Tax reform agenda for next government

By Shahid Kardar

Pakistan has one of the lowest tax to GDP ratios and, even considering developing countries alone, it is in the bottom ranked nations in terms of the proportion of population registered as taxpayers – less than 5 percent. of household population. There is rampant tax evasion, partly with the collusion of the official machinery. Whereas 3.1 million people have the National tax Number, a mere 1.2 million filed an income tax return in 2010/11. What is even more startling is that of 47,800 companies that have NTNs, less than 16,800 filed an income tax return against 400,000 industrial electricity connections.

As admitted by FBR, there is a tax gap of 79 percent. (the difference between potential revenues under the existing system and that actually collected). Revenues can be raised through broadening of bases, improving the equity of the tax regime, incentivising documentation, checking evasion by embracing a zero-tolerance policy, checking harassment of, or collusion with, taxpayers by simplifying tax returns and making FBR a faceless bureaucracy, with interaction between taxpayers and tax officials limited through greater reliance on automated computerised systems.

The general tax reforms would include taxation of all incomes of same levels equally irrespective of source, with a swift reversal of the travesty of the recent amnesty granted to trading in shares. There is also need for legislation that will render all Benami Transactions illegal and subjecting all cabinet members, who should all be taxpayers, to detailed tax scrutiny throughout period of office, and they should all be taxpayers. The tax returns and Wealth Statements of all parliamentarians and holders of key public offices and their spouses (including Secretaries, Chief Justices, Chief of Army Staff, Governor State Bank, Auditor and Attorney Generals) should be public during period of office and one year thereafter. Finally, following good results of tax mobilisation initiatives, individual and corporate income tax rates and the GST rate could be lowered under a phased programme.

The specific reforms under different tax heads would be the following: For Income Tax: Greater dependence needs to be placed on technology and through that on the CNIC for tracking commercial transactions to identify potential tax evasion/evaders, including movements in bank accounts of large deposit holders. The FBR should periodically reconcile the property tax registers of all provincial governments, names of credit card holders and members of private clubs with those allotted National Tax Numbers, for the system to generate notices to non-filers. All presumptive taxes should be replaced by withholding taxes (which presently contribute 60 percent. of income tax revenues). And the rates of all withholding taxes should be increased by at least two percentage points as a revenue enhancing measure, to incentivise documentation and penalise those trying to avoid capture in the tax net. ….

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