TAX REFORMS

New draft of income tax for salaried class

By AMANULLAH BASHAR
Jan 09 - 22, 2006

Salman Nabi, Member Direct Taxes, has disclosed that Income Tax Department is preparing drafts of new income tax rules for the salaried class and Non-Governmental Organizations (NGOs).

These drafts would be sent to the premier trade bodies for soliciting professional views. He was optimistic that the new rules for salaried people would resolve many issues. The Online Verification System of Income Tax Refund is also being revamped and all irritants faced by the taxpayers would be removed shortly. In this regard major changes in the system as well as forms are being introduced, besides the number of National Bank branches, accepting income tax returns, has been increased.

Speaking at a reception hosted by the SITE Association of Pakistan, the Member added that the policy of forced compliance would never prove successful in the long run so CBR is relying on voluntary reliance and compliance. He said to detect and add new income tax payees "a big project of data base" has been initiated and information collected under this project would be sifted to rope in new taxpayers. Under this project only those new or potential income tax payers would be handled who could yield substantial income tax revenue.

He was of the view that Universal Self Assessment Scheme (USAS) has started paying dividends after three years of operations and both the numbers of income tax payers and tax collection has yielded substantially. He said the issue of determination of criteria of selection of income tax cases for detailed audit is pending before Supreme Court of Pakistan. He said the introduction of e-filing of income tax returns would change the whole tax system of the country.

Adding further, Member Director Taxes, said that there had been 20 percent growth in revenue during the last five months, which will, eventually, help achieve 17 percent targeted growth during the remaining seven months of 2005-06. "And, as such, there is no reason why should we not meet our Rs. 690 billion, an all-time high revenue collection target". He pointed out that in Pakistan, revenues have been on the rise for the last five years due to implementation of positive policies and avoiding unnecessary favors to any segment of society. Total revenues are projected to grow at an annual compound growth rate of 10.5 percent and tax revenues at 10.3 percent during 2005-2010.

However, the CBR taxes were estimated to rise at an annual compound growth rate of 11.1 percent, and of these taxes, the highest growth of 12.7 percent was projected in sales tax, followed by direct taxes 12 percent, customs duty 7.3 percent and central excise 5.6 percent. According to the latest government's estimates, a relatively higher growth projection of sales tax among the indirect taxes would be, chiefly, the outcome of taxation strategy of expanding the VAT variant. Similarly, high growth projection for direct taxes, primarily, hinges on tax reforms to enlarge the tax net, plug tax loopholes and improve tax administration, the Member added. These tax reforms will be implemented by the CBR under their tax administration reform program project, being funded by the World Bank at a cost of Rs. 9.501 billion. Moreover, in view of the sensitivity of the issue of revenue collection and its enhancement and to monitor closely the reform process of CBR, a high-powered Federal Committee is supervising the affairs of the organization.

Tax revenues collected by the CBR during the next five years are projected to increase at the rate of 0.3 percent of GDP every year on the back of second generation reforms and enhancing confidence of the taxpayers. The tax collection machinery by adopting more facilitation measures is bringing changes in duty drawback system, refund procedures, good governance and introduction of automated taxation, which will help in minimizing unnecessary physical interaction between the taxpayers and the tax machinery.

Though the enhanced share of revenues is likely to become available to the provinces from the federal divisible pool under the new National Finance Commission (NFC) award, yet there is a need to gear-up efforts for increasing revenues for diverting more funds towards community and social services and poverty alleviation.

Salman Nabi admitted that the tariff regime is well structured but despite that the figure has marginally increased to around 1.5 million taxpayers, which are being squeezed for the past so many years. According to the official figures of the total revenue of above Rs. 600 billion, the volume of direct taxes on different segments of society is Rs. 165 billion compared to the indirect tax collection of Rs. 355.8 billion.

He agreed that direct tax collection was inadequate and large number of taxpayers has yet to be brought into the tax-net. He cited the example of income generating areas of the economy including Agriculture, Real Estate, Stock Market, Professionals like doctors, lawyers, architects, artists etc., and said that the CBR is making all efforts to increase revenue mobilization, so that poverty-related expenditures can be met.

Ameen Bandukda said that determined efforts are necessary to complete institutional and policy reforms within the CBR. In Pakistan, out of a population of over 150 million, barely one percent, or 1.5 million persons, filed income tax returns.

According to economists there should be at least three million taxpayers in the country and the low numbers of taxpayers have meant that the government has increasingly been relying on indirect taxes to raise revenues and meet the expenditure. Widening Pakistan's narrow tax base has been a challenge that most governments have not been able to meet. The two issues that stand in the way are the lack of political will on the part of the government to go after untaxed sector and its inability to check corruption in the CBR, Ameen added.

"The present government needs to further reduce the Direct Tax Rates and increase the tax base. We suggest that every new commercial entity be it a retail/store or a doctor's office or a workshop, should first take get an NTN before being allowed to get any utility connection," he added.

If increasing the direct tax base is not pursued with the priority it deserves and the revenue base remains as small at present, there is a danger that economic progress would halt and the government would have to resort to heavy borrowing, as was done in the past, Ameen said.

Furthermore the trouble with Pakistan's taxation system is that it is highly regressive. It has created distortions. Decisions taken in recent years have done nothing to alleviate the miseries of the people as regards taxation, though one or two measures in the recent budget are professed to bring (procedural) relief to some categories of income tax payers. The scope of the self-assessment scheme, for example, has now been extended. However, its true impact would be known only with time.

In our blessed environment, even paying the tax honestly often does not save you from harassment at the hands of the tax officials. One has to go begging the tax inspectors to get one's Income Tax Assessment Order passed. In the countries they cite as paragons of virtue in tax matters, you get it without hassles, with either a demand note or a refund cheque. "When such a scenario does come to pass in Pakistan, I am sure most people will be only too glad to fulfill their tax obligations more willingly and honestly", Ameen Bandukda concluded.