The World Bank has conveyed to the Federal Board of Revenue that 'political will' is crucial to tax reforms in Pakistan, as lack of political backing is hampering reforms in tax administration. Sources told Business Recorder on Saturday that the World Bank has recently completed a review of the Tax Administration Reform Project (Tarp).
In this connection, the WB mission had meetings with the Ministry of Finance and FBR. During presentation of the World Bank, it has been pointed out that tax collection would not be substantially improved unless and until political leadership is serious about reforming the tax machinery. The FBR should also bring structural changes in the tax administration under the reform program.
Explaining the structural changes and distortions in the tax system, sources said that the potential sectors of economy are contributing nothing in the form of taxes. The revenue collection would not improve unless these distortions in the tax system are not removed.
Textile industry with zero-rated sales tax is a clear violation of the Value Added Tax (VAT) regime. The FBR failed to control inadmissible refunds in leading sectors, which forced the department to zero-rate the entire textile sector. The zero-rating of five major export-oriented sectors is the biggest violation of standard sales tax system. The completion of VAT chain is not possible till all the potential sectors start paying sales tax.
Another major area ie agriculture income is also not taxable pointing towards serious flaws in the taxation system where major sectors were neglected in the past. Sources said that the withdrawal of sales tax and income tax exemptions are needed to ensure level playing field for all industries and sectors. On the whole, 64 percent of potential revenue is being collected from the manufacturing sector and 57 percent from mining and quarrying sector.
Whereas the services sector contributes only 13 percent of its potential, the contribution of agriculture sector is far too low. The services sector presents a gloomy picture. In fact, except for few subsectors like telecom, finance and insurance, electricity and gas distribution, and sale maintenance and maintenance of motor vehicles, the remaining services sector has negligible tax contribution. Break-up of direct and indirect taxes in the services sector showed that barring finance and insurance and other services, no other sub-sector makes any significant direct tax contribution.
The revenue collected from construction, transport, storage and communication, sale, maintenance of motor vehicles and hotels and restaurants remains frightening below their respective potential. While this situation improves slightly when indirect taxes are considered, but overall contribution of the services sector is extremely low.
The services sector has always been a difficult-to-tax area, but a mechanism has to be developed to improve collection from this potential sector. Tax administration cannot ignore this sector whose overall contribution to GDP is over 50 percent and this share is growing with the passage of time, sources added.
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