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Pre- Budget 2019-20: Efforts on to rationalize tax regime

The National Economic Council (NEC),the country’s highest decision-making body on economic policy, in consensus with federal cabinet is looking forward the various proposals that could create a revenue cushion of about Rs1.45 trillion in the next fiscal year, taking the year’s revenue target to Rs5.55 trillion from a dismal Rs4.2 trillion. Over Rs700 billion in additional revenue has to come from two areas viz sales tax and income tax. However, proposals are underway for increasing general sales tax by 1 per cent or 1.5 percent to yield over Rs350 billion.

The proposed budget strategy paper estimated the next year’s federal current expenditure by more than Rs6 trillion, including interest payments of more than Rs2.8 trillion and normal defense expenditure of about Rs1.28 trillion, which was more than 16 percent higher than the original estimates. The National Economic Council (NEC) has approved the National Development Outlay of 2019-20 amounting to Rs1.837 trillion, including the federal Public Sector Development Program (PSDP) and provincial Annual Development Plans (ADPs). The NEC reviewed the Annual Plan 2018-19 and the proposed Annual Plan 2019-20. It approved a GDP growth target of 4 percent along with a sectoral growth of agriculture (3.5 percent) industry (2.2 percent) and services sector (4.8 percent) for the financial year 2019-20.

The increase in revenue would come from additional tax measures of about Rs500 billion while Rs100 billion or so would be generated through widening of the tax base with major contributions coming in the period following the amnesty scheme this year.The Federal Board of Revenue (FBR) has claimed that it could provide about Rs220 billion or so through better monitoring and enforcement measures while about Rs520 billion would automatically flow on account of the inflation rate of 9 percent and 4 percent economic growth rate targeted for next year. About Rs200 billion would be generated through withdrawal of tax exemptions. The recovery of about Rs200 billion in arrears through settlement of litigations is not taken into account as a revenue source.

The NEC will consider a seven-point agenda, including a review of the Annual Plan 2018-19 and proposed annual plan for 2019-20 and draft 12th five-year plan (2018-23). The NEC will also review Public Sector Development Program during the current year and approve next year’s development plan.

The 12th Five Year Plan (2018-23) would focus on balanced and equitable regional development; sustainable, inclusive, job-creating and export-led growth; resource mobilization and good governance; social protection; food and water security; connectivity enhancement; promotion of knowledge economy; and initiatives like ‘Clean and Green Pakistan’.

The plan would further be fine-tuned, especially its implementation mechanism, in consultation with all stakeholders.

The PSDP 2019-20 focuses on new initiatives in the field of agriculture, information technology, higher education, science & technology and technical education. The meeting was informed that targeted interventions will be made in the less-developed districts of the country so that they could be brought at par with other parts of the country.

The government looks set to reverse tax concessions extended by the previous government to benefit high-earning salaried and non-salaried individuals substantially more than the middle-class workforce. This will revert back the income tax brackets applicable in the tax year 2017. It is estimated that the reversal of tax rates for salaried individuals will help to pocket extra amount of Rs14 billion in the fiscal year 2019-20. It is estimated to collect income tax amount to the tune of Rs103 billion from salaried individuals in the current fiscal year.

In current budget comprehensive tax cuts were applied to low salary earners, raising the exemption threshold almost three times to Rs1.2 million from Rs400,000. A nominal tax of Rs1,000 for individuals in income brackets ranging from Rs400,001 to Rs800,000 and Rs2,000 for individuals in income brackets ranging from Rs800,001 to Rs1.2 million were introduced in the budget.

For higher income earners, the previous government had scaled down the maximum slab to 15 percent from 35 percent in one go. However, the maximum slab was enhanced to 25 percent through the amended Finance Act 2018.

The estimated revenue from reversing to the previous slabs will help government to pocket extra amount of Rs24 billion in the year 2019-20.For the current fiscal year, it is estimated that the FBR will raise an amount of Rs66 billion under income tax from non-salaried individuals. Similarly, the revision of tax slabs to the year 2017 will help to raise additional income tax of Rs5 billion from association of persons in the tax year 2019-20. Currently, the Federal Board of Revenue (FBR) estimates to collect tax of Rs14 billion from association of persons.

 

Another proposal is also under consideration to decrease corporate income tax rates for small corporations. It is also under consideration to increase turnover tax for loss making companies to 1.25 percent in the budget 2019-20. There is also a proposal to phase out exemption in corporate income tax and in the personal income tax of non-salaried individuals and AoPs starting from 50 exemptions and gradually reducing the number to 45, 35 and 15 over the next three years.

Three specific proposals are also on the table for review with phase wise reduction in BMR tax credit from 10 percent to zero percent under section 65B of the Income Tax Ordinance 2001 over a period of three years. Currently, the cost of this exemption is estimated at Rs88 billion.

The elimination of profit on non-profit organizations under section 100C will help FBR to save around Rs7 billion per annum. It has also been proposed to withdraw the tax exemptions given on new industrial undertaking and for those in the existing industries, the official said, adding it will be difficult for government to withdraw the concessions from industrial sector.

As per the plan, the revenue measures will be achieved through broadly increasing the personal tax base, to “rationalize personal income tax rates”, eliminate tax expenditures, administrative measures to improve the assessment ratios of property tax and eliminate low-yielding withholding tax provisions.

As per the proposed plan, the FBR estimates to raise Rs774.9 billion of fresh taxes in the budget FY20, Rs1,640.3 billion in FY21 and Rs2,654.5 billion in FY22. The largest share of the fresh increase will be raised from reviewing and rationalization of the existing tax rates to the tune of Rs4,981 billion in FY20, Rs1,120.2 billion in FY21 and Rs1,948 billion in FY22, respectively.

Similarly, another Rs250.2 billion will be raised from elimination of tax exemptions in FY20, Rs470.3 billion in FY21 and Rs603.9 billion in FY22 billion, respectively. Another Rs28.6 billion will be raised from reorganizing of federal and provincial tax regimes in FY20, Rs35 billion in FY21 and Rs42.1 billion in FY22, respectively.

The tax measures also include raising Rs18.5 billion from broadening of the tax base in FY20, Rs47.6 billion in FY21 and Rs94.4 billion in FY22. Moreover, it was proposed that to make the tax system equitable and the simplification of legal provision and reduction in compliance cost will also yield another Rs20.5 billion in FY20, Rs32.7 billion in FY21 and Rs33.9 billion in FY22, respectively.

These revenue estimates are calculated on the assumption that the country’s economy will grow at 4 percent per annum and inflation will remain in the range of 9.4 percent, giving revenues a nominal growth rate of 13.4 percent per annum.

If undertaken these measures in the next three years, the steps will lift the country’s tax-to-GDP ratio to 15.4 percent by the year 2021-22, culminating year of the program. The government has also projected to increase the number of taxpayers from 1.9 million to 2.6 million.

However, this planned radical reduction in tax liability perpetuates the regressive character of the taxation regime in Pakistan and is also against the global tax system. These proposed reforms were not just reducing tax slabs, but surrendering Rs90 billion in taxes to high earners in the country.

The writer, Mr. Nazir Ahmed Shaikh is a freelance columnist and is an educationist by profession. Currently he is associated with SZABIST as Registrar and could be reached nazir.ahmed@szabist.edu.pk.

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