As the PTI prepares to outline its maiden mini-budget for the fiscal year 2019, two opposing set of proposals have emerged in the last two weeks, albeit both are somewhat reiterations of the proposals made by the respective experts in the past.
The first is reiteration of the flat tax system by tax advocates Dr Ikram-ul Haq and Huzaima Ikram. They propose 10 percent flat tax on all kinds of incomes of entities other than companies; 20 percent corporate tax; and 8 percent sales tax on goods — all implemented by a modern, automated national tax agency with an efficient appellate structure.
They assert that instead of announcing periodic tax amnesties, the government should ask all citizens to take benefit of flat rate of 10 percent and file returns for past years without any penalty or additional tax. Those who (irrespective of status) fail to comply should be dealt strictly under the law.
Similar theme of flat rates is proposed for customs duty. The Ikrams highlight that in FY18 a little over Rs600 billion was collected even after raising regulatory duty on over 300 items. According to their analysis, 10 items contributed more than 80 percent of those receipts whereas 100s of SROs and numerous valuation rulings have led to complexity and leakages. Instead, therefore, they argue that even if 2 percent duty is levied on all items and across the board revenue of Rs1200 billion can be collected.
In contrast to these proposals Dr. Hafiz Pasha and Shahid Kardar advise to keep the slab-system in income taxes, although with revisions in rates. In a recent report titled “Proposals to Address the Short-Term Challenges to the Economy”, they flag that the currently operative income tax regime implies a heavy loss of over Rs90 billion. Implementation of the proposed tax structure (see table) will bring back over half the loss of revenues.
Likewise, they propose an upward revision in import duties for both, protection of domestic industry and reducing trade deficit. “There is an urgent need, at least temporarily, to partially reverse the process of trade liberalization. The recent introduction of big regulatory duties on selected items has proved to be counterproductive. It has led to under invoicing and more smuggling,” the authors wrote highlighting that Pakistan’s current average MFN tariff at six-digit HS-code is lower than that of India and Bangladesh.
They propose that the maximum regulatory duty, which is 80 percent currently, should initially be limited to a maximum of 30 percent and gradually phased out, along with a more broad-based small increase in tariffs.
The Ikrams’ flat tax proposal; kiosks of revenue authorities established at tehsil and district levels; issuance of notices to and assessments of non-filer SECP-registered companies and of all the persons who paid substantial tax in advance through withholding mechanism but have not filed returns, are some of key measures proposed to broaden the tax net.
In contrast, Pasha and Kardar’s main proposal to that affect is to extend sales tax payment by manufacturers on notified retail prices on a host of consumer goods and consumer durables such as vegetable ghee, paints, motor cars, TV sets, air conditioners, etc. They also propose compulsory filing of tax returns as a pre-condition for continuation of registration of a company with SECP; for continuation of an industrial or commercial connection of electricity where the annual consumption exceeds 500,000 kilowatt hours; and for membership of any chamber of commerce, trade association or any professional body and its continuation.
Which direction will the PTI take? It is difficult to answer at this stage. At the one end, its manifesto and 100-day agenda do not spell out precise policy direction. At the other end, its cabinet and the EAC do not have any fiscal expert per se; whose appointment could give an advance clue of the direction. Some guesstimates have been made earlier in this space in the column titled ‘How might PTI’s tax reform look like?’ However, the upcoming mini-budget and more importantly, the accompanying speech by Finance Minister is the best bet to take a long term view on taxation in Pakistan.
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