KARACHI: The Pakistan Business Council (PBC) has recommended proposals for the upcoming budget and these have been prepared in the backdrop of Pakistan’s economy showing signs of recovery, which though positive is still short of the levels needed by Pakistan if it is to absorb the large numbers of new entrants into the job market, as well as providing meaningful employment to those already in the workforce.
The PCB’s proposals said that the economy needs growth, jobs, value-added exports and structural changes to distribute the burden of taxation on all segments of the population which can afford it. This year’s tax proposals look to jumpstart the manufacturing sector. The Finance Act 2021 needs to support Pakistan’s manufacturing sector and the formal services sector, it added.
- The PBC’s proposals for Budget 2020-21 are divided into the following sections:
- Promoting Industrialisation/Growth/Job Creation,
- Consolidation of Businesses for Scale to Improve Competitiveness
- Documenting the Economy & Providing a Level Playing Field for Domestic Manufacturing
- Reducing the Cost of Doing Business in Pakistan
- Helping Pakistan Meet its Commitments to the UN Sustainable Development Goals
Economy & the Tax Regime:
According to PBC, fundamental reforms are required to improve the taxation regime and to lead to the sustainable growth of both the country and its tax revenues. These reforms are contingent on political will to pursue those outside the tax base and the FBR’s capability and capacity to implement. They will take time to bear results.
In the meantime, any knee-jerk revenue-seeking actions will undermine taxable revenue and tax revenues.
Principles-led tax regime:
The council said that taxes should be simple, predictable and supportive of business growth and the formalisation of the economy. The aim should be for higher tax revenues to flow from the combination of improved profitability of existing taxpayers and from broadening of the tax base.
Industry, which presently contributes taxes disproportionate to its share of GDP must be facilitated to create more jobs, boost value-added exports and promote import substitution. The impact of taxes on manufacturing vs commercial importers should be reviewed.
The FBR and the formal sector should work in partnership to broaden the tax base. The earlier tax credit to encourage taxpayers to transact with the formal sector should be revived. The vast amount of information on non-taxpayers provided by withholding agents should be mined.
Higher advance taxes should be levied on utility bills of non-tax filers. Corporate entities, especially those listed, which operate to a higher standard of governance and accountability and their shareholders must not be penalised in comparison to unincorporated entities and their owners, otherwise, the incentive to incorporate will be undermined. There should be a level playing field in the holding periods for capital gains tax on the sale of company shares vs. real estate.
Targets before capability are not a solution:
For some time now, FBR is given an unrealistic tax target, which in the absence of resources and capability, forces it to extract more tax from existing taxpayers. For the fiscal year 2020-22, the mooted 27% higher tax target is an example. It is more than twice the expected nominal growth of the economy.
Significant changes are required in the structure, resources, and technology of the Federal Board of Revenue before setting targets. Separate targets should be set for revenue from existing and new taxpayers. Targets for existing taxpayers should be in line with expected growth in the nominal GDP. Tax targets from new taxpayers should be set in line with the evolving capability and capacity of the FBR. Tax refunds due should be excluded from revenue when assessing performance against either of these targets.
Reliance on Minimum, Advance and Withholding Taxes:
Minimum tax based on turnover is fundamentally flawed and acts as a barrier to entry of new players as it raises the initial investment required to cover the tax payable in early loss years. FBR’s reliance on minimum, advance and withholding taxes has grown sharply as this is an easier way than assessing taxable profits. This reliance should be phased out gradually. Levying a minimum tax on SEZ enterprises and others in their tax holiday periods defeats the purpose of the tax holiday.
Formalization of the Economy:
The use of cash in the economy should be discouraged. The Punjab government incentive to reduce GST on some card payments is an example to encourage non-cash transactions. Restrictions on the use of cash above a certain limit would also assist.
The transit treaty with Afghanistan has been misused through the diversion of goods to Pakistan. As the treaty has expired, Pakistan can renegotiate to put quantitative and qualitative restrictions on what can transit, insist on letters of credit, charge duty, and GST on import which would only be refunded to the Afghan government on exit, track and monitor containers, strengthen inspection of empty containers returning to Pakistan and make physical controls along the border stronger.
Electronic Data Interchange with key trading partners should be deployed to check under-invoicing of imports. The provinces have little incentive to check smuggling as customs duty and GST evaded are federal taxes and do not hurt their revenues. Provinces may be incentivised to conduct raids on shops that deal in smuggled goods. Positive lessons from the success of cell phone registration with PTA and Urdu language labelling requirement for imported food items can be applied to other smuggling prone goods.
This year’s tax proposals are being submitted in the backdrop of the Pakistani economy beginning to show signs of recovery as the world starts to recover from the impact of the devasting Covid-19.
The budget needs to promote an environment that promotes investments in the manufacturing and services sector leading to the creation of jobs, which increases value-added exports and ultimately benefits the government in the form of greater revenues, increased documentation of the economy, and a broader tax base. The manufacturing jobs as opposed to those in the services sector are primarily in the formal sector which provides a certain level of job security.
Measures for Curbing Massive Under-Invoicing:
a) Values at which import shipments are cleared through PRAL or CARE need to be publicly available.
b) The government must insist on Electronic Data Interchange (EDI), for both FTA and non-FTA imports from China. In the future, the requirement of EDI should be made compulsory for imports from FTA/PTA partner countries.
c) Depending on the industry, the Import Trade Price (ITP) be fixed e.g. on the basis of country of origin, weight, volume, etc. after discussion with stakeholders. ITP’s may be fixed for most items prone to misdeclaration such as consumer goods and margins of commercial importers be monitored to assess the value of subsequent supply of imported goods. A certificate to this effect should be issued by auditors of commercial importers.
d) For items, prone to under-invoicing and misdeclaration, FBR should designate one or two ports (including the dry ports) for clearing of import consignments. This will allow better monitoring of the import consignments where chances of misdeclaration are on a higher side.
e) Additionally, the old Customs General Order 25 needs to be revived with a provision that local manufacturers be given the option to buy at a 15% premium, any consignment which appears undervalued.
f) Taxes and duties deposited by local manufacturers and commercial importers should be published.
g) The rate of tax collected from commercial importers be increased by at least 2%. Presently, tax collected from commercial importers is treated as final tax.
Massive under-invoicing especially by commercial importers is destroying the domestic industry. Across the board, massive under-invoicing and dumping of imported products has been increasing. Information regarding values at which various custom check posts clear import consignments is not publicly available. This encourages unscrupulous importers to under-declare the value of consignments to evade government revenues.
There are massive leakages in the Afghan Transit Trade (ATT) and smuggled goods are being openly sold in all major shopping centers of the country. Customs however is not willing to act against smuggled products citing “lack of cooperation from local authorities”, PBC said in its proposals.
Transparency in the collection of taxes will discourage misdeclaration, measures to discourage evasion of taxes and duties will help the industry to fairly compete with unscrupulous imports, and also Government stands to benefit from the increased indirect taxes revenues. It will also help in the accountability of the customs staff and will reduce the incidence of Customs Duty & Sales Tax evasion and increase government revenues.
