemic-related impacts. On the other hand, it will impact various businesses and the common man through price hike.
Despite a written assurance to the IMF regarding subsidies, the PTI government has announced another subsidy package to further increase its tax collection and bring the un-taxed into the taxation net through Income Tax (Amendment) Ordinance, 2022. This is the third amnesty scheme offered by the PTI government since it assumed power in August 2018.
The government believes that this will help it boost industrial activity and revive ‘sick’ industrial units which are becoming a burden on the national economy. The amendment excludes certain sectors, such as sugar, aerated beverages, cigarette manufacturing, explosives and arms manufacturing.
As per Income Tax (Amendment) Ordinance, 2022, a minimum investment of Rs 50 million may be made in new industries on a no-questions-asked basis from assets not declared up to the tax year 2021 by paying 5 percent tax thereon. The information furnished will be kept confidential irrespective of the provisions of the National Accountability Ordinance, 1999, Federal Investigation Agency Act, 1974.
Such measures compromise the documentation of the economy. It shows the inability of the officials of law enforcement agencies responsible to investigate tax evasion. Moreover, these steps discourage honest taxpayers and citizens who have been regularly and honestly discharging their national duty of paying taxes. The message they get is that the system is inclined towards those who breach and disrespect the tax system.
In the last few years, hundreds of Pakistanis have been named in investigations ranging from Panama Leaks to Swiss Secrets. The government of Pakistan was under an obligation to improve mutual cooperation with concerned governments to track down the offshore bank accounts of its citizens. Moreover, despite opting for membership of the Organisation for Economic Cooperation and Development (OECD), a multilateral convention on mutual administrative assistance in tax matters aimed at curbing growing tax evasion has not been signed.
Unfortunately, we have failed to utilise this avenue to improve our greater international cooperation and ultimately tighten up efforts against tax evaders. It is not too late. The government needs to approach the concerned jurisdictions, sign mutual cooperation treaties with them and catch tax evaders. These financial data leaks can be of great help in straightening our affairs and can be used as an initial step in combating financial crimes, including tax evasion.
Abdul Rauf Shakoori is a corporate lawyer based in the USA
Dr Ikramul Haq, Advocate Supreme Court, is adjunct faculty at Lahore University of Management Sciences