The following write-up was published in the Jan-Mar 2018 Quarterly Edition of “Policy Insights”, the largest global accountancy body ACCA’s regional publication covering MENASA
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Fiscal Reform: Taxation Trends in Pak in the Need for Reforms
By: Omer Zaheer Meer
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 highlighted in need for major fiscal reforms:
- Extremely Low Numbers of Income Tax Returns Filers:
From approximately 1.32 million income tax returns filers in tax year 2016 to fewer than 1.3 million as per last available data in 2017 is an area of major concern. In a country of over 220 million, this amounts to just 0.6% of the total population.
- 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. This by any standard is massive and a point of major concern.
- Taxation Complexities and Ease of Doing Business:
As mentioned above, Pakistan has a very complex tax system and the recently released data by the World Bank has placed the country on a ranking of 147 out of 190. The complex, non-harmonized and multi-layered laws in operations not only make it more expensive but also time-consuming for the businesses.
- Harmonization Issues:
The issue of lack of harmonization among various laws 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. 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 traditional challenges while expanding their businesses in other provinces within the same country.
- 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. 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 of the taxation regimes also translates into further costs for taxpayers in terms of the time and administration required to ensure compliance.
- Structural Issues:
The structural issues including confusing and highly subjective laws, focus on indirect taxes, the improvable 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.
The above issues are requiring 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’ll discuss the possible proposals for reforms in the next issue. Till then, we leave our readers to ponder over these issues.
The writer is a leading economist who is also a qualified chartered certified accountant, chartered financial analyst and anti-money laundering expert. He’s sits on the Global Tax Forum of ACCA and is the sitting Chairman Liaison Committee of LTBA and ACCA’s Taxation Committee in Pakistan. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or firstname.lastname@example.org