Pakistan must strengthen capital gains tax (CGT) regime by adopting a common rate schedule for all financial assets, eliminate exemptions for real estate transactions, integrate general sales tax (GST) collection system on goods/services with a single statutory rate under one collection agent, reduce the tax exempt income threshold, widen tax brackets and adopt more progressive and lower tax rates, the Selected Issues Paper on the International Monetary Fund (IMF) website downloaded on 12 January recommended.
For greater efficiency in indirect taxes, Pakistan should integrate the GST collection system (goods and services) with a single statutory rate under one collection agent, and eliminate GST exemptions, zero-ratings, and special schemes. Simultaneously, the implementation of federal and provincial excises should be based on ad valorem rates to maximise the revenue yield, while better addressing negative externalities associated with some products such as tobacco.
Tax policy reforms must aim to increase revenue yield, while improving the fairness of the tax regime. Direct taxes can be designed better for enhancing efficiency and equity. In the case of personal income tax (PIT), the tax exempt income threshold is set at PRs 400,000 (or about US $3,800). Since this is almost four times per capita income, a significant share of employed people do not pay any income tax at all. Accordingly, reducing the tax exempt income threshold, widening tax brackets, adopting more progressive and lower tax rates, and rationalising concessions and exemptions would not only reduce distortions and increase revenue yield, but also improve the fairness of the tax system. This sense of social justice is key to boosting tax morale and thereby tax buoyancy. In this context, there is also need to strengthen the capital gains tax regime by adopting a common rate schedule for all financial assets and eliminating exemptions for real estate transactions, the Selected Issues Paper maintains.
In the case of CIT, simplifying the system and reducing concessions and exemptions are necessary to pave the way for lower rates while enhancing revenue yields, which would also help on improving the economy''s international competitiveness. With regards to agriculture - a difficult sector to effectively tax, a reasonable approach would be the introduction of presumptive taxes on turnover and land-based tax rates adjusted according to productivity characteristics of agricultural land on a progressive scale with an appropriate threshold to protect low-income farm households. Modernising recurrent property taxes, on the other hand, can be achieved by establishing a central fiscal cadre and a central valuation agency and adopting a market-based valuation methodology.
To improve taxpayer compliance and curb tax avoidance and evasion, reform efforts must aim to modernise and bolster the effectiveness of tax administrations at federal and provincial levels by reorganising along functional lines, integrating databases and information technology, and requiring a tax identity number in all financial and immovable property transactions. This would also help deal with the potential problem of using remittance transfers as a means of tax evasion.
Cross-country figures indicate that there is also a strong relationship between the tax revenue-to-GDP ratio and business climate and corruption. Therefore, institutional reforms aiming to reduce the incidence of corruption and to improve the country''s business climate will help boost tax revenue collections across all layers of government. From an operational point of view, the FBR and provincial revenue administrations should adopt and implement a risk-based auditing system focusing on taxpayer non-compliance risks, defined as the likelihood of yielding large amounts of audit adjustments and penalties, and increase tax fraud penalties and make tax evasion a criminal offence. In this context, fighting tax evasion should initially focus on a comprehensive list of high-wealth individuals and corporate entities they control and prohibit "Benami" transactions, which are commonly used for tax avoidance and evasion, the Selected Issues Paper argues.
It is important for the Ministry of Finance to enhance analytical capacity by establishing a tax policy research and analysis unit-outside the FBR-to improve revenue forecasting and upgrade the quality of fiscal policymaking, the paper said.
Composition of tax revenues is highly skewed towards indirect taxes, which account for about 63 percent of federal tax revenue, while the extensive use of tax concessions and exemptions results in a distortionary and unfair tax regime. Consequently, even though Pakistan''s estimated tax effort-the ratio between actual revenue and tax capacity-improved from 0.43 in 2011 to 0.49 in 2015, it is still significantly below the average of comparator developing countries (0.64) and high-income countries (0.76).
The findings of the Issues Paper suggest that a concerted agenda of well-designed federal and provincial policy adjustments and institutional reforms - aimed at expanding tax bases, reducing tax concessions and exemptions, addressing structural weaknesses in fragmented tax administrations, and improving tax compliance across all sectors of the economy - will not only boost revenue mobilisation, but also improve the perceived fairness of the tax system in Pakistan.
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