PAKISTAN has one of the lowest tax-to-GDP ratios even amongst the bottom ranked developing nations. The following statistics are indicative of the unexploited potential for additional revenue generation.
Whereas there are 3.1 million holders of NTNs (national tax number), less than 800,000 had filed income tax returns in 2011/12. What is even more startling is that of the 47,800 companies that have NTNs less than 16,500 had filed income tax returns as against 400,000 industrial electricity connections. Again, while there are 3.2 million commercial electricity connections less than 50,000 file income tax returns.
Revenues can be raised through the broadening of bases, improving the equity of the tax regime, incentivising documentation and checking evasion by embracing a zero tolerance policy. Following good results of tax mobilisation initiatives, individual and corporate income tax rates and the GST rate could be lowered under a phased programme.
To this end, income tax reforms in this country are overdue. They should include:
a) Taxation of all incomes of same levels equally, irrespective of source. b) Legislation that will render all benami transactions illegal.
c) To give a clear signal of a no-tolerance programme all cabinet ministers should be subjected to a detailed tax scrutiny throughout the period of office.
d) Making public 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) during the period of office and one year thereafter.
e) Greater reliance on technology for tracking commercial transactions to identify potential tax evasion/evaders.
f) Periodically reconcile property tax registers of all provincial governments, names of credit card holders and members of private clubs with those allotted NTNs.
g) Learning from our experience of what works and is accepted domestically and to encourage documentation of the economy, all presumptive taxes should be replaced by withholding taxes whose rate should be increased to incentivise documentation.
h) To prevent tax arbitrage by major shareholder executives the tax differential between the highest individual tax rate and the corporate income tax rate should be narrowed sharply, if not fully eliminated.
i) For individuals there should be a minimum asset tax of say two per cent which should be allowed as tax credit. Such a measure is being proposed for reasons of equity and for ensuring that large farmers end up paying some tax, considering the poor success that provincial governments have had in collecting tax on their incomes.
j) Any CNIC holder receiving remittances of more than $50,000 a year should be required to pay a tax, say at five per cent, on receipts in excess of $50,000.
k) Bills in excess of Rs10,000 per month of domestic and all bills of commercial consumers of electricity should be subject to a withholding tax of 10 and 15 per cent respectively.
l) Provincial governments should tax agricultural incomes, using lease rates in the area or the revised produce index units as proxies of taxable income from agriculture.
m) To augment revenues from the underexploited provincial property tax, “rental values” for determining the property tax liability of residential accommodation should be assessed at one per cent of property “market values” (as against the return of four to six per cent actually earned as rental income on properties), with a small tax credit for self/owner-occupied residential properties). For commercial properties the “rental values” should be assessed at three per cent. The DCO rate used for stamp duty purposes should be used as a proxy for estimating this value.
In the case of GST the following reforms are proposed: a) To incentivise transactions in the formal sector, the rate for sales to entities registered for GST should be 12.5 per cent while for the unregistered it should be retained at the base rate of 16 per cent the latter being the rate that is charged to the final consumer.
b) For extending sales tax to retail trade a single-stage sales tax should be levied by a provincial government based on location, shop area and nature of business. Such a proposal will check official discretion and will be simple to implement, while ensuring a level playing field by bringing everyone into the net.
For customs duties: a) To both enhance revenues and simplify the tariff structure there is a need to consider levying a minimum rate of duty on all imports other than those protected by sovereign agreements (currently Rs1 trillion worth of imports are duty free).
b) We have a highly distorted tariff regime that levies different rates of import duties on the same material based on the consuming industry, thereby creating opportunities for “extracting rent”. There is a need to simplify the tariff structure further by considering a system of “one-chapter one-rate”.
To address the issues related to the Afghan Transit Trade: a) To check the abuse of the ATT facility we should consider incentivising use of Pakistan Railways for transportation and applying technology-tracker and GSP systems.
b) We should consider using quantitative restrictions for items prone to smuggling.
On administrative measures, the focus should be on improving the quality of FBR’s data warehouse and IT systems; ensuring that the taxes collected by the “withholding agents” or from the end consumer as GST are eventually deposited in the governments’ coffers; and on audit/tax notices being generated electronically stating in detail the reasons why the system raised the notice. To check collusion two tax officials should be required to sign the notice and interview the assessee.
This should represent the minimum tax reform agenda for any new government to assume office after the forthcoming elections since the continued postponement of fundamental revenue, expenditure, policy and institutional reforms is no longer sustainable.
The writer is a former governor of the State Bank of Pakistan.