ISLAMABAD: Pakistan Business Council (PBC) has asked the government to set a realistic tax target for the Federal Board of Revenue (FBR) for the year 2023-24, use stock market data to document new taxpayers, simplify withholding tax regime, reduce ‘further sales tax’ from three percent to 1-1.5 percent and specify timelines for applicability of “Super Tax” under Finance Bill 2023.
According to the budget proposals of the PBC for 2023-24 submitted to the Ministry of Finance and Federal Board of Revenue (FBR), the FBR is given an unrealistic tax target, which in the absence of resources and capability, forces it to extract more tax from existing taxpayers.
With Pakistan in an International Monetary Fund (IMF) programme, and likelihood of the current programme being followed by another longer-term program, the temptation to levy substantially higher taxes on existing taxpayers needs to be resisted.
Significant changes are required in the structure, resources, and technology of the FBR before setting targets. Separate targets should be set for revenue from existing and new taxpayers. Targets for existing taxpayers should be in line with expected growth in the nominal GDP.
The target for new taxpayers should be set in line with the evolving capability and capacity of the FBR. Tax refunds due should be excluded from revenue when assessing performance against either of these targets.
The PBC has recommended that the timeliness should be specified for the applicability of super tax. Mere levy of super tax without any specific timeline is simply an increase in the corporate tax rate from the current 29 percent.
With the recent unprecedented depreciation of the Pak Rupee, import constraints, and an increase in interest costs, it has become difficult for businesses to absorb an additional levy of super tax for an indefinite period. Without prejudice to the above, Super Tax should be applied on progressive tax basis instead of application of a certain percentage (%) on the entire income.
The PBC further recommended that the FBR has got access to financial data in various forms including the monthly statements submitted by withholding tax / collecting agents as per various sections. Information as per Statement under sections 165A, 165B, 175A and NADRA, FIA, Bureau of Immigration and Overseas Employment records are also available.
This can be a start to bringing new taxpayers in the net. In addition, the FBR has also collected data about tax paid by non-filers on vehicles, immovable property & on gains made in the Stock Market.
The minimum tax based on turnover is fundamentally flawed and acts as a barrier to entry of new players as it raises the initial investment required to cover tax payable in early loss years. FBR’s reliance on minimum, advance and withholding taxes has grown sharply as this is an easier option than assessing taxable profits. This reliance should be phased out gradually.
The PBC has further recommended that the withholding tax regime should be simplified by reducing the number of withholding provisions. The current withholding tax guide available on FBR website is a 19-page document as of 2022, which clearly shows the complexity of the regime from compliance and ease of doing business aspects.
The withholding taxes applied on non-filers in the real estate and other informal sectors should be punitive in nature to ensure greater compliance. The rates of filers need to be reduced so that the burden of complaint taxpayers is reduced.
The transit treaty with Afghanistan has been misused through diversion of goods to Pakistan. The Afghan Transit Trade Agreement has expired, with the evolving situation in Afghanistan, Pakistan needs to look to renegotiate the treaty with clauses putting in quantitative and qualitative restrictions on what can transit, insist on letters of credit where possible, charge duty and GST on imports which would only be refunded to the Afghan government on exit, track and monitor containers, strengthen inspection of empty containers returning to Pakistan and make physical controls along the border stronger.
The civil and military authorities need to be on the same page to do this. Electronic Data Interchange with key trading partners should be deployed to check under-invoicing of imports. The provinces have little incentive to check smuggling as customs duty and GST evaded are federal taxes and do not hurt their revenues directly.
Provinces may be incentivized to facilitate raids on shops that deal in smuggled goods. Positive lessons from the success of cell phone registration with PTA and Urdu language labelling requirement for imported food items can be applied to other smuggling prone goods, PBC maintained.
The PBC believed that the Finance Bill 2023 which is being presented in very trying times for Pakistan’s economy needs to promote an environment which facilitates investments in the manufacturing and services sector leading to the creation of jobs, which increases retention of workers in the formal sector, which increases value-added exports and ultimately benefits the government in the form of greater revenues, increased documentation of the economy and a broader tax base, PBC added.
Copyright Business Recorder, 2023