Tax proposals for the next budget

A plan to overcome the current challenges

The budget for fiscal year 2020-21 is expected in the first week of June.Like other nations, we have to strive hard to ensure the survival and revival of businesses that employ millions of people having no other source of income and have been adversely affected by the Covid-19 pandemic.

In the wake of the lockdown necessitated by theCovid-19 epidemic, many businesses are on the verge of closure. These were already suffering due to sluggish economic activity and high utility bills and mark-up rates.

Big to small and medium enterprises (SMEs) are demanding comprehensivebailouts, including tax reliefs. They are complaining of facing difficulties in securingthe loan facility announced by the State Bank of Pakistan to pay salaries/wages.

Those paying rents are demanding remission/deferment/loan. Their demand is forinterest-free loans and/or grants to employees to avoid lay-offs.They argue that it will require many months to recoup losses and achieve break even.

Given thebleak scenario, they say, a mark-up would be an additional burden. There is a demand alsofor massive tax reduction, deferment of old and forthcoming liabilities, tax amnesty, and zero taxation for workers making up to Rs100,000 a month, waiver of advance income tax and over 70 withholding tax provisions contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services.

In this article, we are presenting a plan that can help overcome the current challenge through Finance Bill 2020. The most essentialsteps are a simplification of the tax system, guaranteeing the ease of doing business, reducing the cost of doing business, focusing on improving human capital, tapping resources and generating employment. For all these, dismantling and reconstructing ofthe oppressive, inefficient and unproductive tax system is a prerequisite.The current system imposeshigh taxes, but yields low revenues.

A withholding tax system that is operationally inefficient, anti-business, complex, time-consuming and costly must be abolished except for payroll and payment of dividends, interest and payment to non-residents.

The government must be reminded that no agenda for rationalisation of tax codes or simplification of tax system can improve tax compliance, unless there is substantial improvement in public perception regarding the technical competence, integrity and ability of the tax authorities to collect taxesfairly, using modern technological tools. The present functional structureof the Inland Revenue Service(IRS) has failed to achieve these objectives.

The fundamental challenge is providing a simple tax system that is manned by an efficient and competent administration. Tax administrations, both at federal and provincial levels, lack the requisite level of digitization.

The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverketthat maintains data of each and every person, natural or juridical. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish a National Tax Authority (NTA) more or less on the same lines.

The government in its forthcoming budget must provide a transparent tax system for which a complete model is available in a studyTowards Flat, Low-rate, Broad and Predictable Taxes, (PRIME Institute, 2016).

The following measures/steps are necessary to counter damage already inflicted by lockdowns and other global factors resulting in demand contraction and absence of a reliable national socio-economic registry:

All individuals, whatever the level of their income may be, should be facilitated to filesimple and easy tax returns made available both in English and Urdu—the incentive for filing a return should be Rs 2,000 cash payback in the bank account of the filer. This will start the process of documentation of households and their earning levels at national level. Individuals earning below Rs 400,000 a year should be paid income support (negative tax) till the time the State provides them employment.

For individuals, tax rate for incomes up to Rs 1.2 million should be zero.Where taxable income exceeds Rs 1.2m but notRs 2.4millionit should be 5 percent. For taxable income exceeding Rs 2.4 million but not Rs 4.8 millionthe tax should be Rs 120,000 plus10 percentof the amount in excess of Rs2.4 million andfor taxable incomes exceeding Rs 4.8million,Rs 240,000 plus15 percent of the amount in excess of Rs 4.8million. Corporate income tax rate should be reduced to 20 percent.An Income Support Levy should be imposed at 1 percent of net wealth exceeding Rs 20 million.

All citizens should be given a chance to pay any past unpaid liability due to non-reporting or under-reporting by paying 10 percent tax latest by June 30, 2021. After the deadline, stringent action, including confiscation and imprisonment, should be taken.

Under a self-assessment scheme any taxpayer paying more than 25 percent tax over the last year’s liability, should be immune from audit or inquiry. Over the next three years, while businessmen concentrate on revival and growth, the government should prepare their tax profiles by data integration.

Simplified and harmonised sales tax on goods and services should be charged at a low rate of 5 percent.

Customs tariff should be simplified under a ‘One-Chapter One-rate’ rule.

Radiographic scanning of all inbound and outbound containers should be undertaken to plug revenue leakage.

There should be an effective mechanism to counter unfair practices on the part of tax administrators. They should be subject to punitive action and pecuniary damages after the final fact-finding authority adjudges their actions to have been arbitrary, excessive or beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.

Taxpayers’ rights must be safeguarded and strengthenedunder a Taxpayers’ Bill of Rightsensuring quality of treatment and guaranteeing privacy and confidentiality of their declarations. There should be a right to assistance by the State in tax matters, an unfettered right to appeal through an independent tax appellate system and facilities for independent review of disputes with tax authorities.

In Pakistan under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz.

Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;

Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and

6 percent mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.

The above should be revived by suitably amending Section 147 of the Income Tax Ordinance, 2001.

Recovery of tax demand should be made only after the decision of Tax Tribunal.

An efficient tax judiciary should be provided to help remove impediments in the way of collection of genuine tax demands by the State and settling tax disputes within 12 months. For this we need to make the Tribunal a truly independent forum. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Court (NTC). Appeals against the orders of the NTC should lie with the Supreme Court alone. Members for NTCshould be recruited in the same manner as judges of High Court. The pay, perquisites and salary structure of NTA judges and staff should be at par with the High Courts.

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

Tax proposals for Pakistan's next budget