EDITORIAL: It was revealed during Dr Hafeez Sheikh-led press conference that the cabinet has approved three draft bills – (i) the Income Tax Amendment Bill for withdrawal of tax exemptions projected to generate from between 70 to 140 billion rupees, (ii) the State-Owned Enterprises (SOEs) Bill designed to stop political interference by members of the executive including transparent appointment of professionals with the chief executive officers appointing the board members instead of ministers and, last but not least, (iii) the State Bank of Pakistan Amendment Bill envisaging the grant of autonomy to take decisions independent of the government and making the Governor accountable to parliament.
The projection of between 70 to 140 billion rupees from the passage of the income tax amendment bill has been challenged by sector experts who argue that no more than 30 to 40 billion rupees is likely to be generated for two major reasons. First, the withdrawal of exemptions from Pakistan Mortgage Refinance Company and Venture Capital (considered high risk investments in Pakistan) would reduce investment interest considerably, thereby generating lower taxes than last year. Similarly, the withdrawal of exemptions on IT services and IT would be at a cost to productivity (and exports) with a commensurate negative impact on the economy and exchequer which has not been taken into account. Additionally, it is relevant to note that the government needs to revisit the presumptive tax regime which specifies presumptive taxation in the form of minimum tax rate ranging from 1.5 to over 3 percent on turnover and at the same time application of the normal rates of tax whichever yields higher quantum of tax. The flawed taxation system in the country continues to plague administration after administration with no clear vision yet as to how to reform it in order to make it fair, equitable and non-anomalous.
Today the reliance on indirect taxes is very high, considered a low hanging fruit, and the bulk of direct taxes are in the withholding mode with over 70 percent of total collections under this head in the sales tax mode, which is an indirect tax whose incidence on the poor is greater than on the rich. Reports indicate that the government is also going to withdraw the bulk of the withholding taxes which are likely to compromise its efforts to meet its targets next year.
It is critical for the government to begin to reform the tax structure and tax administration and by dint of improved collections show to the public that it has taken steps to reform the tax structure itself and not to meet a tax target set by international institutions or to fund the runaway current expenditure. In other words, the objective of any tax amendment must be to achieve a structure that would tax the rich and the influential and without having a major negative impact on productivity. It is therefore critical for the government to undertake a cost benefit analysis of any and all measures before taking a decision to amend the tax system through a bill.
SOEs will be reformed so stated Dr Ishrat Hussain during the press conference tasked with this challenging objective by the Prime Minister in August 2018. This exercise remains incomplete two and half years into the tenure of the government with the only clear policy that has been evident is privatisation of SOEs to generate non-tax revenue that maybe used as budget support. The three white elephants remain a source of a drain for the treasury – Pakistan International Airlines which has suffered reverses due to the pandemic as other airlines around the world but has also suffered a serious setback after Ghulam Sarwar, the relevant minister, made allegations on the floor of the house prompting the cessation of PIA flights to several countries; Pakistan Railways losses continue with accidents reaching an all-time high; and though the government has initiated the retrenchment of the non-functional mills since 2015 yet the process remains pending to this day.
The three Cabinet-approved draft bills can be supported as they relate to three areas where flawed policies have been the norm yet one would have hoped that a cost benefit analysis had been undertaken with regard to withdrawal of tax concessions to inform the public of its justification rather than simply presenting a partial picture by highlighting the projected benefit.
Copyright Business Recorder, 2021
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