- The Pakistan Development Policy series 2021 is a set of policy discussions organized by CDPR and the World Bank to discuss key reform areas critical to Pakistan’s economic, social and development growth.
The Consortium for Development Policy Research (CDPR) partnered with the World Bank to organize its second webinar on “Unlocking Pakistan’s Income Tax Potential” as part of its Pakistan Development Policy series 2021 on the 1st of March 2021.
The Pakistan Development Policy series 2021 is a set of policy discussions organized by CDPR and the World Bank to discuss key reform areas critical to Pakistan’s economic, social and development growth.
CDPR is a non-profit association of independent researchers and policy advisors based in Pakistan. The organization aims to promote collaboration among participating researchers and organizations for research on critical growth policy issues, and consolidates resources for informed debate. In the past, CDPR has also partnered with federal and provincial governments, and policy makers to provide an informed and independent input into the design and implementation of policy.
Focusing on Income Tax, the March 1 webinar invited leading specialists and representatives from the government and private sector to explore how Pakistan can address the issues faced in income tax policy and administration, reduce compliance costs, and expand Pakistan’s currently narrow income tax base.
The webinar featured a panel debate and a lively Q&A session with the audience. The panelists included Dr. Waqar Masood, Special Assistant to the Prime Minister on Revenue (panel chair), Dr. Michael Best, Assistant Professor of Economics at Columbia University, New York, Ms. Aqeela Mumtaz, Head of Corporate Accounting, Risk and Tax at Jazz, Mr. Ali Khizar, Head of Research at Business Recorder and Mr. Sebastian James, Senior Tax Specialist, World Bank.
Dr Ijaz Nabi, Chairman CDPR, introduced the dissemination platform and the set of planned webinars on taxation. Providing the macro context, he said, "We need to put our fiscal house in order to avoid frequent disruptions in economic growth and job creation – to that end, both better expenditure management and revenue enhancing measures will be needed.”
While poor revenue mobilization remains a perennial problem for Pakistan, Najy Benhassine, World Bank Country Director for Pakistan, explained that “Pakistan can significantly increase tax collection and be at par with other developing countries in the world.”
According to Najy Benhassine, “Pakistan currently collects 11.4 percent of GDP in taxes with an estimated tax gap in excess of 50 percent of current collections. A large part of the tax gap is from income tax collections. Improving income tax is critical for Pakistan to fund service delivery, increase social protection spending and lower compliance costs for taxpayers. With the right policy and administration, income taxes can be the most progressive tax instrument for the government”.
While the panelists discussed how a fragmented tax base in Pakistan created room for more tax evasion, Mr. Ali Khizer pointed out that trust deficit is one of the main reasons why people are not willing to pay taxes in the country. “Pakistanis find tax rates very high and service delivery low. Hence, people are not willing to pay and end up evading taxes,” he adds.
In addition to this, excessive exemptions and concessions, large minimum thresholds, and low marginal tax rates contribute to creating a narrow tax base. The private sector representative at the webinar, Ms. Aqeela Mumtaz also pointed out the complexity of Pakistan’s tax code and how compliance can be costly and difficult. She also explained that the law on taxation and its practice are very far from each other. While the number of tax filer has doubled from 1 million due to new prohibitions, tax filers are discouraged to continue filing because of additional questioning of their previous records.
Ms. Mumtaz suggested that it is important to give amnesty to new tax filers for the initial 4-5 years so that more filers continue to stay within the tax net.
Furthermore, direct tax collection is also adversely impacted by weak tax audit enforcement. To meet its revenue targets, the Federal Board of Revenue relies extensively on withholding and advance tax measures, tantamount to indirect taxation, compromising the progressivity of income tax. Michael Best, an international expert from Columbia University highlighted how progressivity of taxes can allow redistribution of income in developed countries but some level of withholding regime is essential, nonetheless. To bring more people into the tax net, especially from the informal sector, FBR now levies a high rate on withholding taxes for those not filing their tax returns.
Bringing international experience to the table, Mr. Sebastian James also highlighted that over dependence on withholding taxes can become counterproductive: instead of increasing the number of people in the tax net, it may reduce it.