Prime Minister Shahid Khaqan Abbasi, after a meeting of the Economic Advisory Council, on Thursday announced tax reforms aimed at clamping down on tax evaders.
Building his case for the government's new package, the prime minister noted that only 1.2 million Pakistanis file income tax returns. He further noted that of the 1.2m filers, only 700,000 actually paid tax, while others filed returns but paid no income tax.
Presenting his package as an incentive for more people to enter the tax net, PM Abbasi stressed that he felt this to be the most optimum way to maximise the government's revenues keeping in mind the significant challenges it faces.
PM Abbasi's five-point tax reforms package
CNIC numbers to be made NTN numbers to monitor tax compliance of all citizens.
Income tax brackets and percentages to be revised. Complete tax exemption on annual income up to Rs1.2m; maximum percentage of 15pc to be levied on income above Rs4.8m per annum.
Undeclared assets held locally or abroad to be declared after payment of nominal penalties. Those who avail scheme to be granted one-time exemption from accountability laws.
Tax to be collected on all property transactions to be made uniform. Govt to have the right to purchase any property by paying 100pc over and above its declared value within six months of its registration.
Government to monitor citizens' financial records and issue notices if they find evidence of tax evasion. Penalties to be decided in parliament.
"People in this country, unfortunately, believe that paying income tax is an option. This is not true: evading taxes is a criminal offence," he explained.
"Last year, only 0.7m people paid taxes and most of those did not have an option since they were salaried employees. This is an unsustainable situation."
"In usual circumstances, people in a higher income bracket pay a larger amount of taxes and people in lower brackets pay a lower amount. However, when this does not happen, undue burden falls on citizens through indirect taxation, which is unfair."
"Seeing this, we decided to come up with these radical tax reforms as paying taxes is the biggest responsibility of any citizen."
"These reforms are simple and easy, for the convenience of our citizens," he stated.
The government previously used 12 tax brackets for salaried individuals and eight for self-employed individuals to calculate their income tax liabilities. These have now been simplified to four.
"Income tax has been reduced to make tax payment more sustainable," PM Abbasi announced. "At the moment, the [maximum income] tax percentage stands at about 30 per cent. However, after much discussion, we have decided to bring that percentage down drastically," the prime minister said.
"People who make less than Rs100,000 [a month; Rs1.2 million a year] will now be exempt from paying taxes," he revealed.
For comparison, the previous maximum income exempt from income tax was Rs400,000. An individual making Rs100,000 a month was expected to pay Rs4,958.33 in taxes (Rs59,500 per year).
"People who make between Rs1.2m to Rs2.4m will be liable to pay five per cent in income tax," PM Abbasi continued. The income tax for the Rs2.4-Rs4.8m bracket will be 10pc.
"Those earning over Rs4.8m annually will be liable to pay 15 percent tax on their income," he concluded.
PM Abbasi also revealed that "the CNIC numbers of all citizens will now become their tax number. People will now be able to use their CNIC number to file taxes by simply filling out a form."
"The third point in these reforms is that we are introducing a tax amnesty scheme through which people with undeclared income earned before June 30, 2017 on assets within the country will be able to bring them in the tax net by simply paying a five per cent penalty," the prime minister said.
He added that people who hold undocumented assets outside the country will also be able to declare them through the new amnesty scheme.
Foreign exchange could be brought back to the country by paying a 2pc penalty.
Fixed assets will incur a 3pc penalty, to be evaluated at the market value of the asset, which cannot be less than the cost of its acquisition.
Foreign liquid assets like cash, securities and bonds held abroad and in local dollar accounts may be declared with a 5pc penalty.
Dollar account holders in Pakistan who have purchased dollars with undeclared funds can also regularise them on 2pc payment.
Further, all remittances less than $100,000 per year per person will continue without any questions from any agency about the source of funds and enjoy tax exemption. All remittances greater than that amount will enjoy tax exemption but may be scrutinised by the Federal Board of Revenue.
Furthermore, any new foreign exchange accounts can only be opened by tax filers.
"People who take part in the amnesty scheme will be given a one-time exemption from accountability and other laws," the prime minister explained. However, he stressed that politically exposed persons and their families will not be able to avail the amnesty scheme.
Property tax reforms
Moving on to point four, the prime minister said: "On any property that a citizen purchases, they will have to pay a one per cent 'presumptive tax'. That tax will be adjusted in their annual taxes."
"Maximum 1pc tax (local and provincial) for registration of property being recommended," a handout of the announcement read. "At federal level Adjustable Advance Income Tax being reduced to 1pc," it stated.
"The FBR rate on property being abolished from 1st July 2018 and provinces being requested to abolish the DC rate," a handout of the prime minister's announcement read. "No purchase of property over Rs4 million is possible for non-filers of tax returns from July 1, 2018," it added.
"To avoid under-invoicing [in property sale and purchase deeds], the government now holds the right to buy any property that a citizen holds by paying 100 per cent over its declared price," the prime minister warned. This will hold for six months from the registration of the property starting fiscal 2019.
The rate will fall to 75pc in fiscal 2020, and 50pc in fiscal 2021 to disincentivise under reporting.
Monitoring and compliance
"Lastly, the government will be able to now monitor all financial transactions that citizens make so that they do not evade tax," the prime minister said, explaining that the government will send notices to non tax-paying citizens who are found to have made transactions beyond their stated income and ask them to explain their financial situation.
"We do not want to send the police to anyone's home or alert the Federal Board of Revenue, but our citizens need to be responsible and pay their taxes," PM Abbasi stated.
Explaining that punitive measures for those who still fail to comply will be decided on by parliament, the prime minister promised another press briefing in the near future to explain the country's financial situation.
"The reasons for previous amnesty schemes are before you. However, there is only one reason behind this scheme: that is, to bring people of this country into our tax net," he said while responding to a question.
On being asked how many tax payers he thinks Pakistan should have at the conclusion of his scheme, PM Abbasi responded: "I believe that if future governments diligently follow this process they will find at least 30 million tax payers in the country. This is my calculation."
"We have used our executive powers to introduce these reforms," he said in response to another question asking him why he did not consult parliament.
"I don't think anyone will disagree and say that there should be no taxes in this country, or that the tax rate should not be lowered here. If someone does disagree with the reforms, they can challenge it in court and then the court can rule on these reforms as it sees fit."
PM Abbasi assured that: "We will use the cover of the law and parliamentary process to close any loopholes that exist in this scheme. The parliament will also be responsible to create the laws that will decide punishments for various forms of tax evasion."