Pakistan Business Council (PBC) has sent its budget proposals to the government in which it strongly advocated that all income irrespective of source should be taxed and all taxpayers must file tax returns.
The PBC said Pakistan is de-industrializing prematurely, the contribution of manufacturing in GDP is declining, and Pakistanis are slowly turning into a nation of traders. It believes fiscal policy needs to create an atmosphere which promotes the creation of jobs, increases value-added exports, encourages import-substitution and ultimately benefits the government in the form of higher tax revenues.
"Manufacturing jobs as opposed to those in the services sector, are primarily in the formal sector which provide a level of job security. Industries that service manufacturing also benefit," it said.
The PBC asserted fiscal space that the government is looking for to implement its ambitious socio-economic agenda will not, and cannot be provided by continuing to increase taxation on the already taxed sectors of the economy. The taxation base needs to be widened through better documentation by bringing the untaxed, the under-taxed, and the currently exempt sectors in the tax net. Current tax policies are leading to a reduction in investable surpluses for the corporate sector. The short-term revenue enhancement measures pursued by FBR are a disincentive to not only re-investments by existing units but are also acting as a deterrent to fresh investments in industry and the formal sector.
The PBC said it firmly believes that tax policy and tax administration need to be separated. The current arrangement is leading to frequent changes in the tax laws as the government struggles with collection targets. It said introduction of measures such as Super Tax, initially for one year and then its continuation, the undoing of laws on Group Taxation and Group Relief, the tax on under-40-percent distribution of profit thereby restricting the accumulation of reserves, Alternate Corporate Tax (ACT), the refusal to allow carry forward losses under the Minimum Tax Regime, the refusal to clear refunds may have in the short-term helped shore up the FBR's collections; however, in the long-run, these will only lead to a reduction in the FBR's collections as corporate review their investment plans.
"In addition, the arbitrary & non-transparent implementation of tax laws by FBR functionaries in their zeal to achieve unrealistic revenue targets is severely impacting the viability of the formal sector," it said.
The PBC appreciated some of the measures taken by the incumbent government including the differentiation between filers and non-filers, it also believed this specific measure which was initially aimed at increasing the tax base degenerated into another revenue measure. The difference in tax between the filers and non-filers is not large enough to encourage the filing of tax returns. It also noted with concern the inability of the government to take measures to regulate the real estate sector which has become a major avenue for the parking of ill-gotten wealth. The failure of the FBR to ensure data-mining to identify those who are either not paying or underpaying their dues is also an area of concern for the formal sector.
The PBC stated commercial importers are abusing the Final Tax Regime (FTR/PTR) to undermine domestic manufacturing, the profits made through misdeclarations in import values are staggering. There is blatant misuse of the Afghan Transit Trade, wholesale and retail markets all over Pakistan are flooded with smuggled products; however, despite having jurisdiction to act against open sale of smuggled products, the FBR hides behind flimsy excuses like "lack of support from local administration."
The PBC urged that revenue leakages in the Customs department need to be plugged; massive under-invoicing from just China in 2016 had seen a gap between China's reported exports to Pakistan and Pakistan's reported imports from China of US$3.5 billion. It said revenue loss to the government at the import stage in the form of Customs Duty & Sales Tax alone is estimated at a minimum Rs 142 billion. The revenue loss from closure of industry in Pakistan and resulting social impact of unemployment is additional.
"Under-invoicing can and should be addressed; some of the measures include the activation of Electronic Data Exchange between Pakistani and Chinese customs, valuations which are transparent and reflective of ground realities (example would be the current procedure of clearance of auto-parts by weight)," said PBC, adding that Afghan Transit Trade can be better monitored by collection of all dues which are payable by importers in Pakistan and refunding the same once the shipment has conclusively entered Afghanistan.
The existing taxpayers whether in the manufacturing or the services sector are being subject to what can only be referred to as tax discrimination. The formal sector is made to work as the unpaid tax collection arm of the FBR.
The council said that FBR needs to take a more proactive approach to tax administration; it needs to upgrade its HR, improve the use of technology and ensure transparency in its operations.