1.STRATEGY TO WIDEN THE TAX BASE
The Federal Board of Revenue (FBR) has put in place wide range of initiatives to widen the tax base. Three hundred thousand new taxpayers have filed income tax return for tax year 2018. In addition to this, 150,000 returns have been enforced as well, FBR has developed and is implementing the Mapping Big Business and Services (MBBS) strategy to widen the tax base. The FBR will focus on four big and flourishing business, the healthcare sector (private hospitals/diagnostics/laboratories/pharmacies), the food sector (eateries and food outlets/bakers/wedding halls), the entertainment sector (event management, professionals linked with showbiz, sports, drama, film, music, theatre and amusement parks) and private educational institutions, especially joint ventures with international universities.
The real estate sector witnesses countless transactions each year, (mostly falling outside formal tax regime) is infested with concealment, gross understatement and duplicate documentation. The FBR intends to gather investors data, identify unregistered persons and ensure that due tax is paid by them.
While recent tax reforms have impacted income tax base & collection in a big way, by and large sales tax regime remains intact. Sporadic efforts made by Broadening of Tax Based (BTB) Zones Lahore and Karachi during 2017-18 have been reinforced through organized and directional campaign to broaden the sales tax base. The following roadmap will serve this purpose:
Shifting of potential liable to sales tax cases from income tax profiles, similarly, new cases in income tax will be registered through the sales tax withholding statements.
Only registered people are allowed to import or export taxable goods though the customs
computerized system (WeBOC).
Government departments and public sector organizations have been directed only to purchase taxable goods from registered people.
Supplies of taxable goods made to unregistered people have been made chargeable a
further 1% tax.
Purchases of taxable goods from unregistered people are subject to the withholding of tax
1% of the value of such purchases.
Supply of electricity and gas to unregistered persons having industrial or commercial
connections and monthly bill exceeding Rs.15,000 is chargeable to 5% of extra tax.
In order to further expand sales tax registration data-sharing and co-ordination with the following departments / databases will be pursued; customs databases, income tax databases, utility companies, Securities and Exchange Commission of Pakistan (SECP) provincial departments and the State Bank of Pakistan.
In order to augment the above efforts, the following measures are currently being taken:
The Use of Technology: Despite being computer illiterate, common people feel easy to use mobile apps. Therefore, a mobile application would be developed so as to persuade people to file their return of income easily.
Greater sharing of data: Considerable economic data is available with different public sector organizations in Pakistan. The FBR intends to integrate all such databases like NADRA, Provincial Revenue Authorities, Exercise & Taxation Departments, Utility Companies and Land Registering Authorities. This will be done in a way that a 360 degree view of economic profile of a taxpayer/non-taxpayer is developed. FBR is running a joint exercise with NADRA in which potentially one million plus taxpayers would be identified. Presently, the model has used four proxies and it is likely that another four proxies would be used to further enrich the data.
Enforcement measures: Unregistered business premises would be identified through field surveys and will have to register.
These are Pakitan’s Multilateral and Bilateral Conventions:
1. Pakistan has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Multilateral Convention). The convention shall facilitate in the areas of international cooperation for better operation of domestic tax laws. 126 jurisdictions have signed the Multilateral Convention. Under the Multilateral convention, information from other member jurisdictions may be obtained in the following three ways:
i Exchange of Information on Request
ii. Spontaneous Exchange of Information
iii. Automatic Exchange of Information
2. Moreover, Pakistan has signed 65 Avoidance of Double Taxation Agreement with other countries. Under these bilateral arrangements, information may be exchanged with treaty partners on bilateral basis. By exchanging information through this mechanism, Pakistan tax-resident persons having financial assets or income generating activities in overseas jurisdictions can be brought into the tax net.
3. Pakistan has also signed Multilateral Competent Authority Agreement (MCAA). The MCAA
enables the exchange of the following information on an annual basis:
– Name address, TIN, date and place of birth, account number.
– Name and identifying number of Reporting Financial Institution.
– Account balance or value on the last date of the reporting period.
– Total gross amount of interest and dividend credited to the account during the reporting
4. Pakistan has successfully exchanged information with 39 jurisdictions. The number of exchange partners is likely to increase in the coming year. Any information exchanged with any partner jurisdiction under any of the above frameworks can be used for the purposes of broadening the tax base.
2. Growth of the Banking and Financial Sector and lending to the Real Economy:
During CY18, the financial sector comprising of Banks, Micro-Finance Banks, Development Finance Institutions, Non-Bank Financial Institutions (including Mutual Funds), Insurance Companies and Central Directorate of National Savings (CDNS) has witnessed asset growth of 7.4 percent to reach PKR 26.6 trillion. The banking sector being the dominant player of the financial sector (74 percent share in total assets) has registered a growth of 7.3 percent during CY18, which is lower than the growth of 15.9 percent recorded in CY17. This deceleration is mainly due to decline in overall investments by 9.3 percent (PKR 815 billion). Noticeably, the banks’ investment in long-term government securities i.e. Pakistan Investment Bonds (PIBs) has observed a dip of PKR 972.6 billion during CY18.
However, uptrend in advances (net) is a welcome aspect of banks’ balance sheet. During CY18, the overall advances have risen by 22.2 percent (18.4 percent during CY17) mostly to textile, food and beverages, cement, production and transmission of energy and the chemicals sectors. The domestic private sector advances have also revealed a growth of 20.0 percent in CY18 (16.4 percent in CY17). Most of this financing has been availed for short-term working capital needs (33.3 percent growth in CY18 against 17.7 percent in CY17 owing to rising costs of raw material).
3. WHY IS AN IMF PROGRAM BENEFICIAL FOR PAKISTAN?
The IMF program is beneficial to Pakistan for many reasons. Firstly, the fiscal costs associated with reforms that the Government intends to put in place through home grown
reform agenda is covered with the funding provided by the IMF. This support is crucial in the early phases of reforms, once reforms are in place and fiscal costs are covered, the systems starts adjusting to reforms and are able to sustain without any support. Secondly, it gives confidence to the market sentiments. This helps mobilize resources domestically as well as internationally. Finally, other development partners will also support reforms that are not particularly identified under the IMF program but are otherwise much needed with regards to fiscal costs. These costs are then catered by the Asian Development Bank, the World Bank and bilateral development partners.