Tax Management and Budget 2018-19: Expectations versus Reality
BUDGET every year brings in plan for government to collect revenues and do expenditures in the form of development and non-development. To manage the expenditure side, every government try to look towards tax culture it is possessing and how it is going to balance in between direct and indirect taxes.
Since its inception in 2013, current government tried its way out to increase tax to GDP ratio where there was less to celebrate for them. From 2013-17, there is only 1.8 percentage points as far as tax to GDP ratio is concerned. Within this period and increase of 1.8 percent, aggregate focus was always on Sales Tax as primary tax collection due to which indirect taxes are 60 percent of the total taxes. After Sales tax though focus is on direct taxes but it only increased by 1.7 percent during this period.
Prior to budget 2018-19, number of platforms were used by economists working and advocating issues and challenges for Pakistan economy, voiced concerns over irrational tax culture where person from business community is target to double taxation. Stress was there on reduction of compliance cost and introduction of simplified and rational tax regime.
Over the past couple of years, Sustainable Development Policy Institute (SDPI) being one of the key institute to raise its voice after conducting research both at federal and provincial level. In this regard within budget recommendation, beside simplification of tariff regime with three slab structure, gradual end to regulatory duties was proposed. It was also proposed that, in the medium term, there is need to move toward a uniform tariff regime, reduce regressive withholding taxes, compliance and reporting costs under direct and indirect taxes, and broaden the corporate tax base to reduce burden on manufacturing sector. It was also proposed that there is need to have stronger measures for crackdown on harassment faced by businesses at the hands of tax and regulatory authorities including environment, labor, food and municipal administration department.
Contrary to these recommendations and expectations, government prior to this budget and to manage the tax system introduced economic reforms package with key focus on tax management and rates on individual taxes.
While not touching the compliance cost issue which eventually is increasing cost of doing business for Pakistan, in this budget complete exemption has been given to people who earn up to PKR 12 lakh per year. Under new formula tax will be levied at the rate of 5 percent for income between two and four lakhs per month whereas people earning above four lakhs monthly will be taxed at the rate of 15 percent.
In Pakistan though tax burden is on the salaried middle-class but within this formula there has been no clarification in the definition of taxable and non-taxable income. i.e. who will be filer and who will be not. This has been case observed in the past as well that those earning seasonally over the year with no proper income sources are also being termed non-filer and deductions were made at high rates.
Thus these new rates may benefit few in reality with more room open for avoiding taxes and therefore pressure will be still on salaried middle-class in terms of indirect taxes.
Similarly looking at another step under this budget, where undeclared incomes earned before 30th June 2017 and held as local assets (gold, bonds, property etc.) can be regularized on payment of the 5 percent of the value of asset. There is possibility for more people to avoid long term payment by paying a minimal amount once. With this regularization, which may play positive role but there is no management system defined to this. This case may also hold true in the case of dollar account holders in Pakistan who have purchased dollars through undeclared money who can regularize them on a payment of 2%. Within this whole framework, government ignored number of questions, unanswered: 1) Who will regularize and who will be exempted? i.e. there is no proper framework announced in this regard. 2) Who will define which money is undeclared and which one is declared?
Further as this budget proposed FBR tax revenue target to be PKR 4,435 billion with aim to achieve through tax administration and compliance, but there is no focus on reduction of existing compliance cost. In this regard prior to budget, voices were raised for introduction of Uniform taxation for all businesses but it has been just introduced in case of fertilizers to support agriculture, thus giving targeted relaxation.
Government further is expecting to manage tax by introducing reforms in audit mechanism to encourage business and reducing cost of business to some extent. Though reforming audit mechanism may drop down cost of doing business but no significant discussion and proposals were linked to taxes which are of less positive results.
Though government tried its best to somehow manage the tax system and it did give some relaxation on the bank transactions, withholding taxes and other direct and indirect taxes, but it failed to address the compliance cost of the existing tax system, didn’t talked about other regulatory and tariff burden faced by business community.
Thus beside proposed measures which include simplification of tax regime in the long run, government should also ensure within the existing measures there is no room for leakages. This will not only help interim government to manage finances during its period but will also help the new government to run business effectively.
Also in order to reduce burden of taxes from middle class and salaried income, focus should be on bringing people into the tax net with stress on increasing weight on direct taxes. Further, it should also be on the government now and post-elections to define tax filer and non-filer, to define and answer about undeclared and declared money and what will be framework for regularization in order to manage tax system of Pakistan.
This article was originally published at:
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.