EDITORIAL: Finance Minister Shaukat Tarin has reiterated in his recent interviews on private television channels that the government is focused on raising revenue by around one trillion rupees in budget 2021-22 - not through levying higher taxes on existing taxpayers, the practice in the past two budgets - but on widening the tax net through taking two proactive measures. In this context, it is relevant to note that this pledge is in line with the commitment made by the Pakistani authorities to the IMF as noted in the second to the fifth reviews dated April 2019, that Federal Board of Revenue collections would rise from the projected 4.69 trillion rupees in the ongoing year to 5.96 trillion rupees in 2021-22.

This target is achievable if one takes into account successful attempts by other developing countries to widen their tax net. Akitoby’s paper titled Raising Revenue uploaded on International Monetary Fund website provides an evaluation of tax reform success stories in five countries including Colombia, Ukraine, Cambodia, Guyana and Liberia. His recommendations for success are as follows: (i) have a clear mandate and secure high level political commitment and buy-in from all stakeholders – Tarin has clearly got the full support of Prime Minister Imran Khan and has been engaging with all stakeholders particularly those with vested interests and has referred to the need to compensate the losers; (ii) simplify the tax system and curb exemptions which would render tax administration less of a challenge; reducing exemptions featured prominently in all five countries with Guyana going as far as to eliminate the power of the finance minister to grant discretionary exemptions, and Georgia, by streamlining the value-added tax system, raised revenue from this source from 8.5 percent of GDP in 2005 to 11.5 percent in 2009; (iii) introduce tax administration reforms that cover a broad spectrum including legal, technical and administrative measures that require management, governance and human resources reforms; (iv) enhanced audit and verification programme with the argument that “a risk-based audit, which links the likelihood and nature of an audit to the taxpayer’s inherent risks, is the most effective type in terms of encouraging compliance. All five countries have made this a key part of their revenue mobilization strategy. Notably, Cambodia conducted risk-based audits of taxpayers at customs and of the 150 largest taxpayers and hired some 200 new auditors;” and (v) strengthening the taxation on real estate and on agricultural turnover and eliminating distortionary withholding taxes.

Shaukat Tarin has been at pains to ease concerns by insisting that the government does not intend to harass the legitimate taxpayers, that it would be focused on raising revenue to GDP ratio by a percentage point each year - a doable exercise based on what the above five countries have achieved – and that third-party audit would be carried out and in the event of tax evasion or avoidance, jail term would be on the cards instead of a penalty.

In all fairness to the IMF in the second to the fifth reviews dated April 2021 it states that: “the authorities have taken an important step in their multiyear tax policy strategy by committing to parliamentary adoption of a comprehensive corporate income tax (CIT) reform in March 2021. The reform simplifies the CIT system by streamlining numerous tax exemptions and bringing provisions in line with international practices (including tax credits, accelerated deductions, exempted income, reduced tax rates and tax liability reductions).”

It is, therefore, critical for the government not to postpone tax reforms as in previous years and to be steadfast against opposition by compensating the ‘losers’ initially. There is little doubt that if Tarin succeeds, the pressure to raise utility rates would decline and the economy would have the breathing space to grow.

Copyright Business Recorder, 2021

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