Taxation and PTI Government

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Islamabad/Rawalpindi, September 02, 2018
Taxation under new political landscape
Dr Vaqar Ahmed
A new social contract between citizens and the
government is imperative
The government of Pakistan Tehreek-e-Insaaf
comes with a promise to tackle the menace of
corruption in all its forms. It faces the chronic
difficulty of improving the tax administration
which is also marred with rent seeking. Most
indicators in doing business indices point
towards fragmented and complex tax regime —
a key factor creating difficulties for existing and
new business persons, in turn also denting
Pakistan’s prospects for attracting foreign direct
investment.
A survey of failed start-up companies in
Pakistan conducted by the Sustainable
Development Policy Institute (SDPI) points
towards three main findings: a) several start-ups
are unable to meet the high compliance costs of
taxation (e.g. each province in Pakistan has a
different tax regime); b) as start-ups expand the
burden of tax compliance also increases (e.g.
several companies are unable to hire a fleet of
accountants only to perform the task of filing
taxes on a monthly basis); and c) a complex
system of sales tax, customs and regulatory
duties has prevented start-up companies to
become exporting entities.
On point-c it is important to note that Pakistan’s
list of exporting companies has largely remained
the same over the past decade. This country is
not producing new exporters and tax regime has
a large role to play here. Perhaps Pakistan
remains the only country which has imposed
withholding tax on export proceeds even if the

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company is facing a loss. Besides there is a
large number of other withholding taxes which
are against the principles of a progressive fiscal
regime.
In a recent convention organised by PRIME
Institute, the audience was informed by Dr
Ikramul Haq that currently Pakistan has 68
withholding provisions – many of which are not
even understood by the most experienced tax
officials, in turn resulting in arbitrary levies.
In the same convention Syed Shujaat Ahmed of
SDPI informed that several withholding taxes
which lead to increase in the cost of doing
business in Pakistan are not found in regional or
peer economies. These include withholding
taxes on exports, cash withdrawals, utilities like
electricity and telephone, profits from banking
deposits, and contracts. He also suggested that it
was important for all tax authorities in the
country to only suggest imposition of taxes to
the parliament after a through impact
assessment which should inform how such taxes
would affect poverty and inequality levels in the
country.
Using data from Household Integrated
Economic Surveys published by the Pakistan
Bureau of Statistics between 2011-12 and 2015-
16 his study demonstrates that withholding taxes
(which were not adjustable for a large part of
Pakistan’s population) ended up in reducing
disposable income of citizens and contributed to
higher poverty levels in the country. Those
households who were under the poverty line in
2012 and still reported payments of several
withholding taxes became poorer in 2016.
Who is to blame for regressive and arbitrary
taxation in Pakistan? Ultimately the blame will
rest with the parliament and tax authorities. In
the case of latter none of the tax bodies in the
country have a fully functional research unit
which can advise the leadership regarding rising
tax gap and incidence of direct and indirect
taxes. As Huzaima Bukhari’s recent research
informs us that under such a rudderless tax
administration, most officials at Federal Board
of Revenue (FBR) and provincial tax authorities
are driven by the quarterly tax targets provided
by their superiors.
As Pakistan’s traditional sources of
foreign assistance are drying out, the
country’s economic managers will
need to tap the source of wealth still
available inside the country.
Just to meet these targets, officials end up
pestering the tax payers, in turn resulting in
discouraging business activity across the
country. Such destructive behaviour is resulting
in poor quality of corporatisation in the country.
A negative consequence has been the continued
existence of a large informal segment of the
economy which on most occasions ends up
promoting cash-based undocumented
businesses.
An evaluation of the past tax amnesty scheme
by SDPI also reveals why the envisaged gains
could not be realised. Most potential tax payers
have reported the lack of trust as a single most
important reason for not availing the amnesty.
As Pakistan’s traditional sources of foreign
assistance are drying out, the country’s
economic managers will need to tap the source
of wealth still available inside the country.
Pakistan has large undeclared wealth lying in
cash, prize bonds and certificates, undeclared
foreign currency accounts, undeclared local
currency accounts and undervalued real estate.
This wealth can become part of the formal
economy only if the predatory behaviour of tax
administration is curbed. Unfortunately, this
undeclared wealth is also a source of suspicion
for Financial Action Task Force which has put
Pakistan on the grey list.
In view of the above mentioned, it is imperative
to take urgent measures which can put in place a
new social contract between citizens and the
government. Of course, citizens must realise
their responsibility towards paying taxes.
However, it remains the government’s duty to
make the tax compliance process less
cumbersome so that it does not result in
excessive transactions cost to the tax payer.
It is also evident now that the federal and
provincial tax authorities cannot work in silos.
There is a need for an independent national tax

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authority which has internal capacities for
research, forensic audit, outreach and deeper
engagement with public. This authority is
perhaps the only answer to, for example, the
removal of double taxation currently seen in the
case of several manufacturing and services
supply chains operating in one or more
provinces. Such an authority will also look into
operationalising the MoUs between various tax
authorities across the country who currently do
not have a mechanism to discuss and coordinate
their policy actions on a regular basis.
Second, an independent tax authority will also
be responsible for recruiting, training and
providing a career to a national tax civil service.
All tax officials across Pakistan, even those who
work for provincial tax authorities should be
part of a single tax civil service cadre. This is
important in an environment where the tax laws
carry thousands of amendments and continue to
be interpreted differently across the country.
Third, simplify the appellate system! Currently
the complainant can be made to appeal to FBR’s
Commissioner, appellate tax tribunal (whose
website is out of operation), tax ombudsman and
even high courts. Even after going through all
these steps there is no certainty of decision. A
related aspect is the need for judiciary to realise
that taxation is a highly technical subject and
they need specialised training on a regular basis
to update their knowledge in this area.
Fourth, simplify tax laws and filing systems!
There is a vast proportion of population that
lacks access to personal computers, web-
enabled smartphones, and internet. They cannot
be expected to file online. Similarly tax codes
have been heavily updated through amendments
passed in the parliament. Reading,
understanding and on several occasions wrongly
interpreting documents having thousands of
bylines and footnotes is creating distortions in
the economy.
Tax codes with all amendments subsumed
within the main section of the law should be
abridged with a view to offer ease of
understanding for all stakeholders. All updated
tax laws should then be translated in Urdu and
regional languages. A starting point could be to
first simplify and reform the system of sales tax
on goods and services. This can readily improve
the estimation of turnover and income by
revenue authorities.
The above mentioned remedial measures have
been discussed in detail during the past 24
months in the public private dialogues
conducted by local think tanks. International
technical advice on comparative tax systems
was also available from the Centre for
International Private Enterprise and Friedrich-
Ebert-Stiftung. The Tax Reform Commission of
2014 also left some decent advice for the then
government.
Perhaps, it would be best to take some urgent
executive decisions now, based on the available
research and not resort to a task force approach
to tax administration. Time is of essence here;
forming more committees for providing the
same advice received in the past goes against
the new government’s ambitious first-100 day’s
agenda.
Dr Vaqar Ahmed
The writer is joint executive director of the Sustainable
Development Policy Institute, Pakistan. Tweets
@vaqarahmed