It is clear by now that the government of Pakistan Tahreek-i-Insaf (PTI), like its predecessors, has no definite action plan for tax reforms that were promised in its ‘First 100-Day Agenda’. The modus operandi of bureaucrats (it has by now successfully captivated/trapped the PTI government) is known to all -- disconnect the leaders from masses and convince them to defer the much-needed structural reforms for good governance as it would end their control, benefits, perks, perquisites and privileges.

By constituting advisory committees, task forces and committees -- this is the worst one can do as too many cooks spoil the broth -- the PTI government has conceded that it had never prepared any actionable plan before coming to power. The prime minister and finance minister must remember that tax reforms are too serious a matter to be left to the bureaucrats and/or economists!

The spasmodic approach to tax reforms through task forces, comprising "experts" from outside and bureaucrats sitting in the Ministry of Finance and FBR will never work. In the past as well they have been suggesting patchwork here and there, which is not the answer. The previous reports/suggestions by them testify to it. The following measures are sine qua non for making tax system conducive for investors, local and foreign, and ensuring sufficient resources for the state:

Documentation/broadening of tax base/raising number of filers

According to 2017 census, our population is 207.77 million [provisional]. The dependent population of children under the age of 15 years is 35.4 percent and 4.2 percent people are above 65 years. Out of total population, 40 million are below poverty line earning less than two dollars a day. Our labour force, among the tenth largest in the world, is around 70 million. Majority of rural labour force [42.3 percent] earns below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001. Analysing all these figures (juxtaposed), individuals liable to income tax cannot be more than 10 million. FBR collected 12 percent advance, adjustable income tax from 95 million mobile users alone (Out of total subscribers of 151 million as on June 30, 2018, many had multiple SIMs) during the fiscal year 2017-18. Out of these only 1,492,507 (0.98 percent) filed tax return for tax year 2018 till the last date (December 17, 2018) after availing many months of relaxation. The following measures are required to improve the situation:

After reducing tax rate for individuals to 10 percent, subject to minimum alternate tax of 2.5 percent of net wealth, if net value of assets exceeds Rs10 million on the last day of tax year, all individuals having taxable income should be required to file simple and easy tax return form which should be available both in English and Urdu. There should be incentive for filing of return of Rs2,000 cash payback in the bank account of the filer. It will help create data base at national level about households and their earning levels.

All non-filers should be given a chance to whiten all untaxed assets/incomes for any past year, at home or abroad, by paying 10 percent tax latest by June 30, 2019. After the deadline, stringent action under the law should be taken including confiscation and imprisonment. For this, asset seizure legislation should be passed.

One-time de-log litigation scheme for taxpayers to pay 10 percent of tax arrears between January 1, 2019 to June 30, 2019. This will clear backlog of pending cases in various courts and recover stuck up revenue of billions of rupees.

The government may offer all persons to pay income tax/sales tax for tax year 2018 to 2020 under a self-assessment scheme, every year paying more than 25 percent tax over the last year, with no audit or inquiry. It would bring much-needed revenues to overcome fiscal deficit. In three years’ time, while the businessmen concentrate on business growth, the government should prepare their tax profiles by data integration. After three years, both would be in a position to determine income tax/sales tax payment on actual basis.

Simplified, low rate (8 percent) harmonised sales tax on goods and services with no exemptions.

Simplify Customs tariff with ‘One-Chapter One-rate’. TVs, air conditioners, cars exceeding 1000CC and luxury items (to be identified consulting the stakeholders), tobacco, liquor should be taxed at a higher rate.

Radiographic scanning of all inbound and outbound containers to plug revenue leakages. Stringent measures to counter under-invoicing etc.

No functional mechanism has so far been evolved to effectively check any unfair practices on the part of tax administrators. They are not made liable to punitive actions and/or pecuniary damages even after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.

Advance ruling and alternate dispute resolution for non-resident and resident taxpayers within one month of applying it.

Taxpayers must be given adequate rights before the State justifies strict actions for enforcing tax obligations. For restoring confidence of taxpayers the State should promulgate Taxpayers’ Bill of Rights that must safeguard and strengthen the rights of taxpayers, ensure equality of treatment, guarantee privacy and confidentiality of their declarations, provide right to assistance by State in tax matters, guarantee unfettered right of appeal through an independent tax appellate system and provide facilities for independent review of disputes with tax authorities.

There is massive sales tax evasion -- even registered persons are not depositing full amount of sales tax. A scheme should be announced entitling a payer of sales tax to get refund of 20 percent of the amount paid. He/she should send invoices to FBR, which can authorise and remit refund after verification of genuineness of the invoice (by checking sellers’ registration number). In this way, FBR can develop data base about sales of all persons and then cross verify the same with the receipts declared by them in their sales/income tax returns.

Advance tax/refunds/compensation/recovery

In Pakistan under the repealed Income Tax Ordinance, 1079 (until assessment year 1995-1996), the following three specific characteristics were the hallmarks of advance tax system:

Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;

Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and

6 percent mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.

The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001 and 10 percent compensation should be paid for amount retained as advance tax including collected/deducted through withholding regime.

Presently refunds of billions are struck up with FBR. This issue needs urgent resolution. The refunds should be paid as expeditiously as demands are collected. The following should be made effective and mandatory through statutory provisions so that no one can exercise discretionary powers:

Income and sales tax refunds should be issued without application within 60 days of their becoming due. There should be automatic payment of compensation if any refund is issued after 60 days.

The officer responsible for incurring compensation should be made liable to pay the amount from his salary.

There should be zero tax regime for exporters to avoid refund accumulation.

The recovery should be after the decision of the Tribunal and not before that. Banks accounts should not be attached without prior notice to the taxpayer and after seeking approval in writing of Commissioner in the light of reply submitted by the taxpayer.

 Independent Tax Justice System

The main reason behind the reluctance of ordinary people to file tax returns and submit their record for scrutiny is due to lack of faith in the FBR and justice system. A reliable tax judiciary ensures that demands arising out of legitimate tax assessments are collected expeditiously. As long as there is a pending litigation in relation to a particular tax levy, there is a natural, and quite understandable, desire on the taxpayer’s part not to pay the disputed amount.

An efficient tax judiciary resolves disputes quickly, quashes demands which are not legally sustainable, and thus segregates serious tax demands from frivolous tax demands. This in turn ensures that taxpayers cannot resort to dilatory tactics for paying these genuine and legitimate tax demands which have received
judicial approval. A good tax judiciary thus helps remove impediments from collection of genuine tax demands by the State, which, once again, results in greater resource mobilisation. For making tax justice system
effective and independent, it is imperative to:

Replace existing 4-tier appeal system under the tax laws--direct and indirect--with two-tier system. The Customs Tribunal and Appellate Tribunal Inland Revenue should be merged into singular National Tax Tribunal. Like the Services Tribunal this should work under direct supervision of the Supreme Court. Appeals against its decisions should go directly to the Supreme Court.

Members for National Tax Tribunal should be recruited in the same manner as judges of High Court. The salary structure of chairman, members and staff of tribunal should be at par with the judge of a High Court.