PTR: time to shelve a failed experiment

When it was first introduced in early 1990s, at the behest of Dr Hafeez Pasha, the Presumptive Tax Regime (PTR) was meant to be a stop-gap measure until FBR’s capability and automation were considerably improved.
It was aimed at passing the onus of deducting tax within the payment system in order to overcome the rampant corruption in the system. Withholding tax deducted was meant to be adjustable against the final tax liability and not as a final tax in itself.
At that time, the logic put forth was that self-assessment at relatively low rates will encourage companies to give up tax evasion. It was argued that FBR’s ability to monitor and apprehend evasion would develop in time through development of PRAL and other capabilities, while documentation would meanwhile be enhanced. Obviously, the desired effects have not been realized, because self-assessment scheme without effective audit is meaningless.
FBR today appears as the epitome of lethargic bureaucracy while importers, exporters and other businesses continue to pay dime on the dollar and pass that cost on to consumers too.
In an interview with BR Research in mid-2010, former Finance Minister Sartaj Aziz had admitted that “almost one-third of direct taxes are withholding taxes, which in essence, is indirect taxation.
In its Budget Proposal FY14, the Institute of Chartered Accountants of Pakistan has highlighted that “an effective tax system can only work where there are identical tax procedures and processes for the same kind or nature of business activities. Furthermore, there has to be no discrimination in incidence by one sector over the other.”
On both counts, ICAP has accorded a failing grade to PTR.
Tax authorities are also awakening from their lengthy slumber on the matter. Former Member (Policy) FBR, Asrar Rauf told BR Research that there is consensus that the use of withholding taxes as discharge of final tax liability cannot continue ad-infinitum.
Yet the direction of policy recommendations from FBR suggests satisfaction with the status quo.
In the Finance Act 2012, firms engaged in import, export and sale of goods were given the option of filing under Normal Tax Regime, but tax accountants highlight that the caveats are skewed in favour of firms reporting higher profits. And the same faulty option is all set to be extended to execution of contracts, brokerage and commission, goods transport, CNG stations and vehicles plying for hire in the upcoming Finance Act.
The Government of Sindh presented a “Report on Resource Mobilisation” on 17th May. That report pointed out that “there is no mechanism to ensure completeness and correctness of taxes paid” and that “there is minimal interaction between the stakeholders and tax collectors; leading to deficit of trust, problems for taxpayers and abuse of discretion.”
In short, the real kicker, that is as yet missing, has to come from FBR in the form of enforcement and audit. Secondly, tangible incentives, such as lower tax rates for firms opting for the documentation route needs to be incorporated.
Both these measures will probably add to the working hours at FBR. Also, while documentation will improve, tax collection tallies may not rise off the bat. And it is for these two reasons that tax authorities remain loathed to meaningful tax reform that will expand the tax base; instead of solely helping to meet annual tax collection targets.
The Centre has blamed provincial authorities for failure to enhance their taxation ability as low hanging fruits such as property tax and agri-income tax fall in the latter’s domain. FBR has failed to recognise its constant failure to tax the services sector which contributes more than half of the GDP. Retail, wholesale and transport sectors do not pay their due shares.
After the 18th Constitutional Amendment and the 7th NFC Award, the blame game between FBR and provincial tax collectors continues. It is a failure of both. FBR in not moving away from PTR to receipt of tax on actual profits and the provinces on their inability to merge under one roof, their excise and taxation with sales tax on services.
The courts have not been much help either. Billions of rupees in revenue are held up on account of stay orders due to poor representation of revenue hounds because of poor quality of personnel in the Attorney General and Advocate General offices as well as a shortage of competent judges to handle complex revenue cases.