Head of Taxation, Association of Chartered Certified Accountants (ACCA), Chas Roy-Chowdhury has proposed Pakistani tax authorities to considerably reduce the standard rate of 17 percent sales tax, remove tax disputes between the Federal Board of Revenue (FBR) and provincial revenue boards/authorities, adopt speedy appeal process, discourage policy of higher rates of withholding taxes on non-filers, reduce tax gap and avoid revenue generation through withholding taxes.
He also shared the findings of the new ACCA report on 'Indirect taxes - current trends across South Asia and UAE' with Business Recorder during his recent visit to Pakistan. Asad Masud Mirza, Head of Policy MENASA, ACCA, was also present with the international tax expert of the ACCA. In an exclusive chat, the Head of Taxation ACCA stated, "We need to move away from the withholding taxes which should not be used as a tool to generate additional revenue. The number of existing withholding taxes has not gone down, but they are used for revenue generation in Pakistan, which should be discouraged."
While opposing the idea of different rates of withholding taxes on filers and non-filers of returns, he suggested that the FBR should work to make taxpayers compliant. The reliance on withholding taxes from non-filers is not a very good policy to expand the tax base or increase revenue collection.
He said that the speedy appeal process is very important for the taxpayers. In the present appellate forums available in Pakistan, quick justice in tax and assessment disputes is necessary to provide timely relief to the taxpayers. For this purpose, the capacity of the appellate authorities should be improved. He specifically suggested that the higher tax rates, particularly Value Added Tax (VAT) or sales tax, should be reduced. It would improve tax compliance by the registered taxpayers as well as encourage new taxpayers to come into the documented regime. As compared to other tax jurisdictions, the rate of VAT in Pakistan is much higher which needs to be brought down. Moreover, VAT is a consumer tax on businesses which should not be higher.
"Businesses in Pakistan should not be overburdened with taxes under tax policy. A careful tax policy should address this issue," Chas Roy-Chowdhury remarked. He said, "We need to have a broad tax base as well as reduced tax rates which would result in more acceptance and higher level of tax compliance. Pakistan can have very low levels of income tax, GST, VAT to broaden the tax base."
Chas Roy-Chowdhury stated that the plugging tax leakages should be top priority of the tax authorities of the FBR. The control on revenue leakages would also be instrumental in documentation of the economy and broadening the tax base. To a query, he said that the 'trust gap' needs to be narrowed down between the tax collectors and taxpayers. In this regard, Pakistan has already introduced electronic system for filing of income tax returns and monthly sales tax returns. The IT systems are also being modernised in line with the best international practices. The role of e-intermediary in filing of returns and statements is also a right step towards documentation.
Talking about the new ACCA report, he said that ACCA has recommended that South Asian countries particularly Pakistan should limit Value Added Tax (VAT) or sales tax exemptions to health, education, charity and basic essential food items excluding those supplied to restaurants and hotels, etc.
About Pakistan, the report said that in the country, the federal as well as provincial governments are competent to levy various types of tax. The responsibility for collecting taxes for the federal government has been assigned to the Federal Board of Revenue (FBR), a semi-autonomous federal agency, whereas recently established provincial revenue authorities are responsible for the collection of sales tax on services. The federal government has implemented both types of tax ie direct and indirect, including income tax, general sales tax on goods, customs duty and excise duty. Under the 18th Amendment to the Constitution of Pakistan made in 2010, the responsibility for collecting sales tax on services along with certain other taxes was devolved to the provincial governments.
The scope of direct taxes is very limited as 61.7 percent of the total population of Pakistan lives in rural areas and around 38.8 percent of households are below the poverty line. So in order to meet the operational and developmental needs of the government, indirect taxes, especially sales tax, contribute heavily to overall revenue collection. The major reason for reliance on sales tax is because of a large undocumented economy and capacity issues within the taxation system, besides structural problems that have created multiple bottlenecks in government efforts to broaden the tax base, he referred to the said report.
Pakistan's GST rate on goods is higher than Bangladesh's VAT rate. Unlike Bangladesh, in Pakistan the provincial authorities have the power to impose a tax on services. Punjab has set up a standard rate of 16 percent on services, which is higher than the VAT rate on services established by Bangladeshi authorities, while Sindh, KPK and Balochistan have set standard rates of 14 percent, 15 percent and 15 percent, respectively. On the other hand, Sri Lanka has set a very low VAT rate of 11 percent on goods and services, reduced from the 12 percent rate that applied up to 2014.
The government of Pakistan has also established Federal Tax Ombudsman (FTO) where a taxpayer can file a complaint against any maladministration on the part of tax department. Nonetheless, the FTO is not an appellate forum. The gap between the law and practice reflects the very poor performance of the authorities: in Pakistan only 15,000 out of 118,000 registered sale entities pay their tax. Similarly, in India, the land of over a billion people, only 619,000 filed their tax returns for 2012/13, ACCA report added.
Referring to the Restaurant Invoice Monitoring System (RIMS) of Pakistan Revenue Authority (PRA), he appreciated such kind of invoices ideas for documentation of economy. The direct electronic payment system of refunds and increased used of IT technology has also improving tax compliance and facilitation in Pakistan. He said that the disputes between the federal and provincial tax departments should be resolved. He quoted definition of goods and services which is presently a matter of dispute between the FBR and provinces.
To check VAT tax frauds, he said that the provisions like 'Missing Traders Fraud' can be effectively used to penalise the entire supply chain involved in tax frauds or fake/flying invoices. The Head of Taxation ACCA stated that there is no harm in FBR's policy of computerised selection of audit cases through random balloting, but the intelligence based audit under risk assessment can be very effective.
Chas Roy-Chowdhury stated that the tax authorities must know the sensitivity about the anti-money laundering provisions. These powers must be exercised with caution against the taxpayers. There should be a clear demarcation for the tax officials for exercising anti-money laundering provisions against the taxpayers.
For better training of tax officials, he said that the tax employees should work in the business environment of companies to have firsthand knowledge about the corporate structure and their working. Tax employees must spend sometime in the business environment of the corporate culture. They should have experience of business environment and working of the corporate entities.
The tax system in Pakistan and elsewhere needs to have integrity. It has to be simple, specific, and as politics-free as possible. What ACCA has been advocating for a long time is the idea of a tax policy committee (TPC) where government might set the overall economic framework, while this independent body will set the tax policy.