Jan 26 - Feb 01, 2009

In order to meet the revenue collection target of Rs.1300 billion during the current financial year (2008-09) both IMF and the World Bank are pressing hard to impose new taxes and making different suggestions in this regard. The World Bank has now asked the Federal Board of Revenue (FBR) to examine the possibility of levying withholding tax on withdrawal of foreign currency from banks in Pakistan.

Sources in the FBR told this correspondence that the issue was discussed in a meeting between the tax authorities and World Bank officials last week. The WB officials were of the view that withholding tax on withdrawal of cash from banks should be extended to foreign currency accounts also. The FBR should apply withholding tax on cash withdrawals of foreign currency. During the meeting, the WB also asked the tax authorities to double withholding tax, from 0.3 percent to 0.6 percent, on cash withdrawals from banks, sources added. They said that the government has to amend the Economic Reforms Act to take away protection on foreign currency accounts. Section 3 of the Protection of Economic Reforms Act, (PERA) 1992 has an overriding effect on Foreign Exchange Regulation Act (FERA), 1947, the Customs Act, 1969, the Income Tax Ordinance and other laws for the time being in force.

Sources said that levy of withholding tax on foreign currency is part of active proposals of the WB. However, it has not yet been finalized at the level of the Board. The FBR is examining different proposals in view of WB recommendations, and a consolidated summary on taxation proposals would be moved to the Economic Co-ordination Committee (ECC) of the Cabinet. Other recommendations of the WB include immediate development of a comprehensive business process re-engineering (BPR) strategy. Although, co-location has been achieved, full integration of income tax and sales tax must follow as soon as possible. The Board has to take effective steps for prevention of revenue leakage.

The rationale behind this move is fairly evident. As FBR tax collection efforts are not coming up to the expectations of meeting the target of Rs.1300 billion, the Government is being pressurized to impose new taxes. This proposal is, however, being opposed by the independent economist and analysts who are of the view that the proposal if implemented would create many new problems for the economic managers of the country while it would not make any sizeable contribution to our revenue.

In the wake of IMF's 23 month standby agreements for Pakistan of US$7.6billion number of conditions have been imposed by the lender, of which the foremost demand is to levy new taxes to raise revenues by about Rs.100 billion over the target of Rs.1250 billion for the financial year 2008-09. The IMF team which visited Pakistan last month also held meetings with high officials of the FBR besides advisor on Finance to discuss the imposition of new taxes and bringing more people into tax net.

Expecting the pressure from the IMF the FBR had earlier held a 3 days International Conference on "Tax Policy Options for Pakistan" in Lahore. The Conference which was attended by leading national and international experts was expected to identify and generate concrete tax policy options for achieving broad micro and macro economic objectives. The Conference was inaugurated by PM advisor on Finance Shaukat Tarin. In his augural speech Mr. Tarin said "low tax-to-GDP ratio was the root cause of our economic ills. We have to improve this ratio by at least 5% to overcome our problems. The public sector plays a central role in providing key social welfare and infrastructure services to meet the needs of a growing economy. However, the most desirable way of meeting the cost of such services is through an equitable system of taxation," he said adding that generally, countries with comparable level of development background mobilize tax revenues that are about 18 per cent of GDP. In the last fiscal year, Pakistan mobilized only 9.6 per cent of GDP in taxes. This is not an acceptable level of tax effort. Indeed, it is significantly below the effort that was registered in the 1980s and 1990s when it hovered around 13 per cent, he added. The PM's adviser said the ill-effects of a poor tax effort pervaded the whole economic landscape and no reform effort to correct the economy could succeed without putting the public finances on sound foundations.

He emphasized that the tax treatment of income must be uniform and non-discriminatory without regard of its origin. Moreover, he said there should be no exemption in taxes on income and consumption except for income of charitable trust or consumption of food stuff. Replying to a question he pointedly said that income from agriculture should also brought under tax net. Under intense pressure from the feudal lobby, overwhelmingly represented in the National and Provincial assemblies, Financial Advisor Shaukat Tarin had to back out from his earlier announcement that Agriculture will be among the sectors whose income would be taxed as a part of new measures to boast revenue badly needed to meet the financial difficulties presently faced by the nation. The November 25 communiquÈ of the IMF executive board, however, briefly stated that fiscal adjustment would be primarily achieved by phasing out energy subsidies and strengthening revenue mobilization through tax policy and administrative measures.

There are no two opinions that the tax to GDP ratio has to be improved. The real question is how to improve tax-to-GDP ratio which is dismally low at 9.5% despite levying of irrational withholding and presumptive taxes. The issue is not that of increasing number of taxpayers (the gap is due to non-registration of all taxpayers by FBR) but how to rationalize tax incidence and bring the rich and mighty into the tax net. And at the same time how to cut the monstrous size of unproductive government spending. The IMF is insisting for changes in the tax structure to increase general sales tax (GST) by Rs.50 billion in the current fiscal year (FY09). Do they know that its real brunt will be on the poor of Pakistan?

The ever fattening black economy is another impediment in raising the tax GDP ratio and enhancement of Government revenues. According to the experts the size of informal (black and untaxed) economy has acquired a mammoth size in Pakistan. According to them it is over 51% of total GDP and is inflicting a colossal loss to state revenue. Obviously it cannot happen without rampant corruption in our tax collecting agencies. According to the experts cross-border smuggling from Afghanistan under the guise of Afghan transit trade (ATT) in particular, has fuelled the already powerful black economy which is estimated to have swelled from Rs.15 billion in 1980 to 1.25 trillion by 2000 with its share in GDP from 20% to almost 50%. Under the circumstances, no exercise to enhance state revenue or improve tax to GDP ratio will prove meaningful unless government is courageous enough to lay hands on strong and powerful feudal lobby and bring them into tax not by eliminating corruption from FBR and its attached departments.