MEHER KASHIF YOUNIS
The govt evidently should be on tightrope on revenue targets. Five percent GDP with economic stabilization and fiscal consolidation with improved management of twin deficits and increased revenue streams is prime focus to keep economy sustainable in the near term.
At the same time, government will find little or no room to make cut in public expenditure. The delay in taking position to collect the projected numbers will not only make a daunting task but will also land government in hot waters as there would be no margin of delay without commencing much deferred FBR reforms.
Besides, rolling year’s non-tax revenue estimates relied significantly on the collection of petroleum levy (PDL) and Gas infrastructure development CESS (GIDC), which did not turn out to be the case on the back of multiyear high oil prices and yet will stay posing a challenge for government this year as well.
Growth exceeded expectations in fiscal 2022, however, opportunity cost was ominously too immense to bear for government on a sustainable basis. The revenues growth brought yawning twin deficits, weakened Pak rupee, dwindling forex reserves and double-digit inflation with it. Whereas, going into fiscal 2023, government expects growth momentum to slightly ease off by restraining domestic demand but bet is on improved management of the twin deficits and increased revenue streams to keep it sustainable in the near term.
There is clear and broad consensus that simplification of tax structure is the key that government needs to move with optimal taxation, which is real among the main challenges by shifting the paradigm of tax policy to encourage businesses perform better, ultimately promising more tax revenue collection for government.
Pakistan has substantial potential to increase tax receipts without imposing new taxes or raising tax rates
Pakistan has substantial potential to increase tax receipts without imposing new taxes or raising tax rates, which recommends a Broad Base-Low Rate approach. A detailed gap analysis that has been recently completed by World Bank indicates that Pakistan’s tax revenue potential could easily be reached 26 percent of GDP if tax compliance were to be raised to 75 percent, a realistic level of compliance for LMICs.
This means that country’s tax authorities are currently attaining below half of this revenue potential. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector that stands 67 percent against 46 percent respectively and is larger for the GST/GSTS than for income tax, 65 percent against 57 percent respectively. The size of the tax gap reflects primarily the relative levels of informality and tax compliance in each sector.
Government needs to address issues combined with the methodology that FBR presently is using to assess the tax liabilities for some sectors like on basis of electricity consumption bills for the steel sector. The tax system has been picked up the pace of complexity following overlapping jurisdictions with different laws, exemptions, and frequent policy changes. The Constitution assigns income taxes except for income derived from agriculture, the General Sales Tax (GST) on goods, customs duties, federal excises, and the Capital Gains Tax (CGT) to the federal level. These taxes are collected by the Federal Board of Revenue (FBR). The Constitutions assigns the following taxes to the provinces: GST on services (GSTS), tax on professions, Agricultural Income Tax (AIT), Motor Vehicle Tax (MVT), Urban Immovable Property Tax (UIPT), and other taxes related to real estate like stamp duty, Capital Value Tax. This tax assignment essentially fragmented Pakistan revenue stream into five markets in the services sector, with important consequences for tax authorities and taxpayers alike.
In addition, Pakistan’s tax system is also regressive owing its reliance on indirect taxes and the collection of most income taxes through withholding agents. This is a primarily by reason of restrained capacity of the tax administration to identify unregistered firms and individuals with incomes above the taxable threshold. This capacity constraint has driven the FBR to rely on withholding agents to collect the bulk of income tax. Over 60 percent of income tax receipts were being collected by withholding agents such as banks, telecom and utility companies, and car dealerships. Withholding agents are required to levy income tax on transactions at the same time as GST.
Income tax collected in this manner essentially turned into an indirect tax. Individuals with incomes below the income tax threshold have income tax withheld on their transactions like payment of utility bills, banking transactions would need to file income tax returns to have the withheld tax refunded, but in practice this is very onerous and tedious. The same practice applies to income tax filers who may claim a deduction of the withheld tax from their total income tax liability at the end of the fiscal year. For higher income non-filers, paying the withholding tax might well be beneficial compared to filing income tax with FBR.
In core functions, FBR has been hampered by a dearth of up-to-date skills in audit techniques, economic research, and data analysis, resultantly from Pakistan’s rigid career-based civil service system, whereby the federal Establishment Division recruits professional-grade staff through generic entry-level examinations and assigns recruits to different agencies regardless of academic background. These generalists are subject to frequent rotations across functions, which limit opportunities to build technical expertise.
Moreover, civil service regulations do not require relevant knowledge for appointment to specific posts, nor do they recognize job performance as a criterion for promotion. In this system, lateral entry at mid-career or senior level is generally not possible, though few specialized positions may be filled by externally contracted employees. By contrast, the FBR’s Transformation Roadmap envisages a robust evidence-based performance management system based on strategic organizational-level Key Performance Indicators with operational performance indicators for FBR functions and units, and specific indicators for FBR staff according to their roles, making it critical for the FBR to obtain a degree of autonomy in HR matters on the model of the State Bank. Problems with tax system are obvious, but there is no room and capacity to discuss them to bring reforms. Every time externally different agendas are imposed by declaring to be best and one is supposed to implement.
— Meher Kashif Younis
is a freelance writer.
The govt evidently should be on tightrope on revenue targets. Five percent GDP with economic stabilization and fiscal consolidation with improved management of twin deficits and increased revenue streams is prime focus to keep economy sustainable in the near term.
At the same time, government will find little or no room to make cut in public expenditure. The delay in taking position to collect the projected numbers will not only make a daunting task but will also land government in hot waters as there would be no margin of delay without commencing much deferred FBR reforms.
Besides, rolling year’s non-tax revenue estimates relied significantly on the collection of petroleum levy (PDL) and Gas infrastructure development CESS (GIDC), which did not turn out to be the case on the back of multiyear high oil prices and yet will stay posing a challenge for government this year as well.
Growth exceeded expectations in fiscal 2022, however, opportunity cost was ominously too immense to bear for government on a sustainable basis. The revenues growth brought yawning twin deficits, weakened Pak rupee, dwindling forex reserves and double-digit inflation with it. Whereas, going into fiscal 2023, government expects growth momentum to slightly ease off by restraining domestic demand but bet is on improved management of the twin deficits and increased revenue streams to keep it sustainable in the near term.
There is clear and broad consensus that simplification of tax structure is the key that government needs to move with optimal taxation, which is real among the main challenges by shifting the paradigm of tax policy to encourage businesses perform better, ultimately promising more tax revenue collection for government.
Pakistan has substantial potential to increase tax receipts without imposing new taxes or raising tax rates
Pakistan has substantial potential to increase tax receipts without imposing new taxes or raising tax rates, which recommends a Broad Base-Low Rate approach. A detailed gap analysis that has been recently completed by World Bank indicates that Pakistan’s tax revenue potential could easily be reached 26 percent of GDP if tax compliance were to be raised to 75 percent, a realistic level of compliance for LMICs.
This means that country’s tax authorities are currently attaining below half of this revenue potential. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector that stands 67 percent against 46 percent respectively and is larger for the GST/GSTS than for income tax, 65 percent against 57 percent respectively. The size of the tax gap reflects primarily the relative levels of informality and tax compliance in each sector.
Government needs to address issues combined with the methodology that FBR presently is using to assess the tax liabilities for some sectors like on basis of electricity consumption bills for the steel sector. The tax system has been picked up the pace of complexity following overlapping jurisdictions with different laws, exemptions, and frequent policy changes. The Constitution assigns income taxes except for income derived from agriculture, the General Sales Tax (GST) on goods, customs duties, federal excises, and the Capital Gains Tax (CGT) to the federal level. These taxes are collected by the Federal Board of Revenue (FBR). The Constitutions assigns the following taxes to the provinces: GST on services (GSTS), tax on professions, Agricultural Income Tax (AIT), Motor Vehicle Tax (MVT), Urban Immovable Property Tax (UIPT), and other taxes related to real estate like stamp duty, Capital Value Tax. This tax assignment essentially fragmented Pakistan revenue stream into five markets in the services sector, with important consequences for tax authorities and taxpayers alike.
In addition, Pakistan’s tax system is also regressive owing its reliance on indirect taxes and the collection of most income taxes through withholding agents. This is a primarily by reason of restrained capacity of the tax administration to identify unregistered firms and individuals with incomes above the taxable threshold. This capacity constraint has driven the FBR to rely on withholding agents to collect the bulk of income tax. Over 60 percent of income tax receipts were being collected by withholding agents such as banks, telecom and utility companies, and car dealerships. Withholding agents are required to levy income tax on transactions at the same time as GST.
Income tax collected in this manner essentially turned into an indirect tax. Individuals with incomes below the income tax threshold have income tax withheld on their transactions like payment of utility bills, banking transactions would need to file income tax returns to have the withheld tax refunded, but in practice this is very onerous and tedious. The same practice applies to income tax filers who may claim a deduction of the withheld tax from their total income tax liability at the end of the fiscal year. For higher income non-filers, paying the withholding tax might well be beneficial compared to filing income tax with FBR.
In core functions, FBR has been hampered by a dearth of up-to-date skills in audit techniques, economic research, and data analysis, resultantly from Pakistan’s rigid career-based civil service system, whereby the federal Establishment Division recruits professional-grade staff through generic entry-level examinations and assigns recruits to different agencies regardless of academic background. These generalists are subject to frequent rotations across functions, which limit opportunities to build technical expertise.
Moreover, civil service regulations do not require relevant knowledge for appointment to specific posts, nor do they recognize job performance as a criterion for promotion. In this system, lateral entry at mid-career or senior level is generally not possible, though few specialized positions may be filled by externally contracted employees. By contrast, the FBR’s Transformation Roadmap envisages a robust evidence-based performance management system based on strategic organizational-level Key Performance Indicators with operational performance indicators for FBR functions and units, and specific indicators for FBR staff according to their roles, making it critical for the FBR to obtain a degree of autonomy in HR matters on the model of the State Bank. Problems with tax system are obvious, but there is no room and capacity to discuss them to bring reforms. Every time externally different agendas are imposed by declaring to be best and one is supposed to implement.
— Meher Kashif Younis
is a freelance writer.
