The government has been mulling over discontinuing a large number of low yielding withholding taxes in the next year''s budget. According to the Medium Term Economic Framework released by the government on Tuesday, the withholding taxes become regressive if people who are not liable to income taxes and/or if firms treat them as consumption taxes and are generally passed them on to the consumers, badly impacting the progressivity of the tax. As such, the tax needs some fundamental reforms. As a first step, the government intends to discontinue a large number of low yielding withholding taxes in the next year''s budget.
It said that since the federal government collects tax on income from property and provincial and local governments collect property and transaction tax on immovable property, all parties have an interest in proper documentation and valuation of property. The government intends to pursue a coordinated approach to taxation and valuation of the real estate sector in a way to collect optimum revenue from it without discouraging investment.
It said that the practice of withholding payments of tax refunds has deprived exporters of funds that could have used to expand business activity. The government has already taken measures to expedite clearance of the present backlog of tax refund arrears through issuing of a negotiable financial instrument. For future, the government remains committed to streamlining the system of tax refunds to reduce the time-lag in payment of these refunds so that there in buildup of refund arrears. Greater use of technology will help detect fraudulent claims and speed up refunds claims for honest taxpayers. Using these techniques prompt issuing of refunds within strict timeline will be ensured.
It said that presently tax policy has a predominant revenue focus and as such is likely to create distortions in the economy which can adversely affect the growth and equity objectives. In addition, even the revenue objective is compromised by large scale exemptions.
To correct this shortcoming, the government intends to enact a law to ensure that no tax exemption is allowed through law or notification without an estimate of its cost independently by the tax department as well as the concerned ministry. Such cost will be made public before notification of the exemption.
The government will review all existing exemptions, with the purpose of eliminating as many of those as possible. Even if an exemption is to be retained its cost will be determined and made public.
Ministry of Finance to publish annually a statement of tax expenditures to show how much revenue is being foregone due to exemptions. The government would ensure that all exemptions, existing or newly proposed, will have a sunset clause (ideally not more than 5 years).
The government will publish a list of all government owned, quasi-government and government-linked enterprises availing tax exemptions/concessions in any way along with quantification of the tax expenditure. In addition, a plan be prepared for phasing out of these concessions.
The government will withdraw FBR powers to issue SROs to grant exemptions. This power will vest only with the Parliament. The government would ensure that all non-procedural existing SROs will expire at the end of the fiscal year. Steps taken over the last two years to incorporate all exemptions granted through SROs to be made part of the body of law.
It said that the government is well aware that some tax issues (e.g. non-harmonized sales tax rates across tiers of government, taxation of real estate, etc.) add to the cost of doing business by requiring multiple tax returns to be filed in a single tax year. While working with the provincial governments in the NFC framework, the federal government intends to harmonize the tax codes and integrate tax processes through digitization and process automation. In addition, it intends to establish a mechanism to fast-track resolution of tax disputes, thus reducing compliance cost. This will reduce the cost of doing business to some extent and make it harder for taxpayers to play the tax administrations off against each other to evade taxes. An NFC sub-group (see below) has already been tasked with formulating recommendations to simplify payment of taxes to enhance ease of doing business in taxation area.
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