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.
“Winning the confidence of the masses, removing the fear of harassment and changing the ill-repute of the FBR are the biggest challenges. Without these, no reforms can work to achieve the full potential of our taxation system“
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.
Conclusion:
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
Had a very productive meeting with Ms. Helen Brand, CEO of #ACCA, the largest global accountancy body in human history. In all my interactions, I’ve always found her to be very articulate and a methodical professional, yet at the same time being a very humble and friendly person.
Vital proposals regarding ACCA fraternity and brand, culminated from the feedbacks of the members and the collective wisdom of representatives, were shared and discussed at length with her and Sundeep Takwani. Sundeep is also an impressive professional.
Although it was peak period professionally, the importance of advocacy and contributing to my Alma-mater & wider society meant that I took extra time off work. And it was well worth it. The contents of the discussions were confidential, but let me share that ACCA believes in Thinking Ahead so look forward to the exciting times and initiatives ahead.
Omer Zaheer Meer's Blog 