Haq proposes 10 percent income tax rate for all entities, 20 percent for companies

A simple and flat income tax rate of 10 percent for all entities and 20 percent for companies can achieve fairness in the taxation system of Pakistan, said renowned tax expert Dr Ikramul Haq.

While talking to Business Recorder, he said, income taxation at the moment is highly complex and fragmented. There is classical taxation under various heads of income, while many transactional taxes, presumptive and minimum taxes have been added to distort the entire concept of personal income taxation. He said the present government has a golden opportunity to restructure the complicated and inefficient tax system and give meaningful and result-oriented tax bailout, incentivizing all businessmen to pay low-rate taxes to mitigate the impact of Coronavirus.

He said only the low, flat, predictable and broad-based taxes, administered by an efficient tax apparatus create incentives for better compliance and lead to accelerated economic growth. A paradigm shift is required to restructure the entire tax system to induce more investment.

Similarly, he said, the right to levy sales tax on goods rests with the federal government and that on services lies with the provincial governments. Presently, federal sales tax on goods is fraught with exemptions, multiple rates (from 17% standard rate to about 70% on high diesel oil) and complicated procedures for various kinds of goods. The same position prevails with the provincial tax codes where telecommunication services are taxed at 19.5 percent in addition to 14 percent advance income tax paid by the subscribers. This kind of harmful taxation is anti-growth and anti-investment.

He has suggested a single-stage, single-digit sales tax on goods by the federal government at the rate of 5 percent across the board with no exemption, albeit exporters shall have a zero-rated regime. The only exemption shall be on food, life-saving drugs, books, children's garments, and educational equipment, he said and added that provinces can also consider imposing harmonized sales tax (HST) at the same rate on service, details of which requires a separate study.

Under the current customs law (Customs Act -1969), Dr Haq said exemptions/concessions are granted to goods that are imported into Pakistan through Statutory Regulatory Orders (SROs). There are about 5,000 effectively traded tariff lines. However, SROs, covering nearly 84 percent of those tariff lines and impacting 45 percent of imports across almost all sub-sectors, have been issued over the course of years. The SRO-based customs policy has rendered the actual tariff different from the standard tariff. As a result of this, customs tariff has multiple rates and several exemptions, and various 'conditions and requirements" are to be fulfilled to avail those exemptions. This creates opportunities for the discretionary use of powers by officials, raising the cost of doing business and incentivizing malpractices and misdeclaration for evading duties.

Recognizing these problems, he has proposed that there should be a single slab of 5 percent for all imports to end these undesirable practices.