As the
euphoria surrounding former cricket star Imran Khan’s election victory begins
to fade in Pakistan, the country’s economic managers must deal with the hard
tasks ahead. Immediately improving foreign currency reserves is simply a
tactical necessity. The real challenges are strategic.
If Pakistan
approaches the International Monetary Fund (IMF) for economic support – as is
widely predicted by most analysts – then the IMF will remind Pakistan’s new
Finance Minister of at least two priorities: increasing revenue and reducing
expenses.
In order to achieve
these two objectives there is a need to move away from the simple solution of
imposing additional withholding taxes on an already excessively used taxation
technique. To date, this method has only resulted in mixed success.
Presently,
virtually any financial transaction in Pakistan’s organized sector, i.e. a
documented transaction and not in cash, requires the collection of withholding
tax. For example, registering a car or paying motor vehicle tax; registering a
property; cash dividend payments made by listed corporations to individuals;
and banking transactions such as preparing a bank draft all require collection
/ payment of a withholding tax.
In theory,
this tax payment is an advance tax and may be adjusted against future corporate
or individual tax liabilities. In practice, few individual taxpayers make the
effort to reduce their tax liability by the advance tax amount. For
corporations, except maybe for top tier multinational and local institutions,
increased bookkeeping coupled with a weak and often corrupt tax collection
infrastructure reduce the incentive to claim advance tax. In other words, other
than a few large corporations with sufficient resources to devote to copious
bookkeeping, few businesses ever see the benefits of any ‘advance tax’ collected on their behalf.
Sure, it
will be easy to continue and ‘widen’ Pakistan’s tax base by implementing
additional presumptive tax on more transactions – or increasing percentages on
existing advance tax payments - especially as these tax collections will likely
be booked under the Direct Income Tax category and (falsely) boost the
government’s claim of broadening the tax net.
Nevertheless, such taxes will only make Pakistan’s economy more
inefficient by pushing up the cost of doing business, especially for Small and
Medium Enterprises (SMEs), a backbone of the country’s economy.
Improving
Pakistan’s tax collection infrastructure through reforming the operations of Federal
Board of Revenue (FBR) is a prerequisite for success. It should be noted that
reforming the FBR is a necessary though not sufficient condition for enhancing
the country’s tax revenue.
One means of
increasing FBR’s operational efficiencies is to reduce unnecessary human touch
points. Corporate and individual tax payers should have as little interaction
with humans as possible. Basic tax transactions must be simplified. More transactions should be shifted online.
Online transactions reduce the possibility of corruption, improve speed and
result in simplicity - an all round elegant solution.
To the
naysayers who believe serious reform of the FBR is impossible only need look at
the successes of NADRA and even the Election Commission. Both these government
agencies have adopted new technologies and greatly simplified the lives of many
Pakistanis as a result. Transactions which took weeks, months or even longer and
were impossible without several unproductive visits to government departments
are now routinely completed using a few clicks on a keyboard. Smart solutions
are the way forward for the FBR.
Undoubtedly,
increasing revenue and reducing expenses lie at the heart of any economic
restructuring be it national, corporate or individual. Unfortunately,
converting these two principles into effective policy decisions is a
complicated process fraught with political minefields. Nonetheless, Imran
Khan’s Justice Party (PTI) has a real opportunity to lay the foundation for
genuine reform.
In my next
post, I will discuss the necessity of approaching the ‘Filer’ and ‘Non-Filer’ distinction
with greater finesse. ‘Non-Filers’ are not synonymous with tax evaders. Hence, throwing
all ‘Non-Filers’ into a ‘penalize by paying more tax’ bucket is an unfair use
of state powers. The policy must be improved to make it more equitable. Stay
tuned.
__________________
Imran is a Singapore based Tour Guide with a special interest in
arts and history. Imran has lived and worked in several countries during his
past career as an international banker. He enjoys traveling, especially by
train, as a way to feed his curiosity about the world and nurture his interest
in photography. He
is available on twitter (@grandmoofti); Instagram (@imranahmedsg) and can be
contacted at imran.ahmed.sg@gmail.com
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