Prime Minister Raja Pervez Ashraf has given approval to the tax administration and enforcement initiative proposed by the Federal Board of Revenue (FBR) which seeks to document 3.8 million potential income taxpayers currently outside the tax net. Sceptics have expressed their concerns over the success of this scheme based on the failure of such schemes in the past when potential taxpayers would maintain that the source of their income was non-taxable for example from agriculture or from remittances received.
New technology through Nadra accounts for the ability of the FBR to put in place a process whereby it can collate and recheck data at the touch of a button which was not possible before. In addition, the FBR has also developed capacity to analyse data that is at its fingertips, courtesy Nadra. This initiative must be fully supported and one hopes that the government does not back down in the face of expected resistance from the 3.8 million identified potential taxpayers as well as parliamentarians.
Approval by the Prime Minister does pave the way for approval by the federal cabinet. Once such approval is secured the next step in the process entails submitting the proposal to the parliament for necessary legislation. Hence there is many a slip between the cup and the lip and given parliament's past voting history on tax proposals legitimate concerns over the implementation of these proposals remain. Be that as it may, there is no question about the fairness of the proposed initiative and its need given the fact that Pakistan suffers from an appallingly poor tax to Gross Domestic Product ratio of around 9 percent, which places it amongst a group of Sub-Sahara African countries rather than amongst the ranks of its regional partners.
The Prime Minister reportedly stated that the approval for the tax registration and enforcement initiative should have been given two years ago, a time period that many would rightly argue should have commenced from the time the present government took over power because the country's key macroeconomic indicators would have reflected a considerably better performance than today. It is relevant to note that fiscal reforms were identified and agreed with the International Monetary Fund (IMF) in the Letter of Intent (LoI) submitted by the government of Pakistan as a prerequisite for the approval of the 7.6 billion dollar Stand-By Arrangement in November 2008. The LoI specified that the government must integrate the income and sales tax administration, one of the few conditions dictated by the IMF that have been complied with. The integration should enable the FBR to "harmonise the income tax and GST laws, including for tax administration purposes, and reduce exemptions for both taxes. To that end, it will submit legislative amendments to parliament."
Unfortunately, however, these proposed amendments remain unimplemented and one would hope that the government undertakes the necessary steps to begin their ratification by parliament. In addition, value-added tax, the LoI committed, would be broad-based, a condition that the government of Pakistan has failed to comply with to this date and which, together with the failure to comply with power sector reforms, remains a key impediment to either the release of a Letter of Comfort by the IMF or indeed a new financial arrangement.
Opposition to broad-basing the VAT was from several political parties in parliament with support base amongst traders who quite naturally oppose the VAT. It is to be hoped that political parties come together to approve this proposal as it envisages a reform in the tax structure that is critical to putting the economy on the path towards reform and macroeconomic stability.