Cabinet’s directive to Revenue Division: Arrest of tax filer contingent on third party report

ISLAMABAD: The Federal Cabinet has directed Revenue Division to alter the wording of the draft amendment in the income tax law, making arrest of a tax filer for willful mis-declaration/hiding of facts in filling self-assessment forms conditional upon report of third-party audit. Official documents available with Business Recorder reveal that the decision was taken after a discussion during the special budget cabinet meeting held on 11 June, 2021 with Prime Minister Imran Khan in the chair.

Minister for Law & Justice Farogh Naseem drew attention to the income tax proposal for making tax offences under the Income Tax law cognizable and subject to the same procedure as was being followed for sales tax, federal excise and customs offences. He underscored that the proposal aims at conferring wide discretionary powers on tax authorities that may be subject to misuse. The Minister for Finance, Shaukat Tarin, responded that with Commissioner's power to make inquiries in to Self-Assessment Cases being withdrawn and tax audit proposed to be outsourced to third parties like chartered accountants firms. According to him, a new procedure for investigation of tax offences is absolutely necessary to ensure reasonable level of deterrence for tax enforcement. Alluding to the international best practices on the subject, he cited certain specific examples from the developed world and neighboring countries where tax offences are sternly handled and influential people face convictions. While agreeing to the need to create a meaningful deterrence, the Cabinet desired that the proposal be reviewed to make it less prone to misuse by shifting the power of arrest for income tax offence to a senior level than the presently proposed level of Assistant Commissioner.

The Finance Secretary gave a presentation on the budget proposals. He stated that the Medium-Term Budget Strategy Paper for FY 2021-22 to FY 2023-24 was approved by the Federal Cabinet in April, 2021. The Paper highlighted macroeconomic and fiscal projections, revenue and expenditure priorities and policies of the government, aimed at achieving economic stability and growth. Due to efficient financial management, fiscal performance during the first ten months of CFY had remained promising as the overall fiscal deficit had been brought down to 4.2% of GDP, while Current Account was in surplus and there was a primary budget surplus of 0.3% of GDP. The government had also maintained policies of zero borrowing from SBP and approval of supplementary grants for exigencies only.

Pakistan's economic growth for the CFY was now projected at 3.94% of GDP against the budget estimates of 2.1% of GDP in June 2020. Consequently, nominal GDP is projected to be Rs. 47,709 billion against budget estimates of Rs. 45,567 billion. FBR revenue collections had crossed the threshold of Rs. 4 trillion for the first time and year-end collection was expected to achieve the target of Rs. 4.7 trillion. The SBP policy rate had remained stable, rupee had appreciated by 8%, remittances had shown a 29% growth, large-scale-manufacturing had a registered 9% growth, agriculture yields had improved and consequently employment opportunities had increased.

The revised estimates for CFY 2020-21 were being projected with overall fiscal deficit to remain 7.0% of GDP as targeted. On the revenue side, gross receipts were estimated to be Rs. 6.4 trillion against the target of Rs. 6.5 trillion, while total current expenditure estimates had been revised to Rs. 7.3 trillion against the target of Rs. 7.1 trillion. Public Sector Development Program (PSDP) expenditures were estimated to be Rs. 630 billion against an allocation of Rs. 650 billion.

It was further noted that in line with the policy directions and vision of the Prime Minister of Pakistan, the budget estimates for FY 2021-22 had been worked out in the context of inclusive sustained growth, higher PSDP allocation, vertical and horizontal expansion of Ehsaas programme, job creation through special sectoral packages and incentives, allocations for power subsidy and circular debt liabilities of PHPL and IPPs, enhanced grants for special areas like GB, AJK and KP/FATA, and optimal revenue mobilization without new taxes. In order to provide relief to the pensioners and federal government employees, an increase in pension and Adhoc Relief Allowance (ARA) would be granted respectively.

The Secretary, Revenue Division also made a presentation to the Cabinet on Budget Proposals 2021-22. After sharing the projected revenues that aggregated at Rs. 5,829 billion and briefly touching on the guiding principles behind the proposals, the Chairman FBR/ Secretary Revenue Division, apprised that the customs side proposals were grouped into relief and revenue measures. It was elaborated that the recommendations of the TPB had been grouped into two parts: Industry and common man relief measures; and Revenue measures.

Under industry and common man relief measures, various exemptions/ concessions from Customs Duty (CD)/ Additional Customs Duty (ACD) and Regulatory Duty (RD) were proposed on raw materials and intermediate products to incentivize local production and consolidate/ expand exports in various industrial sectors such as textiles, pharmaceuticals, chemicals, tourism, steel products, packaging, publishing/ printing, grain storage, etc. These interventions were deemed necessary in view of the government's focus on accelerating GDP growth, export promotion and new job creation.

Being mindful of the need to promote local manufacturing and discourage increasing imports, certain revenue measures were being proposed, by way of imposition of levy of RD on mobile phones, tyres and non-essential/ luxury items as well as rationalization of duty structure on petroleum products to incentivize up gradation of refineries in their transition from Euro II to Euro V standard mandated by the government.

Certain other proposals regarding changes in the Customs Act, 1969 to facilitate ongoing reforms, facilitation for exporters and enforcement measures to curb origin concealment, smuggling, etc., were also approved after thorough deliberations.

Coming to the next part of the presentation, i.e., sales tax and federal excise, The Chairman FBR highlighted various relief measures like exemption from FED granted to FATA/PATA, sales tax exemptions to silos for storage of agriculture produce, reduction in sales tax rate from 17% to 12.5% on cars up to 850cc, elimination of FED on such cars, and concessions to Electric Vehicle granted in pursuance Electric Vehicle Policy.

The Statement of Estimated Receipts and Expenditure of the Federal Government for the FY 2021-22 as stated in the Annual Budget Statement (ABS) was presented as follows: (i) Gross revenues have been estimated at Rs 7,909 billion vis-a-vis revised estimate of Rs 6,395 billion for 2020-21, with a growth of 24%; (ii) FBR revenue projected at Rs 5,829 billion vis-a-vis Rs 4,691 billion of revised estimates for FY 2020-21 with a growth of 24%; (iii) non-tax revenue estimated at Rs 2,080 billion against revised estimates of last year of Rs 1,704 billion with a growth of 22%; (iv) provincial share in federal taxes will increase from Rs 2,704 billion during FY 2020-21 to Rs 3,412 billion which depicts a growth of 25%; (v) net federal revenues have been estimated at Rs. 4,497 billion as compared to Rs 3,691 billion as per the revised estimates of last year, reflecting a growth of 22%; (vi) Federal expenditure has been estimated at Rs 8,487 billion compared to Rs 7,341 billion of revised estimates of last year, with a growth of 16%; (vii) current expenditure is projected at Rs 7,523 billion vis-a-vis Rs 6,561 billion of revised estimates of last year, with an increase of 15% (excluding interest payment and one-off expenditure on COVID and settlement of IPP dues, increase in current expenditure is 12%); (viii) overall fiscal deficit is estimated at 6.3% of the GDP as compared to the revised estimates of 7.1% for the current fiscal year; (ix) primary deficit is targeted at 0.7 % vis-a-vis revised estimate of 1.2% for the current fiscal year; (xi) debt to GDP ratio will be gradually reduced from 87.6% (FY 2020) to 83% (FY 2021) and 81% (FY 2022); (xi) grant of 10% Ad-hoc Relief Allowance to all Federal Government employees with effect from 1st July 2021; (xii) grant of 10% increase in pension to all pensioners of the Federal Government with effect from 1 July, 2021; (xiii) The Disparity Reduction Allowance (@25% of BPS 2017) which was earlier granted to civil employees of BPS 1-19 to reduce the high level of disparity in salaries within the Federal Government shall now be extended to the officers in BPS 20 to 22 on the existing terms and conditions with effect from 1st July 2021; (xiv) an increase in orderly allowance from Rs. 14,000 to Rs.17,500; and (xv) an increase of integrated allowance for employees in BPS 1.5 from Rs. 450 to Rs. 900.

During a discussion, FED and Sales Tax Revenue Measures that chiefly included the levy of FED on mobiles phone calls, SMS and internet data usage was questioned as it was against the government's digitization policy. The Minister for Finance & Revenue highlighted that they had limited choices to mobilize tax revenue through new tax measures. He said that they had analyzed the entire exemption and concessionary regime in sales tax and the choice precisely was either to tax fertilizer and pesticide sector, cotton seed, etc., which was not affordable in the given socio-cultural context, or to go for a very mild taxation across a wide spectrum of population. The majority of the members were of the view that the proposed FED on mobile telephony and internet data was regressive and at cross purposes with the government's policy of Digital Pakistan. It was suggested that other avenues for revenue generation, such as marginally enhancing PDL or curtailing PSDP by Rs. 50 billion, be explored.

The proposal of enhancement of RD on imported mobile phones was also debated as it would affect the general population. The Cabinet was informed that in a short period of one year many local businesses in collaboration with foreign principals have started production of 2G/ 3G/4G phones and they have plans for enhancement provided the government provided adequate protection to them to enable them to compete with foreign brands. Moreover, there was interest from big manufacturers such as Samsung, Oppo and Nokia to localize their brands in Pakistan.

The cabinet approved the proposals contained in summary except the proposed FED on mobiles phone calls, SMS and internet data usage. Furthermore, the Revenue Division was directed that the wording of the draft amendment in income tax law may be altered so as to making arrest of tax filer for willful mis-declaration/hiding of facts in filling self-assessment forms conditional upon report of third-party audit.

Copyright Business Recorder, 2021