International Monetary Fund (IMF) has said that Pakistan’s Federal budget (2021-22) will abolish all sales tax concessionary rates and sales tax exemptions, excluding a small subset of goods (i.e., basic food, medicines, live animals for human consumption, education and health-related goods) and bring all others to the standard rate of 17 percent sales tax.
This has been revealed in the second, third, fourth, and fifth reviews under the extended arrangement under the extended fund facility and request for re-phasing of access released on Thursday.
The report said the government would introduce both the GST and the PIT reform with the budget (2021-22), yielding an estimated 1.1 percent of GDP. This is crucial for broadening the tax base, key strategic fiscal objective, reducing informality, and simplifying and modernizing the tax system. The reforms will be underpinned by high-quality tax measures in line with IMF staff recommendations.
Under GST reforms, the government will
- Eliminate all zero-rated goods (Fifth Schedule of the Sales Tax Act), except on export and capital machinery goods, and move them to the standard sales tax rate.
- Remove reduced rates under the Eight Schedule and bring all those goods to the standard sales tax rate.
- Eliminate exemptions (Sixth Schedule of the Sales Tax Act) excluding a small subset of goods (i.e., basic food, medicines, live animals for human consumption, education, and health-related goods) and bring all others to the standard rate
- Remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate.
These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis.
The government missed structural reform agenda on the avoidance of further tax amnesties and new preferential tax treatments after launching a temporary tax amnesty for construction in July 2020 (extended for one year in December 2020), IMF said.
Moreover, the government is also in the process of harmonizing the service sales tax across provincial jurisdictions, with support from the World Bank, expected to be completed by the end-June 2021.
To simplify and increase PIT progressivity, the government will seek to change the existing tax rate structure by reducing the number of rates and income tax brackets from eleven to five and decreasing the size of the income slabs, to simplify the system and increase progress, reduce tax credits and allowances by 50 percent (except for Zakat and those provided for disabled and senior citizens), introduce special tax procedures for very small taxpayers (aimed at preventing further tax base erosion and facilitating the formalization of the economy), and adopt a long-term strategy to reduce labor informality and to bring additional taxpayers into the PIT net. This reform is expected to yield 0.4 percent of GDP on an annualized basis.
The report revealed that the revenues are expected to increase by 0.5 percent of GDP from 2020-21 due to the net impact of:
- Revenue measures (especially a hike in the petroleum levy on gasoline and diesel toward PRs 30/liter).
- Reinforced tax administration efforts.
- Automatic stabilizers.
The authorities have made an important step in their multi-year tax policy strategy by committing to the parliamentary adoption of a comprehensive corporate income tax (CIT) reform in March 2021. The reform simplifies the CIT system by streamlining numerous tax exemptions and bringing provisions in line with best international practices (including tax credits, accelerated deductions, exempted income, reduced tax rates, and tax liability reductions).
The authorities’ key fiscal objective remains to broaden the tax base, reduce informality, and simplify and modernize the tax system. In this regard, they plan to introduce a high-quality tax reform package in the budget 2021-22 (of about 0.7 percent of GDP), based on the recommendations of previously provided technical assistance (TA).
The General sales tax (GST) reform will broaden the GST tax base and harmonize the system between federal and provincial governments.
Specifically, it will:
- Eliminate nonstandard preferential rates and tax exemptions, and bring those goods to the standard rate of 17 percent.
- Harmonize the service sales tax across provinces, in coordination with the World Bank.
- Unify the current fragmentation with services subject to provincial taxation and goods under Federal Government taxation.
Other broad-based reforms will strengthen tax administration. The authorities recognize that tax administration reforms and enforcement efforts need to complement their tax policy measures. The authorities plan to introduce a centralized, risk-based compliance function; update IT and automation; use third-party data, cross-checks, and analysis; simplify registration and filing processes; modernize and target audit practices and bolster the Large Taxpayer Office (LTO).
Efforts will also be made to establish a single filing, taxpayer, and return portal and redress high outstanding tax arrears. To contain smuggling, the authorities will reintroduce the track-and-trace system for tobacco products by July 1, 2021, the report added.
The government remains committed to broadening the tax base and gradually increasing the tax-to-GDP ratio by more than 3 percent of GDP through the fiscal year 2023, the report said.
The government recognizes that for tax policy measures to be successful and generate the expected revenues, we need to step up tax administration reforms and enforcement. To this end, we will focus on:
- Introducing a centralized, risk-based compliance function.
- Modernizing the IT system and further advancing automation.
- Actively using third-party data, strengthening data cross-checking, and analysis.
- Simplifying registration and filing processes.
- Modernizing audit practices and taking a more targeted audit approach.
- Further strengthening the large taxpayer approach and expanding the activities of the Large Taxpayer Office (LTO).
“Additionally, we will continue the process of sales tax harmonization, implement the single return and taxpayer portal by the end of June 2021, and launch a Collectible Debt Campaign by end-March 2021 to redress the high percentage of outstanding debt,” added the report.
The procurement procedures related to the track-and-trace licenses to address the smuggling of tobacco products have been declared invalid by the Islamabad High Court (IHC) and the roll-out of the track-and-trace system for tobacco products was suspended. Nonetheless, and building on the lessons from this experience, we are seeking to reintroduce and roll out the track-and-trace systems for tobacco products by the end of June and consider its introduction for other items subject to high levels of smuggling, including sugar, drinks, and cement. To support GST harmonization, we will establish the single filing portal by September 2024, it added.