Federal tax collections increased by 14.8 percent in the first half of 2014-15, but the second-quarter indicative target was missed due to legal challenges to tax measures and fiscal effects of the drop in crude oil prices, the sixth review under the extended arrangement and modification of performance criteria uploaded on the IMF website maintained.
The elimination of some Statutory Regulatory Orders and additional tax broadening measures in the current fiscal year have yielded better than expected results in the first half of the year, the report notes and adds that going forward removing all designated SROs is expected to yield of 1-11/2 percent of the GDP over a period of three years.
The government has committed to permanently prohibit the issuance of SROs and draft legislation for this purpose would be completed by March 2015 with enactment expected by end-December 2015.
As the part of the strategy for comprehensive tax reform, the Federal Board of Revenue (FBR) has granted no new tax concessions or exemptions through SROs, which narrow the tax base, complicate tax administration and weaken tax compliance.
Due to legal challenges, the GIDC has so far produced only about one-tenth of an expected annual yield of 0.6 percent of the GDP (including GST on the GIDC) in 2014-15. In addition, a court stay has blocked a 10 percent tax on the value of bonus shares, which was estimated to bring in 0.1 percent of the GDP. The plunge in oil prices has produced a shortfall in general sales tax (GST) revenue from petroleum products, which fell by 19 percent in the second quarter of 2014-15. Without corrective measures, these would have resulted in a fiscal gap of 0.45 percent of the GDP relative to the programme target for end-2014-15.
The staff review noted that the FBR issued more than its target of 150,000 first notices to non-taxpayers by end-December 2014, as part of a plan to bring more potential income taxpayers into the tax base. It has also initiated a GST collection scheme for over 25,000 large retailers and over 1.3 million small retailers as new potential GST payers.
The government is also improving its IT infrastructure and expanding access to taxpayer information from multiple sources including financial and real estate transactions, motor vehicle procurement, and international travel. Furthermore, the FBR will merge the National Tax Number (NTN) system covering 3.6 million individuals with the Computerized National Identity Card (CNIC) database that covers about 150 million people by end-September 2015 (new structural benchmark). To enhance the efficiency and progressivity of Pakistan's tax regime, the FBR will focus enforcement efforts on non-filers who have the potential to contribute at least the average tax paid by currently registered taxpayers and especially on a list of high wealth individuals, including elected representatives and key public figures.
Tax-to-GDP ratio increased from 9.7 percent of the GDP in 2012-13 to 101/2 percent in 2013-14, and tax collection at the federal level registered a nominal increase of 14.8 percent in the first half of FY2014/15, despite the legal challenges to the GIDC and the bonus shares taxes.
The FBR will update and improve the content of the Tax Expenditure Annex to be submitted with the 2015-16 budget documents, so as to reflect and make transparent the impact of this plan. These steps will help turn the GST into a full-fledged integrated modern indirect system of taxation with few exemptions, along with an integrated income tax, by 2016-17.
The sixth review noted that the FBR has managed to lower the number of outstanding refund claims by some 5 percent and have increased monthly refund payments by 15 percent in the first half of 2014-15.
Although the stock of the GST refund claims increased in July-November largely due to old claims being logged into the system, in December the FBR reversed the upward trend and will continue to lower the stock in the coming months. The new IT system for processing GST refund claims (computerized risk-based evaluation of sales tax or CREST) is helping to identify invoice discrepancies at different stages and to put an effective check on many fake invoices and inadmissible refund claims.
The CREST verification system has allowed for the rejection of false claims worth about Rs 10 billion in the first half of FY2014/15. To deal with the refund backlog, the FBR is carrying out an exercise to process deferred claims by end-March 2015. The FBR will prepare a plan to address the issue of unpaid GST refund claims by end-June 2015. Looking forward, to process new GST refund claims in a timely manner, the FBR will adopt an automated system of pre-verification instead of the current system of post-verification by end-June 2015, it added.
In its Letter of Intent submitted to the Fund as a prerequisite for Board approval of the tranche the government committed to conduct a review to reduce the number of existing processes and forms for sales and income tax by end-March 2015 (structural benchmark). Subsequently, the government would work on an integrated end-to end IT solution (IRIS) to serve all streamlined business taxpayer-related processes (registration, declaration, audit, recovery, refunds and appeals).
The government is also finalizing the design of the new system to simplify the tariff structure to move over three years to a simple, transparent framework, with four slabs between 1 and 25 percent rates with fewer exceptions. For 2014-15, the FBR consolidated from seven tariff slabs to six. All items at 30 percent have been moved to a new maximum rate of 25 percent rate. The phase-in of the revised tariff rates and phase-out of trade SROs began in July 2014). The FBR is on track to further reduce tariff slabs to five and the next round of trade-related SRO elimination with the 2015-16 budget cycle. Implementation of the new tariff structure would be completed by July 2017.
The reporting requirements to the Fund under the programme for the FBR include data of revenue collection/tax credits (total revenue collected separately by the tax administration and customs administration, including revenue by individual tax, and social contributions) to be submitted on monthly basis. The data of tax arrears by category would be communicated on monthly basis. The data of the GST refund claims in arrears (for the 30 largest debtors) on monthly basis. The automated GST refunds data to be submitted on quarterly basis covered detailed data, by type of tax, of outstanding tax credits for all types of tax revenues Quarterly Within 7 days of the end of each month, number of refunds that were processed automatically (share of total refunds); total value of automated and automatic refunds and offsets; average waiting time (days) to receive refund.
Large Taxpayer Units (LTUs) would provide quarterly data on the number of taxpayers and amount of taxes managed by the large tax payer units.
Under the reporting requirements, the FBR will provide import data on quarterly basis ie total value of recorded imports, total value of duty-paid recorded imports; number of total transactions involving recorded imports; number of total transactions involving non-duty free recorded imports.
On quarterly basis, the FBR will provide data related to audits including percentage of selected companies and identified revenue from audits.
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