“NOTo government can exist without taxation. This money must necessarily be taken from the people, and the great art consists in taking so as not to oppress” – Frederick the Great
Governments around the world operate with the responsibility of providing necessities to their citizens. These include food, health care, housing, education and functional infrastructure. Fulfilling this obligation is directly dependent on generating revenue through an effective fiscal framework.
In Pakistan, the Federal Board of Revenue (FBR), the supreme revenue authority at the federal level, collects revenue for the Federation. The two main components of federal revenue are direct and indirect taxes. The main components of direct taxes are income tax levied both on legal persons and individuals and capital value tax, while indirect taxes include general sales tax, Federal excise and customs duties.
In an economy with fair taxation, the share of direct taxes is always higher than that of indirect taxes. In underdeveloped and developing economies, the use of indirect taxes is greater. According to the data available in the RBFs Phone book for the 2020-21 financial year, this is the case of Pakistan.
Advanced industrial countries such as the United States, Belgium, Sweden, Japan, Austria, Germany, the Netherlands, France, Norway and Switzerland are examples of economies where the share of direct taxes exceed 60% of total tax revenue. In emerging economies such as Turkey, Mexico, Brazil and Korea, the contribution of direct taxes is gradually increasing. It is currently around 45%.
However, in Pakistan, according to official data, the share of direct taxation is around 39%. It has increased from 18% in the early 1990s to around 38% in 2019-2020.
Successive governments in Pakistan have made efforts to improve tax collection. However, neither government has introduced simplified tax laws and improved tax administration. These are the main obstacles to effective tax collection. These steps alone can make the tax system progressive and create a business-friendly environment, leading to an increase in the tax-to-GDP ratio.
In recent years, the FBR has taken many steps to achieve the objective of maximizing tax revenue and safeguarding economic activities. The focus remained on documenting the economy by engaging the real estate, wholesale and retail sectors to increase the share of direct taxes.
To facilitate operations, FBR is working hard on automating processes from registration to self-assessment. Digitization and transparency related measures such as track and trace, integration of retailers’ point of sale (POS) with RBF system and electronic appeal filing are major steps in this regard. Currently, the FBR is working on personal income tax reforms, reducing reliance on withholding taxes, removing anomalies, preferential treatment and exemptions, and harmonizing the sales tax so that revenue mobilization occurs at a faster pace.
The first two years of the Pakistani Tehreek-i-Insaf (PTI) government, that is to say fiscal years 2019 and 2020 showed revenue growth of -0.4% and 4.4%. However, revenue collection recorded an 18.4% growth in fiscal year 2021.
Figures for eight months of the current fiscal year show substantial growth in tax collection which can be attributed to several factors, including a depreciated exchange rate and higher volume of imports than the previous year..
During the current financial year, the FBR has successfully maintained the momentum of its growth trajectory and achieved fundraising beyond the objectives assigned to it. The FBR collected Rs 444 billion in February 2022. The net revenue collection from July 2021 to February 2022 is Rs 3,800 billion. Compared to the corresponding months of the previous year, the increase in net income is 883 billion rupees, showing a strong growth of 30.3%. The performance was recently hailed by Prime Minister Imran Khan.
Figures for eight months of the current fiscal year show substantial growth in tax collection which can be attributed to several factors, including a depreciated exchange rate and higher volume of imports than the previous year. Most analysts continue to criticize the government for what they call its hostile fiscal policies. They argue that the government was able to collect more taxes by removing various exemptions available under the Sales Tax Act 1990.
The recent staff report released by the International Monetary Fund (IMF) upon approval of a $1 billion loan tranche stresses that the government, as part of the plan, should step up its tax collection efforts ; avoid new preferential tax treatments or exemptions; and reform tax policy. In a recent mini-budget introduced through the Finance (Supplementary) Act 2022, the PTI government introduced tax measures of around Rs 375 billion including flat sales tax rates of 17% for different items.
However, the significant increase in tax collection by the RBF, on the one hand, will compensate for the shortfall in non-tax revenue, mainly due to the reduction in the oil development tax, and the increase spending, including grants and subsidies to mitigate pandemic-related impacts. . On the other hand, it will impact various businesses and the common man through rising prices.
Despite a written assurance to the IMF about the subsidies, the PTI government has announced another subsidy program to further increase its tax collection and bring the untaxed into the tax net through the Tax Ordinance. Income Tax (Amendment), 2022. This is the third amnesty program. offered by the PTI government since it came to power in August 2018.
The government believes this will help it stimulate industrial activity and revive “sick” industrial units that are becoming a burden on the national economy. The amendment excludes certain sectors, such as sugar, soft drinks, the manufacture of cigarettes, explosives and the manufacture of weapons.
As per the Income Tax (Amendment) Order 2022, a minimum investment of Rs 50 million can be made in new industries no questions asked from undeclared assets till the year tax 2021 by paying a tax of 5%. Information provided will be kept confidential regardless of the provisions of the National Accountability Ordinance, 1999, Federal Investigation Agency Act, 1974.
Such measures compromise the documentation of the economy. It shows the incapacity of law enforcement officers responsible for investigating tax evasion. Moreover, these measures discourage honest taxpayers and citizens who regularly and honestly fulfill their national duty to pay taxes. The message they get is that the system is prone to those who violate and disrespect the tax system.
In recent years, hundreds of Pakistanis have been named in investigations ranging from Panama Leaks to Swiss Secrets. The government of Pakistan was under an obligation to improve mutual cooperation with the governments concerned to trace the offshore bank accounts of its citizens. Moreover, despite the option of joining the Organization for Economic Co-operation and Development (OECD), a multilateral convention on mutual administrative assistance in tax matters aimed at combating growing tax evasion has not been signed. .
Unfortunately, we have not used this route to improve our greater international cooperation and, ultimately, to intensify our efforts against tax evaders. It is not too late. The government should approach relevant jurisdictions, sign mutual cooperation treaties with them and catch tax evaders. These financial data leaks can be of great help in straightening out our affairs and can be used as a first step in the fight against financial crimes, including tax evasion.
Abdul Rauf Shakoori is a US-based corporate lawyer
Supreme Court Advocate Dr. Ikramul Haq is Adjunct Professor at Lahore University of Management Sciences