EAC recommends sweeping changes in tax policy

The Economic Advisory Council (EAC) has recommended withdrawal of the FBR powers to write SROs, issuance of exemptions with estimated cost only through Parliament, sunset clause for all existing/future exemptions, maximum period of five years for any exemption, phasing out of tax concessions to all government owned enterprises and powers to Tax Policy Board to approve tax policy proposals. Sources told Business Recorder here on Saturday that the EAC has finalized its recommendations on tax policy of the country.
The EAC has recommended that the laws should be enacted to ensure that no tax exemption to be allowed though law or notification without an estimate of its cost independently by the tax department as well as the concerned ministry. Such cost should be made public. It recommended that all the existing exemptions be reviewed. Even if the exemption is to be retained its cost should be determined and made public.
It recommended that all exemptions, existing or newly proposed, should have a sunset clause. Even where an exemption is desired to be continued indefinitely, it should expire after a period of five years and should be reenacted after that with redetermination of the costs. EAC has recommended that a list of all government owned enterprises availing exemptions/concessions in any way long with quantification of the tax expenditure should be published and a plan for phasing out of these concessions should be prepared to remove this distortion from the market.
"Take the power to write SROs away from the FBR. Only Parliament should be able to grant exemptions after a proper public debate, making them accountable to voters. Progress towards this was made in the last budget," the EAC recommended. The EAC has also recommended that all non-procedural existing SROs should expire at the end of the fiscal year. In the last two years steps were taken to incorporate all exemptions granted through SROs to be made part of the body of law.
The EAC has recommended that the focus of the FBR should be strengthening of the tax administration. The function of tax policy making should not be responsibility of FBR and FBR should focus on administering and enforcing the tax code. The capacity for developing tax policy outside FBR will take time. A suitable location for developing such capacity can be Parliament. This will have the advantage of long term strengthening of Parliament and providing informed input to the opposition members as well.
It recommended that another alternative can be establishment of the Policy Board for approval of all policy proposals. This can be immediately implemented and will provide a necessary corrective and check on the policy making process of the FBR.
The EAC recommended that the annual budget exercise that announces changes in tax policy for the next year is not an appropriate and sufficient document to provide guideline for medium to long term tax policy direction. The long term objectives of the tax policy would be too broad and general to provide useful immediate guidance. The appropriate solution to the need for guiding principles for tax policy guideline is an annual medium tax policy framework that should indicate the direction of tax policy over the next few years. A medium term budget frame work is prepared each year but it does not contain details of the tax policy.
The EAC has recommended that a medium tax policy frame work would provide an opportunity for the government to delineate its tax policy over the next few years. It would also convey to the businesses the direction of tax policy providing stability and helping them in planning. More importantly, it would provide a platform for elaborating the principles and objectives of tax policy at a more granular level providing guidance about priorities in different areas of tax policy planning and administration.
The annual budget proposals, currently ad hoc, would have to be consistent with the more medium term direction of the tax policy. This would allow pre-budget vetting of proposals to ensure consistency between the two. For that the medium term tax policy document should be in place. This is an important recommendation. We should suggest the institutional framework (FBR not make tax policy; setting up a tax policy board/commission for this up front rather than later in the document, the EAC recommended.