In the first half of its five-year constitutional term, the government has made very little progress towards achieving 10 electoral promises about reforming tax system, ending corruption in tax machinery and moving towards more equitable taxation, says a report of an independent think tank.
Over the last two and a half years, out of the 10 promised tax reforms related targets, one has been fully achieved, according to a review of tax reforms under the Pakistan Tehreek-e-Insaf (PTI) government by the Policy Research Institute of Market Economy (PRIME). The PTI came to power in August 2018.
PRIME said that six targets had been partially achieved, one was less than partially achieved and two remained unattended to. It added that work in some areas was limited only to the extent of files and there was no progress on the ground. But the report underlined that two and a half years were not enough to roll out tax reforms in any country, let alone a country like Pakistan that faces various socio-economic challenges.
It said that the current government made some efforts to reform tax policy and administration during the first half of its tenure.
The PTI had promised its voters that it would introduce reforms in the Federal Board of Revenue (FBR), widen tax net through a robust tax policy, an efficient tax administration structure and an effective enforcement mechanism.
Pakistan’s tax-to-GDP ratio remains low at less than 10% – the lowest in the region – despite massive indirect taxes collected by successive governments. The PTI had promised to give autonomy to the FBR.
PRIME said that the government separated the FBR’s policy board from its operation.
“Since February 2019, the board only exists on paper without clearly specified functions,” it added. It said that chairpersons of the FBR had changed five times and the current one was also going to retire in two months.
Another key goal was to shift towards direct taxes as a primary source of tax revenue. “No progress was made over the last two and a half years and the share of direct taxes has remained fixed at 38%.”
However, it has lately come down to 36% of the total tax collection by the FBR. The PTI had also promised to incentivise businesses to be part of the formal economy.
PRIME said that the tax amnesty scheme of 2019 was introduced with the aim of documenting the economy.
A total of 137,000 people availed themselves of the scheme by offering Rs70 billion in revenue and legalising Rs3 trillion worth of undisclosed assets.
The PTI had set the goal of championing sustainable initiatives for reducing taxes on businesses. Pakistan made tax payments easier by introducing online payment modules for value added tax and corporate income tax, and less costly by reducing the corporate income tax rate.
The government reduced the number of tax payments from 47 to 34 and the total number of hours required for complying with the tax requirements per year fell from 294 to 283.
The report said that as part of the election manifesto, the PTI had promised to simplify the tax assessment rules and move towards a single sales tax as part of the World Bankfunded project.
The FBR has missed the deadlines to introduce desired reforms including the single sales tax regime and the target could not be achieved.
The only target that has been achieved is to reduce the transaction cost of paying taxes and electronic payment facility for payment of all FBR taxes as well as some provincial taxes has been introduced for convenient and hassle-free payment. There was also a goal to improve the audit by establishing risk engines and smart algorithms to identify potential taxpayers for audit.
“The FBR develops a computer application ‘Taxray’ for a 360-degree view of the taxpayer by linking data directly obtained from the taxpayer with the third-party databanks but the FBR still has not finalised the infrastructure and framework for realtime access to information and databases.”
It said that to improve the enforcement, the FBR could not make the service providers install an electronic fiscal device (EFD) for real-time monitoring and collection of income tax.
But it said that the tax authorities had intensified their operation against illicit and smuggled goods and the FBR took action against Benami transactions.
Smuggled goods worth Rs29 billion have been seized in the current year and assets worth Rs7.4 billion “shall be confiscated after the confirmation of orders from the Federal Appellate Tribunal”.
The PTI had also promised to publish names of non-compliant debtors and pursue large tax evaders.
PRIME said that the FBR had sent e-notices to thousands of individuals and businesses in the hope of widening the tax net and it identified 20,000 wealthy non-filers against whom action was underway “The thousands of notifications sent by the FBR in the last two years to non-filers have borne little fruit, if any,” it added.
Crackdown on the corrupt practices that promoted tax evasion was the slogan of Prime Minister Imran Khan.
PRIME said that the FBR had established an Integrity Management Cell (IMC) to facilitate the general public and taxpayers in filing complaints against corrupt practices of officers of the FBR.
So far, the “FBR has suspended 42 officials on corruption allegations”, but no one has been dismissed.