ISLAMABAD: World Bank’s senior tax specialist has pointed out that Pakistan’s tax-to-GDP ratio dropped and went below average during the last two fiscal years. The overdependence on withholding taxes is also bad because these WHT have been converted into another kind of sales tax, the World Bank’s Senior Tax Specialist, Sebastian James, added.
During the webinar organised by Pakistan Development Policy Series 2021 in collaboration with the World Bank on Monday, the Special Assistant to the Prime Minister on Revenues, Dr Waqar Masood, said that the government was reforming the withholding tax regime. There are only 15 meaningful withholding taxes.
The government would abolish 40 withholding taxes in the next two fiscal years, so the total number of withholding taxes would be brought down from 65 to 25 taxes, starting from the upcoming budget for 2021-22. However, the information collection would continue from these transactions to be made part of the FBR database.
Addressing the webinar, James, who also worked on Pakistan’s taxation policy issues said, “There is a need to broaden the narrow tax base instead of burdening the existing taxpayers. It’s our serious concern that the average tax collection dropped in Pakistan in the last fiscal years compared to the similar economies.”
If the FBR is reducing the number of withholding taxes, the tax authorities must ensure that the information must be available to the system. The withholding information should not be deleted after abolition of these taxes, he said.
The WB’s Country Director in Pakistan, Najy Benhassine, said on the occasion that the tax base was narrow in Pakistan and higher tax expenditures and tax concessions created distortions. He said that this dialogue was aimed at finding out solutions.
James said that there was a need to ponder over two questions, what Pakistan was collecting, and second, how much it could collect. He said that there was higher taxation rate on the formal economy, and under taxation for the informal economy.
“It’s a fact that Pakistan was collecting below average and its collection dropped in the last two fiscal years.”
He said that collecting taxes was not an easy task as it was important that how taxes were collected and how they were spent. He said that the withholding taxes created distortions as it created cash flow problems for the formal sector because the refunds were not paid in a timely manner.
He suggested that the transition for moving away from withholding taxes should be done in a careful manner as it should be done away with placement of improved information management system. Some withholding taxes are not meant for collection of money but they provided information, so transition became tough, and it should be done in a careful manner.
James said that there is an over taxation of the formal economy as compared to the informal regime. He said that the World Bank had always asked for broadening of the narrow tax base.
He said that the WB conducted a study on the agriculture income tax and found that certain loopholes were misused. There is general sales tax (GST) on goods and services. The collection of the sales tax on good is the domain of the FBR, whereas, on services it is collected by the provinces.
There is much more collection from the GST on goods compared to the GST on services. The Special Assistant to PM on Revenue, Dr Waqar Masood, stated that the FBR possessed reservoir of database that would be utilised to broaden the tax base.
He said that he was opposed to the concept of filer and non-filer. He said that the numbers of withholding taxes would be reduced from 65 to 25 over two years period starting from next budget for 2021-22. He said that the government planned to phase out withholding taxes in a gradual manner.
He said that in some instances, the cases of amnesty schemes were opened up, so the government would address genuine problems faced by taxpayers. The continuity will not be broken, he added. Aqeela Mumtaz, head of corporate, accounting and tax at Jazz, said on the occasion, that tax compliance was complex as tax rates were on higher side, and cited examples that the advance tax stood in the range of five to 12.5 percent.
She said that the people wanted to get themselves registered with the tax authorities but there was discrimination in case of certain sector, and certain income bracket.
She said that if her driver charges fuel in his motorbike he is supposed to pay taxes despite this fact that his income did not come in taxable income bracket. There is a tendency to squeeze those who are already within the tax regime, she added. There is a misconception in Pakistan that the services sector is comparatively paying low taxes.
She pointed that despite paying higher tax amount there was no incentive provided in Pakistan. Aqeela Mumtaz highly appreciated the reintroduction of the Alternative Dispute Resolution mechanism to end litigation through out-of-the-court settlement.
Dr Michael Best, assistant professor at Columbia University, stressed the need for automation of tax systems in Pakistan, which would check the discretionary powers of the tax officials. Renowned economist Dr Ijaz Nabi and Business Recorder’s Research Head Ali Khizer also spoke on the occasion.
Copyright Business Recorder, 2021