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Presentation On. Enhancement Of Tax Revenues 26 th April 2010. Background. Pakistan needs additional revenues to meet the social and infrastructure needs and thereby grow annually at a reasonable rate. Tax Gap is more than 50% of what is being collected at present.

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  1. Presentation On Enhancement Of Tax Revenues 26th April 2010.

  2. Background • Pakistan needs additional revenues to meet the social and infrastructure needs and thereby grow annually at a reasonable rate. Tax Gap is more than 50% of what is being collected at present. • In order to achieve this there have been efforts to reform FBR and introduce tax policy measures. • In the last 10 years (barring two years) tax to GDP ratio has almost been stagnant at around 10% .

  3. Why has this been so? • First of all under WTO and other international commitments Governments substantially reduced Custom Duty and Excise Duty rates. The plan was that this reduction would be made up by the introduction of GST. This did not happen adequately. • Inequitable and inadequate levy of taxation vis a vis their contribution to GDP. For example Agriculture and large components of Services sectors. • Temptation of GOP to enhance non-tax revenues at the cost of tax revenues. Example Petroleum levies, surcharges and profits of SBP. • Clearly the present level of 10% tax to GDP ratio has to be enhanced and we agree that the target should be to enhance this to 14 to 15% in the next 5 to 7 years.

  4. The question is ----How to do it ? • Obviously it would require a major effort by FBR and Provincial governments and the will and commitment of the GOP. • Fortunately a roadmap is already available in the form of Tax administration reforms programme (TARP}funded by WB and DFID. We strongly believe that this needs to be religiously followed by GOP till satisfactory completion. In fact the programme could be suitably modified if and where required. • Revenue mobilization efforts could be bifurcated in two parts: • 1. Tax administration reforms (FBR) • 2. Tax Policy Reforms

  5. Tax Administration Reforms • An effective and efficient tax machinery (FBR) is required to be able to meet the challenges of revenue collection . In a growing economy the tax collection machinery has to run fast to standstill. • Fair amount of progress has been made in restructuring through the creation of LTU’s RTO’s which has put all Internal Revenues under one roof. • However complete integration of Internal Revenues (Income-tax , GST and Excise Duty) is still a long way . The proposed policy to create Inland Revenue Service has been implemented. • Human Resource policy initiatives like career planning, training, compensation of staff and their working environment also need further action. • BPR and Automation --- We believe it is the introduction of effective systems and procedures which can achieve the overall objective of an efficient and transparent FBR

  6. Tax Administration Reforms • Introduction of Data Warehouse (NEXUS). We believe this is the key to achieving expansion of taxpayers base—both existing and potential. A serious effort is needed to make use of the data already available and pursue further access to the areas not yet covered. Both internal data and third party information needs to be collected and then used for cross-checking returns submitted or not submitted . • With E-filing of returns for income-tax, sales tax and excise duty by and large in place, there is a need to effectively automate the processing of these returns which should ensure elimination of discretion and substantial reduction of human interaction.

  7. Tax Administration Reforms • Audits--- Systems, manuals and training of staff seem to be in place. There is now a need to pursue planned and professionally supervised audits starting from LTU’s and going down to RTO’s. Care should be taken not to harass genuine tax-payers. Moreover, audits of W.H. Agents have to be undertaken. In addition to own staff of FBR, outsourcing of special audits has been outsourced to practicing Chartered Accountants . • Customs- In the case of customs, PAACS (pilot project) needs to be enlarged in its scope and rolled out to the entire country forthwith. This will bring efficiency and transparency badly needed for international competitiveness of Trade. • FBR should keep the lead role and pursue for the early implementation of National Trade Corridor project of GOP.

  8. Tax policy • Three basic principles to be kept in mind: • 1. Make base as broad as possible. • 2. Keep tax rates as low as possible. • 3. Make compliance simple and non-compliance expensive. • Ideally taxation as a policy has to be levied equitably across the board on all sectors of the economy so that contribution of each sector to the GDP is proportionately reflected in the collection of taxes. Presently this is totally disproportionate. For example manufacturing sector contributing 18% to GDP contributes almost 2/3rd to the taxes whereas Agriculture and Services Sectors contributing almost 80% to GDP contribute less than 1/3rd to the taxes.

  9. Provincial Governments • Tax on Services---- Primarily a constitutional issue as Provinces are authorized to levy and collect. Present arrangements with Provinces could be expanded to include more services and FBR collects taxes on their behalf and the money so collected is transferred to them, This role could eventually in Medium to Long-term be passed on to the provinces after due training.

  10. Provincial Governments • Capital Gains tax on Property--- There is no reason for the provincial governments not to levy CGT on Property as per law. Major effort in this regard is to establish title of ownership and realistic valuation by Provinces. Once this is achieved then present CVT levied by GOP can be withdrawn. • Agriculture income-tax---- Some taxation is in place but totally inadequate. Move should be towards tax on income rather than on holdings in the long term. In the meantime present thresholds should be revised downwards so as to improve collections from this source. • Motor Vehicle tax--- Present system of registeration is cumbersome and prone to corruption. This needs to be computerized preferably centrally--- maybe by NADRA. Moreover, annual MV tax should be collected as a fuel charge on Petrol and Diesel. Oil marketing companies will collect and disburse to the Provinces. This will be equitable, efficient and avoid corruption.

  11. Federal taxes • CGT on securities--- 10% CGT to be levied on short term gains (less than 12 months). NIL on long term holdings. • Income-tax---- Concept of single rate of tax for all type of income tax payers to be considered ---- Rates to be between 12 to 18%. • Deduction of 10% for Medical allowance and Mortgage interest to be allowed. • Individual income tax exemptions to be withdrawn. • Stockbrokers income to be taxed as regular income. • Rationalization of with-holding taxes (long term) so as to achieve 10% rate across the board to be charged on income and nothing on transactions .

  12. Corporate tax. • Avoid tax incentives. • Keep tax rates competitive--- Reduce rate from 35% to 30% @ 1% per annum over 5 years ( except Oil and Gas and Banking sectors) • Withdraw corporate tax exemptions. • Small companies—include old companies falling within the eligibility criteria --- so as to benefit from lower rate of 20%. • Review and revise WWF and WPPF laws so as to charge tax on the Salary and Wages paid as opposed to Profits. • WHT---- make this adjustable for formal economy. • Corporate tax to be charged on the profit of the State Bank of Pakistan .

  13. General Sales Tax (GST). Now Proposed VAT • Present GST is proposed to replaced with VAT w.e.f 1st July 2010. • Threshold limit of Rs. 5 million is being enhanced to Rs. 7.5 million which is to high and need curtailment. • Substantial number of exemptions are proposed to be withdrawn. These would have serious implications. • Systems need to be improved and enforced for Smoother implementation of VAT. • Base to be enlarged substantially and gaps in compliance plugged.

  14. Federal Excise Duty (FED) • Luxury goods to be charged FED @10% • Petroleum Development Levy (PDL) and any surcharges to be converted into FED • FED rates on Cigarettes to be further enhanced.

  15. Custom Duty • Further Regulatory Duty on any item should not be levied in the present economic scenario. • An exercise needs to be undertaken to know the effect of substantial reduction in Oil and other commodity prices to work out potential revenue loss on this account. • Further rationalization of Tariff reductions should continue to achieve the end objective of 3 Tariff Bands(other than exceptional items like cars etc.) of: • 0%------ raw materials • 5%------ intermediary goods • 10%---- Finished goods • This may be achieved over the next 5 to 7 years.

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