Rationalising tax System

Taxation, besides providing resources to governments to run their affairs, should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax policies, laws, regulations and procedures are causing a dampening effect on the industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has badly crippled our trade and industry. Since we have started submitting completely before the dictates of the foreign donors, things have deteriorated instead of improving. It is impossible to enhance revenues with stagnation in economy, and over-taxing an ailing economy. Had the successive governments concentrated on economic growth and industrial expansion, there would have been a consequential significant rise in taxes.
The biggest challenges are simplification of taxes and creating ease of doing business. However, the federal and provincial tax authorities are working in totally opposite direction. On this issue alone we have written dozens of articles in these columns. At operation level, the challenge is creating a user-friendly, competent, transparent and efficient tax apparatus. Though the World Bank and other donors gave a lot of money in the past to Pakistan yet things have changed only for the worse. Now they are providing more funds and in the absence of improving human resource these may also go waste. There is yet no research-based study available for improving tax administrations at all levels and development-oriented tax reform agenda.
In the Finance Act, 2019, instead of improving capacity to detect tax evaders through a Tax Intelligence System, more tax obligations have been imposed on withholding agents. Everyone knows that fault lies with the people who are implementing laws. If we want to improve tax compliance, pragmatic reforms are the need in all areas and at all levels. Successful models of various countries should be studied, debated and adopted after making necessary changes to suit our peculiar conditions.
The only way to check massive evasion in customs, income tax and sales tax is implementing an integrated Tax Intelligence System, which is capable of recording, storing and cross-matching all inflows and outflows. All in-bound and out-bound containers should be scanned/x-rayed to check evasion of customs duties and taxes payable at source. However, no reform agenda can succeed unless tax administrations are restructured, well-equipped and staff is highly-qualified and properly trained. All tax administration should be insulated from outside pressures.
After restructuring the Federal Board of Revenue (FBR) and other tax apparatuses at all levels, the nation must debate to implement simple, fair and efficient tax systems. To start with FBR, the existing complex tax codes, rules and procedures should be replaced. The following points need to be debated and reach a consensus for an effective voluntary tax compliance with strong detterance:
1. Simple and fair tax system containing:
a. 10% tax on individuals for all kinds of incomes with alternate minimum tax of 2% on net wealth exceeding Rs 20 million
b. 20% tax on companies and other entities
c. 8% sales tax on all goods and services, except exporters with 0% rate
d. 5% customs duty on all items, exporters to get refund once export proceeds are realised by State Bank
e. Reconstruction of National Tax Tribunal [Draft law on National Tax Tribunal Business Recorder, November 3, 2017.]
f. Establishment of single tax agency to collect taxes at all levels [A case for National Tax Authority, Business Recorder, November 30, 2018]
2. Action Plan for collection of Rs 8 trillion [Productive tax reforms, Business Recorder, October 27, 2018]
3. Expeditious disposal of tax cases
4. Making FBR an effective and professional institution [Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018]
5. Amending section 6 of Federal Board of Revenue Act, 2005 to make Policy Board an effective body
6. Filing of returns/assessments of all the persons who have taxable income
7. Registered companies as per SECP's record are over 90, 000 whereas income tax returns are filed by less than 50%. All companies that have not filed returns should be issued notices and assessments should be finalised
8. Retrieval of tax loss by taking action against the beneficiaries of loan-write offs under the law [Explanation to section 18(1)(d) of the Income Tax Ordinance, 2001]
9. Recouping of sales tax losses due to under-invoicing and under-reporting
10. Recouping of tax losses on account of transfer pricing
11. Scanning and X-raying of each and every incoming and outgoing container
12. Recouping of loss of customs duty by tracking down under-invoicing through data/information matching. Once this is done the IRS should recover evaded sales tax and income tax.
13. Crackdown on smuggled goods.
To achieve the above goals we need major information technology and human resource improvements in all tax administrations. Tax reforms are meaningless without an effective tax administration that can counter tax avoidance and evasion but at the same time help and facilitate the taxpayers.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)