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Taxation system: FPCCI to discuss significant changes today

Updated 30 Apr, 2021
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ISLAMABAD: Federation of Pakistan Chambers of Commerce and Industry (FPCCI) will discuss significant fundamental changes in taxation system of the country with Finance Minister Shaukat Tarin on Friday (today).

To be led by FPCCI President Mian Nasser Hyatt Maggo, the delegation which will be on zoom from Karachi will make suggestions to improve revenue through replacing Federal Board Revenue (FBR) with National Board of Revenue (NBR) by clubbing all provincial revenue boards.

According to FPCCI there is a huge tax gap between potential taxpayers and filers under the income tax and sales tax regime.

The latest data available on the website of Pakistan Telecommunication Authority (PTA) reveals that the total number of cellular subscribers as on January 31, 2021 is 180 million (84% teledensity), out of which 95 million are 3G/4G subscribers (44.5% penetration), 2 million basic telephony users (1.3 teledensity) and 98 million broadband subscribers (45.6% penetration). At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable 12.5% as pre-paid or post-paid mobile users. There are 100 unique mobile users (many have more than one connection and bills of many are paid by parents/employers).

The number of "active" income tax return filers as per Active Taxpayers List (ATL) on FBR's website was 2.6 million as on the latest date (April 26, 2021), out of which nearly 50% paid no tax at all. According to FBR many filed returns late but did not pay default surcharge to be eligible to appear in ATL.

The potential income tax filers are 10 million. The FBR must bring on tax roll all those having taxable income by amending the law empowering compulsory registration on the basis of credible information and sending text message with user name and password (can be changed by user online) asking the delinquent to provide profiles and file returns. It will bypass the existing system of issuance of notices and delays through crafty (unscrupulous) tax advisers. These advisers, allegedly many staff of FBR, tell the businessmen not to file return as it would lead to "difficulties" later on and they would fix matters in the event of any notice. The culture of deceit, cheat and corruption should end now with zero tolerance towards potential taxpayers not filing the returns and also tax officials-Customs and Inland Revenue Services.

The FPCCI will support the government in this initiative in getting returns and tax from all those who are paying advance taxes through numerous withholding tax provisions but not filing returns, which should be made one-page with no wealth statement. The agencies are available within FBR to locate assets (Benami or in own name) and match expenses with declarations.

On Sales Tax, FPCCI argues that FBR's Year Book: 2019-20 shows an extremely narrow sales tax base. The collection from POL products of domestic sales was Rs 234.6 billion (28.8%). Petroleum products (CH: 27) is also the top source of revenue generation of sales tax at import stage, which was around 26.4% (Rs 231 billion).

The association further argues that sales tax coming through electricity bills was Rs 91.8 billion as per FBR's Year Book: 2019-20. It was second highest after POL at Rs 234.5 billion. The retailers pay 5% sales tax where the monthly bill amount does not exceed Rs 24,000 and at the rate of 7.5% where the monthly bill exceeds this threshold. On unregistered additional 3% sales tax is levied. The electricity supplier is bound to deposit the amount so collected directly without adjusting any input tax.

According to "State of Industry Report 2020" by National Electric Power Authority (Nepra), the total commercial and industrial electricity connections as on June 30, 2020 are 3,716,285 and 370,640 respectively (total 4,086,925). By excluding those not chargeable under the Act e.g. educational institutions, including Deeni Madrassas (religious schools), hospitals/dispensaries, mosques, agricultural sector, and retailers with an annual electricity bill of up to Rs 1.2 million and cottage industries, the fair sales tax base out of 4 million commercial and industrial users comes to around 3 million. Present gap is around 2.8 million (3,000,000 minus 186,000 filers).

FPCCI maintains that it will also support the government in this initiative by getting all those who are taxable under the sales tax net but not filing returns to pay due tax and the association would assist FBR in their compulsory registration.

Success depends on adopting the new model of reduced taxes on broad base-details would be provided in the presentation with projections of tax collection of income tax, sales tax, customs and excise duty.

On March 12, 2020, Ministry of Finance approved the establishment of National Tax Council (NTC) and its terms of reference (ToRs). The NTC has an executive committee, comprising federal finance secretary, Chairman of FBR, provincial finance secretaries and heads of the provincial revenue authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA).

The executive committee of NTC would forward its suggestions/proposals for approval by the NFC. The NTC recommendations will be finalised in terms of the majority to be presented before the Monitoring Committee of the 10th National Finance Commission (NFC).

The NTC as the very first step should strive to reach a consensus on establishing All Pakistan Tax Services (APTS) and merge all the tax agencies mentioned above, through amendment in the Federal Board of Revenue Act, 2007, renaming it as National Board of Revenue Act, 2021 [NBR Act, 2021] after consultation and approval from National Economic Council in terms of Article 156(2): The mode and working of National Board of Revenue (NBR) can be discussed and finalised under Council of Common Interest (CCI) (Article 153 of the Constitution) and its control can be placed under National Economic Council [Article 156] of the Constitution.

All serving officers qualified through FPSC and provincial public service commissions' of FBR, PRA, KPRA and BRA will become part of APTS working under NBR Act, 2021. They will have their seniority and other terms of service as before. Those who joined through or recruited or transferred/promoted by some other means will only be made part of APTS through a competitive examination taken by the Federal Public Service Commission (FPSC).

For collection of harmonised sales tax on goods and services, new law will have to be passed after resolutions by provincial assemblies under Article 144 of the Constitution.

In the same manner the right to enact a uniform law for agricultural income tax (AIT) for all provinces and its collection by NBR is required. In the Income Tax Rules, 2002, one page for declaration of AIT will be added in the income tax return and all the provisions of Income Tax Ordinance, 2001 relating to assessment, recovery, appeals etc will apply mutatis mutandis.

The collection of AIT will be by NBR but the share of same will be transferred to provinces directly. As regards sales tax on goods and services, the transfer of sales tax on services will be directly transferred to provinces to which it belongs and distribution of sales tax on goods will be strictly under prevalent NFC Award. Alternately, if and when agreement is reached by all political parties, harmonised sales tax (HST) on goods and services can be given to provinces and agricultural income tax should be with the Centre under Article 142(a) of the Constitution.

For each tax payment, there will be distinct number so transfer and distribution, as the case may be would be absolutely transparent.

At a later stage, after successful merger of FBR, PRA, SRB, KPRA and BAR, those serving in provincial boards of revenue, provincial departments of excise and taxation and Military Lands and Cantonment Group (ML&CG) can also be made part of NBR Act, 2021 and can join NRB as part of APTS. The non-CSS / Provincial Public Service Commission cadre can join through competitive examination by FPSC.

The NRB, unlike FBR, should not have any role in framing tax policy. For this a permanent Tax Policy Board should be established in the light of Article 156(2) of the Constitution with Planning Commission to become a permanent secretariat for federalised economic development. The role of Policy Board in this permanent secretariat should be of a think-tank to recommend policies for equitable and accelerated growth on national level as well as helping all assemblies and Senate for legislation to achieve the desired goals.

The present taxation negates the provision of constitution, wherein tax adjudication functions have to be separated from tax collection functions for conformance with the constitution as well as to seal the trust amongst taxpayers. FPCCI also proposed an efficient tax judiciary to help in removing impediments in the way of collection of genuine tax demands by the State and settling tax disputes within 12 months, if not earlier. The draft law specimen for reference is also available for flat, low-rate, broad and predictable taxes (revised/enlarged edition of December 2020, PRIME Institute). An independent tax revenue draft model was proposed to government by FTO during the tenure of Justice Saleem Akhtar which can be taken assistance of developing an independent tax judicial system. National Tax Appellate Tribunals will be truly an independent forum, fully separated from Executive. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity may be renamed as National Tax Tribunal (NTT) and selection of members may be with consultation of the Supreme Court as is the case with Service Tribunal.

The first appeal will go to NTT and after exercising one intra-court right of appeal only substantial questions of law will go to the Supreme Court by way of leave to appeal as provided in Article 185(3) of the Constitution. The pay, perquisites and salary structure of NTT members and staff should be at par with that of High Courts.

Copyright Business Recorder, 2021

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