NationalVOLUME 16 ISSUE # 13

Tax reforms: Still a long way to go

Many governments in the past tried to reform the tax system but never fully succeeded in their efforts. The same is the case with the PTI government, which promised before the elections to end corruption in the tax machinery and set up an equitable taxation system. The government is halfway through its five-year term but not much progress has been made to achieve the goals.

According to a report by the Policy Research Institute of Market Economy (PRIME), out of the 10 tax reform targets set by the PTI, six have been partially achieved, while the others have been barely touched or have remained unattended. It added that work in some areas was limited only to the extent of moving files from desk to desk and there was no progress on the ground.

Taking a broader view, the PTI’s performance in the tax sector can be described as mixed. The PTI, among other things, had promised to introduce reforms in the Federal Board of Revenue (FBR) and widen the tax-net through a robust tax policy, an efficient tax administration structure and an effective enforcement mechanism. In the fulfillment of its promise to give autonomy to the FBR, the government separated the FBR’s policy board from its operation. But since February 2019, the board has existed only on paper without clearly specified functions. This is a result of administrative atrophy that ails the entire taxation sector.

Another key goal was to shift towards direct taxes as a primary source of tax revenue but no progress has been made in this direction, with the share of direct taxes remaining fixed at 38pc. The FBR was supposed to develop a computer application “Taxray” for a 360-degree view of the taxpayer by linking data directly obtained from the taxpayer with the third-party databanks but the FBR has not yet finalised the infrastructure and framework for real-time access to information and databases. To improve the enforcement, the FBR, as promised, could not make the service providers install an electronic fiscal device (EFD) for real-time monitoring and collection of income tax.

The PTI had also promised to provide incentives to informal businesses to be part of the formal economy and for the purpose it introduced the tax amnesty scheme of 2019, which failed to achieve the desired results. Under the scheme, Rs3 trillion worth of undisclosed assets were legalized, yielding a paltry Rs70billion in revenue.

As part of the election manifesto, the PTI had promised to simplify the tax assessment rules and move towards a single sales tax as part of the World Bank funded project. But the FBR has missed the deadlines to introduce desired reforms, including the single sales tax regime.

However, on the positive side, the government made tax payments easier by introducing online payment modules for value-added tax and corporate income tax. The process was also made less costly by reducing the corporate income tax rate. Another significant success was achieved in reducing the number of tax payments from 47 to 34, and the total number of hours required for complying with the tax requirements per year fell from 294 to 283.

Another target achieved was to reduce the transaction cost of paying taxes and electronic payment facility for payment of all FBR taxes, and a number of provincial taxes have been introduced for convenient and hassle-free payment. Some movement has also been made towards achieving the goal of improving the audit by establishing risk engines and smart algorithms to identify potential taxpayers for audit.

Pushed by the government, the tax authorities intensified their operation against illicit and smuggled goods and the FBR took action against Benami transactions, netting some big fish. Smuggled goods worth Rs29 billion have been seized in the current year and assets worth Rs7.4 billion are set to be confiscated after the confirmation of orders from the Federal Appellate Tribunal.

The FBR has sent e-notices to thousands of individuals and businesses in the hope of widening the tax-net and it has identified 20,000 wealthy non-filers against whom action is underway. A major campaign promise by the PTI was to launch a crackdown on the corrupt practices that promoted tax evasion.

To this end, the FBR has established an Integrity Management Cell (IMC) to facilitate the general public and taxpayers in filing complaints against corrupt practices of officers of the FBR. So far, 42 officials have been suspended on corruption allegations.

The PRIME report has noted that the PTI government made some efforts to reform tax policy and administration during the first half of its tenure, but there is still a lot more to be achieved.

However, realistically speaking, two and a half years is too short a period to clear the mess that has accumulated over the last several decades. It will take persistent efforts spread over several years to bring about a meaningful change to the sector.