ISLAMABAD: The Federal Board of Revenue (FBR) will abolish 30-40 more withholding taxes (WHTs) in a phase-wise manner, but will continue to rely on the WHT regime due to a narrow tax base, distorted tax system and easy mechanism to collect WHTs.
This was stated by a senior FBR official, Chief Income Tax Policy Reema Masud at a webinar on, "Economics of Tax Expenditure by FBR - A debate for reforms" held here on Wednesday organised by the Pakistan Institute of Development Economics (PIDE). Renowned economists including former Governor State Bank of Pakistan (SBP) Shahid Hafiz Kardar, Dr Nadeemul Haq, and international tax expert Dr Ikramul Haq also spoke on the occasion.
Masud stated that there was a long list of withholding taxes as it was the easiest way to collect taxes in a situation when the tax base was narrow.
Over time, withholding taxes have been increased.
There is a pressure on the FBR to collect revenue and meet targets.
Therefore, we have to rely on withholding taxes and other distortionary taxes till the tax base has been widened.
However, the FBR has abolished nine withholding taxes in budget (2020-2021), and a plan is on board to abolish more withholding taxes in the next fiscal year.
The FBR Chief Income Tax Policy endorsed the analysis of international tax expert Dr Ikramul Haq that the collection of withholding taxes on imports was not a good tax policy.
From the FBR viewpoint, it would be the decision of the government to abolish major revenue spinners of withholding taxes or not.
As a policy, most of the presumptive taxes have been phased out and converted into minimum taxes.
She pointed out that the FBR's Tax Gap Analysis showed that Agriculture Income Tax could fetch Rs69 billion revenues on per annum basis if Rs50,000 was collected on per acre basis over certain limit of landholdings.
The agriculture income tax cannot be collected by the FBR under the existing constitutional arrangement because it's the domain of the provinces; however, the FBR has done its tax gap analysis, and estimated that its revenue losses stood at Rs69 billion on per annum basis.
She stated that the cost of tax exemptions surged over the years as it stood at Rs412 billion in the fiscal year 2014-2015 that now had ballooned to Rs1.149 trillion in the fiscal year 2019-2020.
In last two years, the cost of tax exemptions increased phenomenally as it stood at Rs540 billion in the fiscal year 2017-2018 but now it surged to Rs972 billion in 2018-2019 and now further increased to Rs1.149 trillion.
During budget making process, we do try to take all stakeholders on board to bring growth-oriented tax policy.
The FBR does not sponsor/recommend tax exemptions/concessions, but all exemptions are proposed by the other ministries or the stakeholders.
"We are fire fighting. We have to bring in mini-budgets because especially under the IMF programme there are tight targets and hardly any breather for the chairman FBR," she said.
She highlighted that if the FBR's third-party information was going to the NADRA or any other authority, it should not be the concern of a compliant taxpayer.
However, there should be deterrence for the non-compliant and non-abiding citizens.
The tax concession or reduction in payment of taxes under the last amnesty scheme has not been made part of the tax expenditure report, because strictly speaking, it is not a tax expenditure, she clarified.
She said that, "setting up a tax policy unit is very important and the FBR will take economists on board during the next budget preparation exercise."
The government should also look at other alternatives except tinkering with the tax codes. It is not fully proved that the tax credits and exemptions have resulted in improvement in manufacturing sector, export or investments.
There is a need to conduct studies, whether the investment or economic activity has increased in a specific sector as a result of tax exemption or reduction in tax rate or it has only been done due to pressure groups or parties.
She said that the total tax expenditure (cost of exemption) for 2019-2020 stood at Rs1.150 trillion. The FBR's powers to grant tax exemptions and tax concessions have been withdrawn. The federal cabinet and the prime minister is the competent authority for granting tax exemptions or providing tax relief.
It has to be done through the money bill or an Ordinance.
"I can safely say that 100 percent powers of the FBR to grant tax exemptions have been withdrawn," she said.
She said that the FBR was unable to extract data from the database of income tax returns due to simplicity of return.
It is suggested that we should put some "markers" in the income tax returns to help us better understand under each head/clause of exemption and tax expenditure without complicating the tax return.
Masud stated that the FBR intended to improve its sales tax expenditure methodology by following international best practices such as VAT Gap Model.
Former Governor SBP Shahid Hafiz Kardar said that the cost of tax expenditures/exemptions was on a lower side, and argued that the cost of Free Trade Agreements (FTAs) with various countries were estimated at Rs45 billion, while the FTA with China was estimated at revenue loss of Rs34 billion.
These revenue losses, he said, were under stated because massive under invoicing was being done. He said that the cost of the CPEC exemptions was not fully accounted by the FBR.
He also identified that the cost of tax exemptions for the IPPs stood at Rs52 billion in 2013-2014 but now the FBR showed its cost at Rs27 billion in 2019-2020, so how the cost of exemptions got reduced in the last six years.
He also raised the issue of capital gains tax on property and informed that Bombay was collecting $750 million tax from property, while Pakistan's Punjab province was collecting just $75 million.
The collection of Bombay was five times higher than whole of Pakistan, he added.
On agriculture income tax, he said that there were only two options, one was to leave at the discretion of the FBR officers, and second was to slap tax in excise mode.
International tax expert Dr Ikramul Haq stated that the Supreme Court had concluded that delegation of powers for granting exemptions and concessions given in tax laws clearly violated the supreme law of the land. Amending tax codes by way of the SROs is unconstitutional in view of Article 77 read with Article 162 of the Constitution of Pakistan. Through these SROs, the government bypasses the Parliament, and commits violation of the Constitution of Pakistan. He said that the Article 162 debarred even the National Assembly to grant exemptions without the prior approval of the president but interestingly, this power had been delegated unconstitutionally to an executive authority by the Parliament.
The experts rightly raised a question as to how Parliament can delegate a power, which it cannot exercise itself without the prior sanction of the president?
By delegating powers under tax codes, the Legislature has violated Article 162 of the Constitution.
Dr Ikram stated that the most glaring example of abuse of this delegated power surfaced when before presenting the Finance Bill, 2013, the FBR issued many beneficial notifications, especially for sugar and steel industries related to persons in power.
In 2012, when officers of Grade 19-22 were allowed monetized transport allowance, SRO 569(I)/2012 was issued on 26 May 2012 providing that government officials in grade 20-22 would pay just five percent tax on this allowance as a separate block of income.
About the exemption to the IPPs, he raised the question that the profits and gains derived by a taxpayer from an electric power generation project set up in Pakistan on or after the 1st day of July, 1988. In every year it was more than Rs25,000 million and last year went up to Rs2,888 million. He stated that no quantification was given for those who availed frequent amnesty and money whitening schemes.
He referred to the judicial allowance and other benefits of judges and the rationale for exemption; tax-free allocation of plots, and other benefits in kind and cost versus transparency and provision of services.
Copyright Business Recorder, 2020
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