What’s PTI’s plan of action for tax reforms, and will it really work? These are some of the most asked questions by businesses and concerned citizens alike. Courtesy, the recently released medium term economic framework (METF), we now have some answers. (For a bird eye view of the METF, see Reading PTI’s economic roadmap, April 16, 2019)
Aiming to ease the genuine concerns of business community, SMEs and big business alike, the government is moving towards simplifying taxation. It’s not heading towards the ideal state of simplification ala flat taxation, as has been advocated by Dr Ikram Ul-Haq, and Prime think tank for a few years. But some simplification nevertheless.
These include removing some of the distortions, such as advance taxes, tax refunds, and import tariffs that kill export competitiveness. The METF document says that “as a first step, the government intends to discontinue a large number of low yielding withholding taxes in the next year’s budget.”
An exciting development to that end is the likely setting up of a ‘single tax portal’ to be used both by the federal and provincial tax authorities, at least in so far as sales taxes are concerned. This idea hasn’t yet made it into the METF document, but sources in the National Finance Commission suggest the move seems quite likely.
These are good some promises, provided they are kept. Until two days ago, some of the leading businesses had not started receiving the tax refunds via promissory notes, which were promised to be released April onward.
Another measure that will go down well with businesses and debt markets alike is the drafting of medium-term tax policy framework (over a 3-year period), as a part of medium-term revenue strategy, which will be in sync with a medium-term debt strategy. These documents have not been a part of any government’s plan in recent memory, and ‘if’ implemented, businesses would get a sense of direction – tax being an important price signal for business planning – whereas bankers and other financial institutions would also have better sense of guidance to manage their treasury books.
An entire set of planned measures revolve around bringing transparency to the country’s taxation system. For instance, the METF promises 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 METF also promises to review all existing exemptions, with the purpose of eliminating as many as possible, while also ensuring that all exemptions, existing or newly proposed have a sunset clause, and withdrawing FBR’s powers to issue SROs to grant exemptions. “This power will vest only with the parliament,” the METF says.
Again, these are some good promises, ‘if’ they are kept. The PTI’s promise to bring SROs to the parliament is commendable, but some of their actions run contrary to this promise. PM Khan has been widely criticised for not attending the parliament even now that his party is in power, whereas its newest amnesty is likely to be empowered through an ordinance rather than the parliament. (For an opinion on PTI’s tax amnesty, read Tax amnesty 2019: no place to hide? April 10, 2019)
https://www.brecorder.com/2019/04/10/487662/tax-amnesty-2019-no-place-to-hide/
The METF also informs that the central pillar of tax reforms will be the use of technology and third-party databases. In an interview with local media a few days ago, Finance Mininster Asad Umar said the FBR will be sending notices to tax evaders asking them to pay or otherwise justify their lavish expenses, details of which are being collected through data triangulation – basically that Nadra-FBR story. That story has been heard for a decade; whether this government will deliver on that, one can only wait and see.
Another pillar of PTI’s tax reform plans is the separation of tax policy and administration – a long pending agenda since the FBR was set up more than ten years ago. While that step is commendable, the unfortunate reality is that the tax policy board (which has been set up and first meeting already held) does not have provincial representation. Backed by sound economic reason, provinces have been demanding the same, but the federal government has been consistently ignoring those demands. (See also Reforming FBR: don’t wing it, November 15, 2018)
Instead, the METF proposes that the medium-term tax policy framework, which will guide annual budgets will be based on the parameters approved by a certain new “high-powered Tax Commission”. The commission will comprise of area experts as well as federal and four provincial finance ministers. The legal structure of this commission is not known; the METF is silent about it; nor do Q-block sources or independent tax experts have any knowledge of it.
Why exactly is there a need for another commission is beyond any reason at the moment. Recall that the Tax Reform Commission already exists, so does a Tax Reform Implementation Commission which is chaired by the finance minister. Instead of setting up a new commission, the government would do well to strengthen the tax policy board with area experts and political representation.
Lastly, the real estate. Reading the METF, and Mr. Umar’s recent statements, one gets the impression that the government fully understands the need to fix the real estate since it has implications on both saving-investment gap as well as the fiscal gap. It also has implications on business growth since the rise in real estate prices due to speculation throws away feasibilities for say plant expansion or a new café by a small entrepreneur.
Yet, to date, the government has not been able to move positively in that direction. The METF says “the government intends to pursue a coordinated approach to taxation and valuation of the real estate sector.”
However, immovable property being a provincial domain, the federal government has been unable to move effectively in that direction – say by conducting a real estate price survey in Karachi – without creating a turf war with Sindh. Besides, when real estate-walas are some of PTI’s key support bases and when the likes of DHA and naval housing are some of the biggest players in real estate, will the government be really able to unlock the capital lying dead within the Panamas in Pakistan?
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