ISLAMABAD: The government has failed to fully implement the World Bank recommended major tax reforms for enhancing revenue collection by Rs737 billion through the withdrawal of exemptions/concessions, the merger of the tax schedules for salaried and non-salaried taxpayers and combining two tiers of the federal excise duty (FED) into a single slab on cigarettes.
The World Bank in its latest report, “Pakistan Public Expenditure Review 2023,” has recommended reforms for enhancing revenue collection. The removal of concessionary rates and limitation on zero-rating and exemptions would have a revenue impact of Rs402 billion (0.6 percent of the gross domestic product).
The revenue savings would be Rs67 billion (0.1 percent of the GDP)on account of the merger of the tax schedules for salaried and non-salaried taxpayers, reduction in the tax-free threshold and simplification structure of the personal income tax.
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The combination of the two tiers into a single excise slab, imposition of the premium excise rate and collection of the FED on an ad-valorem basis to allow automatic indexation to inflation could generate Rs268 billion (0.8 percent of the GDP).
When contacted, the FBR officials told Business Recorder that the FBR has imposed a FED of Rs106 billion on cigarettes during the last one year.
The FBR increased the excise duty of Rs10 billion on cigarettes in the budget (2022-23) on June 10. The Tax Laws (Second Amendment Bill) in August 2022 increased excise duty by Rs36 billion. The FBR has increased excise duty on cigarettes by another Rs60 billion under the mini-budget announced in February2023.
The personal income tax (PIT) reforms generated Rs125 billion through amendments in the Finance Bill 2023 which become applicable from July 1, 2022. However, the PIT reform has yet not merged the tax slabs for salaried and non-salaried taxpayers.
In budget (2022-23), the limit for taxation of salary was enhanced to Rs1,200,000 from the limit of Rs600,000 and the slabs were reduced from 12 to seven. The maximum rate was reduced from 35 per cent to 32.5 per cent. Through an amendment in the Finance Bill 2023, the income tax exemption limit was reversed to Rs600,000 from Rs1.2 million and revised tax rates upwards for all slabs.
They said that the government has withdrawn Rs343 billion tax exemptions through the Finance Supplementary Act 2021 from January 16, 2022.In budget (2022-23), sales tax and the FED exemption of around Rs30 billion were given on seeds, solar panels, tractors, power generation plant/machinery, etc.
The imposition of sales tax on scraps generated revenue of Rs10 billion in 2022-23. However, the cost of sales tax exemptions increased to Rs1,014.482 billion in 2021-22 against Rs578.456 billion in 2020-21, reflecting an increase of Rs436.027 billion (75 percent).
According to the WB report, the personal income tax is complex, which allows for income shifting, and contains multiple provisions that narrow its base. Tax-free allowances, tax brackets, and tax rates differ significantly between salaried individuals and other taxpayers, which risks generating economic distortions and creating opportunities for tax avoidance through income shifting.
The income tax exemption threshold is set sub-optimally high, leaving formally employed salaried individuals outside of the tax net. At the same time, the threshold for the top income tax bracket for salaried individuals is also very high and is likely to only capture a very limited number of taxpayers.
Copyright Business Recorder, 2023
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