Omer Zaheer Meer,
CFA (USA), CPFA (UK), FCCA (UK), ACA (ICAEW – UK), AMLE (UK)
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With the ongoing budget debate, there is increased focus on the need for fiscal discipline and reforms to be achieved chiefly by a turnaround in the taxation system of Pakistan. Generally speaking, taxation laws are set of laws to derive revenues for the Government to function & service the citizens with the aim of improving their quality of life while continuously improving the facilities and infrastructures provided.
Pakistan has a complex taxation system with a focus on indirect taxes with over 70 different taxes. This has led to several sets of laws dealing with specific taxation areas. Below are some major issues in dire need of major reforms to achieve our taxation potential:
- Extremely Low Numbers of Income Tax Returns Filers:
From approximately 3.5 million income tax returns filers to just above 1.4 million for the (last complete) tax year 2017 with a filing deadline ending in 2018, this is an area of major concern. The filing for tax year 2018 is still ongoing. In a country of over 220 million, this amounts to just 0.6% of the total population and is troubling.
Some steps have been proposed in the budget 2020 to address this challenge including requirement to register for tax after undertaking some transactions and the duty of the FBR to register those who paid withholding taxes but are not registered for NTN using the data to compute the imputed income.
- Undocumented, Black economy:
This builds up from the above issue of low return filers. A larger proportion of the economy, some estimates put the number close to 100% of the GDP, is believed to be undocumented black economy. This by any standard is massive and a point of major concern. Low literacy rate, a fearful reputation of FBR, low public service delivery and rampant corruption are amongst the major reasons for this massive level of black economy.
The steps proposed in the budget to counter this include the key move to require any property transaction over 5 million to be done through banking channel otherwise hefty penalty and tax losses would be incurred.
- Taxation Complexities and Ease of Doing Business:
As mentioned above, Pakistan has a very complex taxation system and as per the data by the World Bank, has placed the country on 136 which though an improvement from the ranking of 147 out of 190 countries, is still worrying. The complex, non-harmonized and multi-layered laws in operations not only make it more expensive but also time-consuming for the businesses.
Registering a business for taxation particularly sales tax is a very complicated and HR driven in this age of technology and when we already have databases and systems like IRIS and STRIVE in operation by the FBR. Steps needs to be taken to automate and facilitate these processes.
- Harmonization Issues:
The issue of lack of harmonization among various taxation laws has increased many-fold post the devolution of Sales Tax on Services regulation and administration to the provinces and each Province setting up its own Revenue Authority for the same, as a result of the 18th Constitutional Amendment. In an era, when countries are agreeing to facilitating arrangements on the likes of European Economic Area, making borders irrelevant in terms of economic activities, Pakistani businesses are facing the challenges of a gone era while expanding their businesses in other provinces within the same country. The regulations are as if these are not the provinces of one country but different countries sans economic treaties.
There needs to be harmonization between various provincial taxation bodies among themselves as well as with the FBR on various issues particularly that of jurisdiction and tax adjustments. This should also lead to rationalization of tax laws in a harmonizing manner.
- High Costs of taxation:
In addition to having one of the most complex taxation systems in the world, Pakistan also has high taxation rates compared to other countries in the region. This adversely impacts the investment climate and business eco-system in the country.
Furthermore the taxation rates are also several times that of the cost of tax avoidance in the country, making it an attractive proposition for some businesses to keep operating beyond the radar of the legal economy.
Moreover, the highly complex nature and high-handedness of the taxation regimes also translates into further costs for taxpayers in terms of the time and administration required to ensure compliance. Even from a pure business perspective, this makes tax avoidance an attractive proposition keeping in view the weak and slow judicial system.
- Structural Issues:
The structural issues including confusing and highly subjective taxation laws, focus on indirect taxes, the ancient systems, mal-practices, singular focus on revenue collection, harassment of the existing taxpayers rather than using the same resources to focus on expanding the tax base and a general ill-perception have all contributed to the current state of affairs and needs to be reformed if the situation is to improve.
Winning the confidence of the masses, removing the fear of harassment and changing the ill-repute of the FBR are the biggest challenges in this regard. Sans these, no reforms can work to achieve the full potential of our taxation system.
The above issues require serious efforts to address the critical issues concerning the taxpayers particularly the businesses in the country. With CPEC and its associated possibilities materializing, now is a good time to ensure these reforms are put to action to achieve the full potential of not only the existing economy but also the developments accruing. We’ve been discussing the possible proposals for reforms and share more in the next issue. Till then, we leave our readers to ponder over this topic.
The writer is a leading economist and experienced tax expert who holds five top professional finance, investment and accountancy qualifications CFA (USA), CPFA (UK), FCCA (UK), CA (ICAEW, UK) & Anti-Money Laundering Specialization along-with substantial international exposure and represents Pakistan on Global Tax Forum while sitting on the boards of several think-tanks. His profile can be accessed at: https://omerzaheermeer.wordpress.com/about