Shabbar Zaidi is no stranger to tax policy and administration affairs in Pakistan. The official notification of his appointment as Chairman FBR was not issued till the time of writing this note, whereas independent critics and tax officers have warned of a legal action against the appointment done without any competitive bidding of sorts. How exactly will PM Khan handle this cannot be said with certainty.
But what kind of tax policy and administration can be expected if Shabbar makes it to the spot (and stays there without further changes in batting order) can be gleaned with some certainty from his many interviews to BR Research over the last ten years, and his regular op-eds published in this paper. Below is an itemised summary of hhis thoughts on some of the hottest tax related topics.
PAKISTAN IS RUN BY ARTHIS
‘Arthis’ are the ones who really run Pakistan. Tax potential of the income earned by the traders of that farm produce, the middleman or the ‘arthis’, is no less than Rs1000 billion. Why isn’t this aspect researched by Pakistani economists?
All of the farm produce - wheat, rice, cotton, sugar, milk, meat, fruits and vegetables - in all of these cases the farmer earns 10-20 percent and the rest is earned by the middleman. If the PTI really means business, then it must go after the ‘arthis’.
Not only is it that this income from trading of farm produce is hidden under the garb of farm produce income, it is the reason why Pakistan has such a huge cash economy. While some of these are financially included but fiscally excluded, most of these are both financially and fiscally excluded.
CAN NADRA-FBR MARRIAGE WORK?
NADRA records should be used. But there are many legal, practical and procedural hurdles in linking NADRA with FBR. Exemptions, zero-rating must go, and agricultural income tax must be implemented to fix information gaps. Without it the NADRA-FBR linking is a futile exercise.
Asset records – such as land, shop, office, industry, car - are with provincial governments. Income tax is with the federal government. What can FBR achieve unless both governments don’t share asset datasets. No reform without linking asset and income records.
POLITICS OF TAXATION
Political parties are not financed by corruption; they are being financed by donations from businessmen across the economy who in turn influence tax policy for their own benefit. One party does not want to hurt the agriculturalists, other party will not like to tax businessmen and retailers; how can there be taxation reforms in the country.
POLITICAL MESSAGING
At the very least, PM Imran Khan should spell out detailed tax problems to the nation and tell people that a country with such a flawed system cannot develop. They are excessively focused on financial corruption; corruption is not the issue. Flawed structure is. The government has already wasted six months harping about corruption, and if they don’t reform the system, its structure, then they too will be back to square one by the end of their tenure.
MEDIA’S ROLE
There is intellectual corruption on the part of media. Media has politicised economic and taxation issues. The core issue of this country is not terrorism, nor is it army or politics; it’s the failure to make economics and economic distribution a subject of discussion.
The media should tell the public which sectors pay and don’t pay taxes. Has the media ever gone to a cloth market, mobile market or a wholesale market or shopping plaza to raise hue and cry about their failure to pay their taxes?
THE PRICE OF REFORMS?
Major tax reforms even if it stalls the economy in the short run. The Prime Minister must take the bitter pill and take tough decisions now. It will shake up the system and create more troubles in the short and medium term. But that is the only way out. And better do it now than to go back to square-one five years later. Effective tax reforms in effect means destroying the current economic edifice and creating a new one.
GST
The administrative split between federal and provincial governments for GST on goods and services must come to an end. Single tax collection agency needs to collect both and distribute it as per whatever formula is agreed upon.
FBR
The FBR has lost its reputation beyond repair; at the least there should be a change of name to signify a change of direction and a new vision.
BANKING SECTOR
Why are banks allowed to open accounts above a certain threshold without the account holder being a filer? Bank accounts must be linked with FBR to ensure that banks give requisite data to tax authorities.
The decision to charge WHT on bank transactions is not based on any economic policy; it is an easy way to drum up collections without chasing tax evaders.
FILER-NON-FILERS
This approach is a fallacy. It may result in increase in tax collection, but it is not mindful of any concept of equitable redistribution. The main problem with this approach is that it is not taxing income; it’s just presumptive and transactional taxes that have only caused problems.
DOCUMENTATION & CORPORATISATION
There is an urgent need to organise the manufacturing sector with appropriate incentives for organised and documented ones and penalise the undocumented sector.
The effective tax rate for shareholders in a corporate sector (assuming all after-tax profits are paid to shareholders) is 41 percent. Given the same income a non-corporate entity – which is what most trading sector firms are — effectively pays 22 percent tax.
There is no data reporting mechanism. The state doesn’t even know the number of shops and hotels in Saddar area in Karachi. The last survey of property in Karachi was done in 1974. In Lahore it was done somewhere in the 80s. How can tax departments – federal and provincial – collect urban property taxes and link asset records to income records without a survey?
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