With the party seen to be forming a cabinet soon, many readers are inquiring about the expected revenue-side changes in the federal budget FY19, and the direction of the tax reform the incoming government may or may not take. As critics and external observers, BR Research doesn’t have detailed inside knowledge; one can only use insights from stakeholder in and outside the party, and whatever that has been made public by the PTI. Below is a summary of those insights.
One thing that is quite clear among stakeholders is that if Pakistan goes to the IMF, as is seen to be the more likely case, the lender will impose far more stringent taxation-related structural targets. Recall that increase in tax collection during the last IMF programme was mostly due to increase in effective tax rates, besides collection of direct taxes in indirect mode rather than broadening of the tax net. BR Genie tells that this time around, it might be different, especially considering the mantra of reforms sold by the incoming government.
While this year’s revised budget cannot be expected to incorporate significant reform changes, given the paucity of time, the Finance Minister hopeful Asad Umar informs that there will at least be a change in direction on two fronts: reduced reliance on indirect taxes, and the collection of indirect taxes in indirect mode. The minimum turnover tax can be expected to stay, considering that even as a part of its planned incentives for SMEs, the party says it will withdraw this tax for SMEs for the first 3 years and then tax at half the rate for the subsequent two years. Regardless, one can only expect concrete revenue-side changes in FY20 and onward.
If the party’s manifesto is any guide, one might also expect some kind of non-amnesty incentives for businesses to become a part of the formal economy, which means perhaps some kind of lottery mechanisms – ala sales tax reforms in Turkey – or one-time tax rate cuts for first one or two years of tax registration. For exporters, the revised budget may come with release of blocked tax refunds, courtesy negotiable instruments that are traded or discounted at commercial banks windows.
Within its first 100 days, the PTI plans to appoint a “bold, capable and dynamic FBR chairman immediately; launch FBR reform and share a business-friendly and equitable tax policy.” That seems like a difficult promise to keep; save for the appointment of a chairperson (not necessarily a chairman), launching a policy in 100 days isn’t going to be a walk in the park given the complex nature of the job.
But if indeed the party lives up to its promise of increasing FBR’s autonomy and reducing the influence of Ministry of Finance, as was also envisioned by the Tax Reform Committee formed by former Fin-Min Ishaq Dar, then it ought to have at least the following characteristics.
One, the institution should be made a tax-collection agency; with the tax-policy function housed somewhere else, perhaps the Planning Commission, or any other mechanism. Either way, policy and collection should not be housed in a single institution.
Two, the institution’s chairperson should be a tenured position ala the central bank governor, whereas the entity should report to a separate revenue minister, and is placed under a board with representation from the provinces.
And three, its recruitment should not be done from the civil service system; rather a team of professionals should be hired from the market whose performance are tied to incentives (such as bonuses) linked with key performance indicators.
Back to the PTI’s promised tax reform agenda, where most of the items are those that have been demanded by businesses over and over again. These include simplification of tax rules, reducing the frequency and cost of tax compliance, lowering of corporate tax rate (which will be a continuation of PML-N’s direction), and a ten-year incentive plan on new investments by SMEs. Agriculture value-added, garments and light-engineering sectors can expect to get further incentives.
The areas where the party has not given a sense of direction are many. For instance, it doesn’t talk about VAT-mode taxation, a can of worms that has been kicked down the road for far too long. It also doesn’t talk about whether it intends to reassign taxes between the centre and provinces or collection thereof; nor does it share any thoughts on whether it wants to move towards a national tax agency or privatise certain functions of the FBR.
Additionally, there is no mention of what forums would the party set up to improve coordination between federal and provincial revenue agencies – something which would make the businesses continue to suffer from double taxation (in the case of GST on services), refund issues, and higher compliance costs. These and many other, related topics would continue to be hotly-debated in the ensuing months; stay tuned!
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