Pakistan Business Council (PBC) has regretted that the Super Tax has penalized successful large businesses and signaled benefits of remaining small and under the radar, promoting fragmentation.
According to the set of recommendations of the PBC on tax reforms and restructuring the FBR, significant changes are required in the structure, talent, and technology of the Federal Board of Revenue (FBR) and in fiscal policy to make taxation equitable, broad-based, and effective in raising the country’s tax to GDP ratio.
Under the key reforms, all income beyond a certain threshold irrespective of the source should be taxed. Fiscal policymaking should be separated from the collection of taxes.
An audit that functions independently of the FBR and is preferably composed of the leading firms of accountants be established to inspire the confidence of taxpayers.
Other reforms included completely overhauling human resources in FBR and training and deployment of technology be given a heightened focus.
Temporary relief be provided to the FBR from chasing unrealistic tax collection targets until the restructuring is completed. The inconsistent and unpredictable fiscal policy is prone to knee-jerk changes and to tax the already-taxed to meet revenue targets. On the other hand, the use of SROs to exempt or provide indefinite relief to certain sectors/taxpayers, PBC stated.
“Front-loaded and unrealistic tax collection targets for an inadequately resourced FBR and provincial revenue authorities force them to chase existing taxpayers and adopt harassment rather than objective assessment as the means to meet these. Until the FBR and the provincial revenue authorities are radically restructured and their capacity to broaden the tax base through the use of technology is not addressed, the scope of broadening the tax base will remain limited. Tax collection targets should be set separately for those in and outside the tax base so that its achievement of growing the latter becomes more visible”, PBC recommended.
The FBR should withdraw the fundamentally flawed turnover-based minimum tax, if necessary, in a phased manner so as not to impact tax revenues.
The FBR should gradually reduce the income and corporate tax rates and remove the disparity between the taxation of profit distribution by companies and withdrawal of profit from business by sole traders and the Association of Persons.
Pakistan suffers from one of the most complex tax structures with multiple taxes and authorities for businesses to deal with. Fragmentation between the federation and the provinces has not helped. Taxes should be unified, returns simplified and the scope for personal interaction be reduced; Incentivize capital retention, group formation, and investment in plant and machinery.
A sales tax rate of 17% is high for a poorly documented economy and provides an incentive to evade, creating an unfair advantage for the informal sector. The Sales Tax regime should be in the true VAT mode, and input tax whether at full or reduced rates should be a pass-through for businesses; Advance and withholding taxes sap the cash flow of businesses and should be reduced gradually. The cross adjustments of refunds between Income Tax, Sales Tax & Excise Duty should be allowed so that refunds if any can be adjusted against tax payables, thus reducing pressures on cashflows; Advance/withholding taxes on the consumption by the poor, although theoretically adjustable, are inequitable due to their below taxable threshold income and inability to obtain refunds. This raises the cost of cellular services thus impeding a sector that can play an important role in the formalization of the economy.
It further highlighted that the transit treaty with Afghanistan has been misused through the diversion of goods to Pakistan. As the treaty has expired, Pakistan can renegotiate in the current more regionally favorable environment, put quantitative and qualitative restrictions on what can transit, insist on letters of credit, charge duty and GST on imports which would only be refunded to the Afghan government on exit, track and monitor containers, strengthen inspection of empty containers returning and make physical controls along the border stronger.
The fiscal policy discourages scale, consolidation, diversification of investment, and wider shareholding by taxing inter-company dividends at multiple stages Super-tax penalizes successful large businesses and signals benefits of remaining small and under the radar, thus promoting fragmentation, instead of scale and efficiency, PBC added.