The government has committed to the International Monetary Fund (IMF) to issue notices to 100,000 non-filers of income tax returns, per month, from January 2010 onwards and take strict legal action against the non-compliant.
The fourth Letter of Intent (LOI), submitted by the government to the IMF under standby arrangement (SBA) said that the rate of special excise duty (SED) would be raised in the third quarter (January-March) 2009-10 to meet the revenue collection target of Rs 1,396 billion.
The Federal Board of Revenue (FBR) intends to achieve Rs 1,396 billion collection during 2009-10. The higher international oil price and the planned increase in electricity tariffs should boost customs and sales tax revenue, offsetting weaker excise and direct tax receipts. In addition, in the third quarter of 2009/10, the FBR will increase the rate of the existing special excise duty, and reduce the capital value tax (CVT) exemptions, if needed.
The FBR has further informed the IMF that the option for retailers, with a turnover over of Rs 10 million, to choose the presumptive tax regime (PTR) will be eliminated in the new VAT law. The FBR has committed to implement expedited sales tax refund system to ensure direct input of refund requests and prompt processing and confirmation of refunds in all Large Taxpayer Units (LTUs) and Regional Tax Offices (RTOs) by end-March, 2010 and introduction of the VAT by July 1, 2010.
An ordinance to harmonise the income tax and the existing general sales tax (GST) law was issued on October 28. This ordinance will be amended given the new VAT law and renewed as needed, and submitted to parliament by end-April 2010. The FBR has claimed that it is making progress on introduction of a broad-based VAT by July 1, 2010 to meet the government's medium-term revenue needs.
It is estimated that the additional revenue generated could reach 3 percent of GDP per annum over the medium term. Much of this will be generated by removing domestic zero rating and reducing exemptions to expand the tax base. The FBR has been implementing its action plan on tax administration reforms. To improve sales tax and corporate income tax compliance the FBR will reduce the number of under-reporting taxpayers and non-filers.
The board has identified 13,000 under-reporting taxpayers and about one million taxpayers (about 40 percent of taxpayers with tax identification numbers) who do not file tax returns. The efforts will focus on under-reporting taxpayers. Letters will be sent to these under-reporting taxpayers to invite them to file tax returns and settle their prospective unpaid taxes. Letters to identified non-filers at the rate of 100,000 per month will begin in January 2010. In cases where this voluntary approach is not successful, the FBR will institute legal claims procedures for non-compliant and non-filing taxpayers.
Tax audit and enforcement plans have been formulated and approved by the FBR Board. Tax authorities have identified 850 companies (15 percent of large taxpayers) for audit by either the FBR or external auditors. The board has planned to complete most of these audits by end-March. Importantly, in the future, the FBR plans to conduct the audits on a regular basis. To that effect, auditing capacity of the FBR is also being strengthened.
The LOI observed that the government is committed to strengthening the system of tax refunds. The government has approved a strengthened and improved electronic payment and refund system. The board had convened technical meetings with banks to establish an electronic filing, payment and refund system and has set up a technical committee to finalise all procedures.
The expedited sales tax refund system is being piloted in Islamabad, Karachi and Lahore. Following completion of the pilot project, the new system would be rolled out nation-wide, and an expedited sales tax refund system-to ensure direct input of refund requests and prompt processing and confirmation of refunds-will be operational in all RTOs and LTUs by end-March, 2010 and ready for the introduction of the VAT.
The Board plans to submit legislation to harmonise the existing tax laws with the VAT law by end-April, 2010. The Board will prepare the needed regulations for the full implementation of the VAT by July 1, 2010. Full implementation of the VAT by July 1, 2010 is a key objective and a structural benchmark. The FBR expects continuation of IMF and World Bank assistance on policy aspects for introducing the VAT.
Tax administration reforms have been subjected to legal challenges, but FBR is committed to achieving the objective of implementing a modern and integrated tax administration. A key objective, the establishment of a functionally structured tax administration within the FBR-that integrates responsibilities for domestic taxes, including the sales, income, and excise taxes, in one occupational group-has been achieved. A functionally structured system will increase the effectiveness of tax administration and facilitate VAT introduction.