ISLAMABAD: The government has given an understanding to the International Monetary Fund (IMF) to move to a single value-added tax (VAT) regime in the country as part of an overall medium-term macroeconomic framework envisaging Rs1.25 trillion incremental federal and provincial revenues.
This would mean an additional revenue effort matching about 2.6 per cent of GDP (gross domestic product) over a period of three years. Federal taxes are committed to be increased by 2.3pc (about Rs1.08tr) during the three-year reform process under the IMF programme, starting with 1.1pc of GDP during the fiscal year 2019-20. This will be followed by 0.9pc of GDP additional revenue generation in FY21 and 0.3pc in FY22.
Provincial taxes are committed to be raised by 0.1pc of GDP every year to achieve 1.6pc tax-to-GDP ratio during FY22 from the current financial year’s ratio of 1.3pc.
Agriculture income and immovable property taxes to be strengthened under three-year Fund programme
Broadly, the tax measures expected to deliver the targets include “drastic reduction in tax expenditures by removing exemptions and excessive tax credits from incomes tax, sales tax and federal excise duty law and moving to a single sales tax (VAT) regime by doing away with special procedures and reduced rate taxation”, according to official papers seen by Dawn.
Officials said these medium-term fiscal projections were based on annualised yield of key measures under the IMF programme. For example, the two sides have broadly agreed to increase the overall federal revenue by 1.1pc of GDP in the first year (2020) of the Fund programme. Out of this, a major chunk of 0.4pc (more than Rs175bn) of GDP will accrue with the shift to a single VAT regime and 0.3pc (Rs130bn) through removal of exemptions and rationalisation of tax credits.
The remaining 0.4pc (Rs175bn) is expected through strengthening of FBR (Federal Board of Revenue) formations, cleansing of databases/integration/data mining, efficient enforcement/process reengineering, taxpayer facilitation/education, etc. That would mean about Rs43.5bn (0.1pc) from each of the four heads above.
The next year’s (FY21) additional revenues of 0.9pc of GDP are targeted through further removal of exemptions and rationalisation of tax credits and single VAT regime (0.2pc of GDP or Rs100bn each), followed by 0.1pc (Rs50bn) from integration of goods and services tax, FBR strengthening, use of technology, facilitation, etc.
Based on these details, “the medium-term framework envisaged revenue effort of 1.1pc in FY20, 0.9pc in FY21 and 0.3pc in FY20 that would take FBR’s tax-to-GDP ratio to around 14pc” of GDP.
Other policy and reform initiatives will include a reduction in the number of withholding taxes which are negatively affecting the use of banking sector or have an insignificant contribution towards revenue, besides freezing corporate tax rates at 30pc or 29pc and increasing the expanse of federal excise duty. This will also need the strengthening of FBR field formations through investment in IT/physical infrastructure and training by increasing investment from the current 0.68pc of revenue collection to at least 1.25pc in three years time. In some countries, investment in revenue machinery and infrastructure goes as high as 6-7pc of the total revenue collection, an FBR official explains.
The government has conceded to the IMF that the present arrangement of four provincial and one federal authorities looking at goods and services tax has increased the cost of doing business in an exponential manner and large businesses have been complaining about the compliance cost. “In three years time, we will move to a single tax collection agency with single return and single auditing authority to cut down on compliance costs,” the government has told the IMF.
This will be balanced through a revision of business processes, administrative structures and efficient dispute resolution mechanism with proactive settlement of disputes through the alternative dispute resolution (ADR) system. These efforts will be coupled with taxpayers’ education and facilitation by developing android apps for filing of returns and payment of taxes.
Cleansing of utilities database and data of immovable property ownership will done to help the FBR identify under-reporting and non-reporting of incomes and sales through use of data mining.
The federal government and the IMF generally agreed that the provincial governments’ role in resources mobilisation was central considering that the constitutional authority to collect sales tax on services and agriculture income tax was with the provincial governments. The provincial tax collection for FY18 was Rs402bn, which was around 1.2pc of GDP. This includes taxation on the services sector of Rs224bn (0.6pc of GDP) and income tax on agriculture of Rs1.6bn, which is very negligible in relation to GDP.
As such, with efforts the provinces would increase taxation on these two sectors. The third area which provides great potential for provincial tax is urban immovable property tax which remains largely untapped. The provinces projected tax collection for FY19 at Rs523bn (1.3pc of GDP), which is 0.1pc higher than that of FY18.
The medium-term macroeconomic framework suggests an increase in provincial taxation by 0.1pc of GDP each year. The provincial tax-to-GDP ratio, which is projected at 1.3pc for FY19, will reach 1.6pc of GDP in FY22. The Fiscal Coordination Committee already notified will be assigned to monitor the progress.
Published in Dawn, April 20th, 2019