In order to increase tax-to-GDP ratio it is imperative to simplify tax laws and minimise tax exemptions. The Large Taxpayers Unit (LTU), in its proposals for the budget 2007-08, suggested that the Central Board of Revenue (CBR) should take measures to improve tax-to-GDP ratio by removing ambiguities in tax laws, reduction in tax exemptions and complete documentation of economy.
It is suggested that voluntary compliance should be promoted through taxpayer facilitation and education, effective deterrence in form of efficient audit and certainty of penalties for defaults. The media campaign and incognito survey of markets and residential areas would also be effective in this regard.
The tax-to-GDP ratio can be improved by creation and effective utilisation of database of all immovable property transactions (including agricultural land), motor vehicles, telephone subscribers, allotment and transfer of stocks and shares, club membership, etc.
The utilisation of withholding tax should be meant as documentation rather than tax collection. The LTU suggested CBR to reduce stamp duty rates, especially on transactions of immovable properties to encourage documentation at correct values and effective curbs on Benami transactions.
It was of the view that the CBR should send clear message to taxpayers that any wilful defaults in payments of taxes would be dealt effectively. Effective checks also suggested to prevent misuse of tax incentives on foreign remittances.
Those in various fields enjoying tax exemptions eg doctors working in rural areas, fish, poultry and dairy farms and non-professional writers, etc should be brought into tax-net.
The CBR is also urged to identify and bring into tax-net sectors traditionally having low tax compliance eg lawyers, jewellers, estate agents, transporters, general medical practitioners, dealers in mobile phones, computer CDs, etc. The statement regarding the break-up of sales to be made obligatory for manufacturers, distributors, retailers and wholesalers.
Percentage of tax collection should be used for taxpayers benevolent fund and taxpayers should know how the tax money is spent and he is the ultimate beneficiary. The country has achieved high economic growth accompanied development of the corporate sectors, which has given rise to a trend of corporate mergers and acquisitions and significant litigation issues.
The CBR should take measures to streamline issues and generate revenue. The Unit suggested that self-generated goodwill should be deemed to be a capital asset chargeable to tax under the head 'income from capital gains', with its cost of acquisition deemed to be 'nil'.
Any compensation received for restraint of trade should be taxed in the hands of recipient as income from business, and if more than one year is involved and payment is received in lump-sum the income to be included in income apportioned proportionately. The term 'de-merger' is not defined in the law, therefore, definition should be provided.
In the definition of amalgamation there is no provision for continuity of ownership of the shareholders of the amalgamation company. There is no concept of payment of actual cash on transfer of losses from subsidiary to the holding company. Therefore, it should be clarified through amendment to law or by adding an explanation thereto. At present, different rates are applicable on different types of dividend income. It is suggested that uniform rates for all dividend income types may be prescribed.
Internal adjustment of sales tax, income tax, customs and federal excise be allowed for better cash management and easier accounting for all concerned parties. Subsection (8A) of section 153 applies 2 percent tax over and above the tax withheld on services, contracts and supply of goods in case of taxpayers, who do not furnish CNIC and NTN to withholding agents.
However, this further tax of 2 percent is not presently applied to taxpayers, who are liable to deduction of tax at source under sections other than 153. Therefore, it is recommended that this sub-section should also be inserted in other sections relating to deduction of tax at source namely Section 149, 150, 151, 154, 155, 156, 156A and 156B.