ISLAMABAD: The budget 2021-22 delayed key reforms and reversed some key policies damaging revenue prospects.
This was stated in the International Monetary Fund sixth review staff report which further contended that the budget “expected unrealistically strong revenue growth (from marked improvements in tax administration, and strong domestic demand, notably imports) and high non-tax revenue receipts this introducing significant risks of fiscal slippages.”
The government however pledged to draft personal income tax (PIT) legislation to come into effect from July 1, 2022 to reduce the number of rates and income tax brackets, reduce tax credits and allowances (except those for disabled and senior citizens, and Zakat receipts) and introduce special tax procedures for very small taxpayers.
The PIT legislation is aimed at simplifying the system, increasing progressivity, and supporting labor formalization, and is targeted to: (i) reduce both the number of rates and income tax brackets; (ii) reduce tax credits and allowances (except those for disabled and senior citizens, and Zakat receipts); (iii) introduce special tax procedures for very small taxpayers; and (iv) bring additional taxpayers into the tax net.
Low-income households will remain protected as the reform preserves the current PIT threshold (almost 3 times income per capita).
The IMF further noted that additional tax policy reforms remain key in the period ahead which will assist Pakistan “address its perennial challenge of a low revenue base, which weighs on debt sustainability and severely constrains much-needed fiscal space for growth-enhancing spending on infrastructure, education, healthcare, and social support. Against this backdrop, staff urged the authorities to continue broadening the tax base, reducing informality, and simplifying and modernizing the tax system.”
The report further emphasizes that the general sales tax (GST) base harmonization will be critical to improving competitiveness and the business environment. Under the current system, the sales tax base is fragmented, with services subject to provincial taxation and goods under federal government taxation. The fragmentation of the tax base has severely compromised tax policy design and administration, generated disagreements over tax base definition and crediting, caused cascading and double taxation for businesses, and significantly increased compliance costs. Indeed, the system is cumbersome and harms competitiveness by increasing the cost of doing business.
The authorities recognize that tax administration reforms and enforcement efforts need to complement their tax policy measures. The authorities plan over the medium term to: (i) introduce a centralized, risk-based compliance function; (ii) update IT and automation; (iii) use third-party data, cross-checks, and analysis; (iv) simplify registration and filing processes; (v) modernize and target audit practices; and (vi) bolster the large taxpayer office (LTO). In line with standing IMF technical assistance advice, staff discouraged the use of third-party audits in favor of developing an adequate compliance risk management framework. The government has also assured the IMF that the efforts will also be made to establish a single filing, taxpayer, and return portal, and redress high outstanding tax arrears. To contain smuggling, the authorities are in the process of reintroducing the track-and-trace system for tobacco products but a full roll-out remains delayed on account of capacity constraints.
The report said that the tax revenues are expected to increase by 1.2 percentage points of the Gross Domestic Product (GDP) from FY 2021, boosted by (i) revenue measures; (ii) reinforced tax administration efforts; and (iii) automatic stabilizers.
The main additional tax measures include: (i) implementing the reform of General Sales Taxes (GST). Parliament will adopt the GST reform as part of the supplementary budget, in line with staff recommendations to broaden the GST tax base and eliminate about 2/3 of the tax expenditures on GST. This is achieved by undoing policy reversals that extended preferential treatment to numerous goods in the FY 2022 Finance Act; (ii) by moving most goods from zero-rating (Fifth Schedule) or reduced rates (Eighth Schedule) to the standard sales tax rate; (iii) by eliminating exemptions (Sixth Schedule) for most goods excluding basic food, live animals for human consumption, and health- and education-related goods; and (iv) by applying the standard rate to higher-end cellphone devices (previously under the Ninth Schedule).
Increasing the Petroleum Development Levy (PDL). In early November, the authorities started to gradually increase the PDL in gasoline and diesel by PRs 4 per liter, with a further PRs 4 per liter in December and will continue to increase the PDL by PRs 4 per liter per month until a maximum of PRs 30/liter is achieved, which was in place in the past, it said.
The government has committed to the IMF to improve tax administration in order to raise the efficiency of revenue collection. The government’s priorities are: (i) developing an overarching compliance strategy and setting up a Central Risk Management Unit and a Compliance Risk Management Committee at the central level; (ii) systematic identification and assessment of compliance risks; (iii) adopting a more project-based approach to addressing specific high-risk areas in tax compliance; and (iv) strengthening data collection and analysis. The government also recognized the need for (i) simplifying tax filing and expanding e-services for taxpayers; (ii) accelerating the resolution of refunds and administrative appeals; and (iii) strengthening the large taxpayer office. In March 2021, the government launched a Collectible Tax Debt Campaign to redress the high percentage of outstanding debt.
The government also reintroduced and rolled out the track-and-trace system for tobacco products in one company in October 2021. Going forward, the track and trace system is likely to cover the full tobacco as well as cement, sugar, and fertilizer sectors. However, given technical capacity issues, the FBR cannot commit to finalizing a full rollout of the track-and-trace system to all companies within the program period and therefore requested to drop this structural benchmark. To support GST harmonization, the FBR will establish the single filing portal by December 2021, which will remove filing with five different tax administrations and simplify with a single tax base, which would improve the ease of doing business and enhance the trust of taxpayers, the report added.
The revenue collection target of the Federal Board of Revenue (FBR) has been projected at Rs 6,100 billion for the current year against the earlier programme target of 5,963 billion, reflecting an increase of Rs 137 billion. The target for the next fiscal year has been projected at Rs 7,255 billion.
Copyright Business Recorder, 2022
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