The budget is being touted as pro-business and pro-consumer on account of reduced rates on income tax for corporate and individuals. But perhaps the businesses are most jubilant because of procedural and administrative changes proposed in the budget with respect to audit. Recall that businesses have been increasingly complaining about FBR’s alleged harassment and enhanced compliance requirements. Those issues are now dealt in a way to reduce FBR’s direct role in collection and auditing. But at what cost?
The fact that there is no indication of reduction in GST rates or rolling it out in VAT mode, the focus is on to lazy taxation by tax collection at source. The heavy reliance on consumption and transaction taxes is not invented by duo of PM Abassi and Miftah Ismail. In fact, this was the philosophy of Ishaq Dar as well. The GST was increased by 1 percent to 17 percent in the very first budget presented by PML-N in this tenure, and the corporate tax was reduced.
Later Dar imposed super tax and heightened the dividend tax to make the effective tax on corporate virtually unchanged (See also “Making corporate tax effective”, May 31, 2017). These are now aimed to be rationalized in staged manner with further reduction in income taxes.
https://www.brecorder.com/2017/05/31/351380/making-corporate-income-tax-effective/
Apart from these, the enhanced pressure on FBR to increase on-demand tax collection has resulted in more audits and complexities for formal businesses as they have to become withholding agents for their vendors in informal sector. These have resulted in higher taxation incidence and more importantly it is consuming more time of SME businesses in tax compliance that reflects in poor score in ease of doing business.
Now the power of FBR audit authority is significantly curtailed and ease of filing return is promised. The efficacy of these is yet to be seen. The concept is to make the taxation system work on market forces. The non-filers penalties are now increasing. Earlier it was higher tax that non-filers assumed as final tax liability, which to a certain degree was also passed on to the consumers.
Today, 95 million mobile phone users pay advance income tax but majority of them do not fall in income tax. Why this has not changed? There are 84 thousand registered companies in Pakistan, while out of those only 34 thousand file return. Why can the FBR not focus on collecting income tax from these non-filers?
The general perception is that the tax evaders don’t file taxes because they are afraid of the FBR. The other theory is that FBR is getting taxes from consumption and transactions, and therefore they do not have any incentive to make efforts of collecting tax by expanding the tax net.
Now the non-filers are barred from buying property, car and opening foreign currency account. Assuming the non-filers will not get a way out of it or real estate lobbies will not have the law reverted; many non-filers will file from now onwards. If they do so, the tax rates are low and audit chances are less, it’s their own will as to how much taxes they want to pay. But still, the FBR will be playing a precious little role in bringing them in the net; it will be happy collecting taxes from the non-filers.
If that is really going to be the case, then should FBR be given so much weight? If it is assumed that FBR cannot be reformed, and its common knowledge that even World Bank funded FBR reform projects have failed then let’s reduce the size of FBR and also its power on paper.
If we are moving towards transaction and consumption-based taxes, then why does the FBR need such a big machinery? That, or gradually scrap FBR and make a National Tax Authority that employs fresh blood and direction, without mixing it too much with FBR resources.
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