Taxation plan

Published September 26, 2024

AT first glance, the new FBR ‘transformation plan’, which aims to broaden the tax net, scrap the category of ‘non-filers’, and improve compliance and enforcement through fresh punitive measures, might come across as a positive step.

Yet, without addressing the deep-seated and long-standing issues of tax equity, policy reforms and institutional restructuring of the FBR, can it work? Indeed, the idea of making ‘dirty money’ redundant through imposing restrictions on asset purchases and investments by tax evaders and cheaters should be appreciated.

But how will the plan be executed? The proposed plan shifts the entire burden of tax scrutiny of a spender on other regulators and sellers rather than building its own capacity to net the dodgers. It is also likely to create problems for tax-exempt segments, including those whose annual income is less than Rs600,000 or housewives or Pakistanis abroad. Will they also be required to file annual tax statements? The plan does not distinguish between tax evaders and middle-class taxpayers showing an annual income of less than Rs10m in their tax statements. They could also face the same spending curbs as articulated for non-filers when they try to purchase a vehicle or real estate or financial instruments or attempt to open bank accounts.

This is not the first time the tax bureaucracy has come up with a plan to boost tax revenues. But previous efforts have, for the most part, only made the taxation system more complex and expensive for taxpayers, providing a ‘reason’ for others to stay out of the net. That inflation-adjusted real tax revenue growth has stood at a mere 2pc a year since 2018 confirms the futility of past FBR plans. Little wonder, Pakistan’s tax-to-GDP ratio has grown to just 9.5pc from 8pc in 2000. In comparison, India has improved its taxes to 18.5pc of its GDP from 13.4pc and Nepal to 17.5pc from 8.7pc in the same period.

These countries have improved their tax performance not just by taking punitive actions against tax dodgers and cheaters but also making their tax regimes equitable, fair and easier to comply with through wide-ranging policy and administrative reforms. Unless Pakistan also follows the principle of equity, does away with wasteful exemptions of Rs4tr, and restructures the FBR to weed out inefficiencies and corruption, punitive actions will not have the intended effect.

The measures to make dirty money difficult to spend are welcome. Those who do not pay their taxes or underreport their income should be punished. But the FBR must also give details on how it intends to execute these proposals without creating more difficulties for compliant taxpayers or tax-exempt segments. So far, the intent seems to be to squeeze existing taxpayers to meet the revenue targets rather than broadening the net.

Published in Dawn, September 26th, 2024

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