The need for tax system reforms

Prime Minister Shehbaz Sharif has a strong connection with the business community, especially with the Lahore Chamber of Commerce, as he has served as its president and is well-acquainted with business and economic affairs. Recently, the Prime Minister expressed his desire for reforms in the Federal Board of Revenue (FBR). This statement is noteworthy because the current tax system has become a source of concern for the business community across the country, and addressing these issues is crucial.

Taxation, though often perceived as a dry subject, has always been of great interest to me, and I have dedicated significant efforts to this area. In Pakistan, the tax system, the number of taxes, their rates, and the methods of collection have consistently been a point of contention between the government and the business community. My personal experience has shown that the business community genuinely wants to pay taxes but is often intimidated by the system.

A rough estimate suggests that there are 119 taxes in Punjab, 82 in Sindh, 54 in Khyber Pakhtunkhwa, and 12 in Balochistan. With such a multitude of taxes, how can we possibly encourage those outside the tax net to voluntarily come forward and join a system that appears burdensome?

Moreover, current policies seem to be designed only for those already within the tax net, whereas legislation should primarily target those who are not yet in it.

At the Lahore Chamber, I regularly receive troubling reports related to taxation. I have directly written to Prime Minister Shehbaz Sharif, requesting the resolution of these issues; otherwise, the dream of expanding the tax net will remain unfulfilled.

For instance, SRO 350(I)/2024, dated March 7, 2024, has created numerous problems for the business community. I informed the Prime Minister that this SRO has made it extremely difficult for businesses to file their sales tax returns because it ties the filing of buyers’ sales tax returns to their suppliers’ compliance.

If a supplier has not filed their return, the buyer is unable to file theirs or must forfeit the input tax already paid. Recently, businesses faced severe difficulties in filing their returns because the Lahore Electric Supply Company (LESCO) had not filed its sales tax return. I urged the Prime Minister to review the implementation of this SRO and to instruct the relevant authorities to take immediate action.

Just as we were grappling with these issues, news broke that heavy fees had been imposed under SRO 428(I)/2024 for electronic compliance. I also alerted the Prime Minister that these charges would further burden the business community.

Pakistan’s business sector is already facing economic challenges such as inflation, currency depreciation, high energy costs, and steep markup rates.

In this context, the substantial fees imposed by the sole licensed entity for integrating with the Federal Board of Revenue’s electronic invoicing system are alarming. The amendments made in the Finance Act 2024, coupled with SRO 350(I)/2024 and SRO 1842(I)/2023, have already created difficulties for the business community.

A one-time fee of Rs 1.5 million and an annual fee of Rs 3.5 million, or Rs 60 per invoice, are exorbitant and unbearable for the business sector.

Such fees will threaten the survival of many businesses; therefore, these measures should be reconsidered. The cost of online integration and maintenance should be minimized to ease the burden on taxpayers.

When we look at Pakistan’s global ranking in terms of ease of paying taxes and regulatory compliance, it becomes evident how much difficulty Pakistani traders face. In developed nations, the tax-to-GDP ratio is between 30% and 40%, while in Pakistan, it is significantly lower. Even in developing countries, this ratio typically ranges between 15% and 20%.

It’s a straightforward concept: every individual with a reasonable income should pay taxes to keep the country’s system functioning. However, in Pakistan, the complex tax system deters people from entering the tax net, while those already within it are burdened with heavy obligations. As a result, despite Pakistan’s population exceeding 230 million, the number of taxpayers remains negligible. Due to the low number of taxpayers, the government does not collect as much revenue as needed, leaving insufficient funds for projects in energy, infrastructure, health, education, and environmental sectors, which could provide much-needed relief to the public. If the government truly aims to achieve economic stability, it must introduce reforms in the revenue system and ensure that tax money is spent on public welfare.

While international lending institutions impose stringent conditions, they at least advocate for the expansion of Pakistan’s tax system, bringing more people into the tax net, and taxing sectors like agriculture, which currently do not contribute.

Another suggestion is to reduce the number and rates of taxes, which have become a source of concern for the business community. Additionally, indirect taxes should be eliminated as they disproportionately affect those least able to bear the burden. For instance, arbitrary taxes are added to electricity bills, and even the poorest individuals are forced to pay them.

The government should utilize the data it has to expand the tax net and create ease for those already within it. By doing so, those outside the tax net might be persuaded to join. None of this will happen without consistent policies. The government should introduce long-term and medium-term policies alongside five-year plans to protect local investments and attract foreign investors.

To expand the tax net, the government can easily gather data and scrutinize companies registered with the Securities and Exchange Commission of Pakistan (SECP). While the tax revenue targets are increased annually, there should also be viable policies to expand the tax net instead of burdening existing taxpayers. If these steps are not taken, achieving tax targets will remain challenging, and the gap between the business community and the government will persist.

Copyright Business Recorder, 2024