Economic team poles apart on new taxes

FBR proposes but finance ministry opposes.

ISLAMABAD:

The government is unsure whether to impose new taxes in the upcoming budget, as tax authorities are pushing hard to slap new levies to achieve an “over-ambitious target” and the finance ministry is reluctant to do so owing to political pitfalls.

The government has worked out a Rs1,952 billion tax collection target for the financial year 2011-12 in order to keep the budget deficit in the range of 4.5 to 5 per cent of national income.

Sources said the finance ministry has told the Federal Board of Revenue to chalk out a plan to achieve the tax target without taking additional revenue measures. They are reluctant to take new measures due to a weak economy and more importantly under political pressure, as the fast changing political scenario may lead to early general elections.

However, FBR has prepared a list of new taxes that could help it get closer to the proposed target of Rs1,952 billion. A final decision on new taxes will be taken on May 7 in a meeting of the Economic Advisory Council.

“There is a loud thinking that new taxes may not be possible from the next financial year due to the existing state of economy but one has yet to determine what is the definition of a new tax,” said a senior FBR official.

He said both the finance secretary and FBR chairman have been engaged in hectic background efforts to convince the provinces to authorise the federal government collect taxes on services from next year. He said if the provinces agree then it would not be a new tax measure, as the bills have already been tabled in the respective assemblies. The provinces had again refused recently to levy tax on services, arguing lack of political support for such measures.

He said if the government decides to levy gross asset tax at a rate of 1 to 1.25 per cent then in return it will have to withdraw one per cent withholding tax, as two regressive taxes are not possible at the same time. He said the gross asset tax would be more beneficial as it would discourage companies from underestimating their assets due to negative implications on the balance sheet.

Currently, one per cent withholding tax is collected on the basis of annual turnover and companies understate their sales to evade taxes.

Moreover, FBR would make the recently taken tax measures except the flood surcharge and 17 per cent tax on plants and machinery part of the Finance Bill 2011. These would not be considered new taxes and will fetch Rs75 to Rs84 billion next year.

Plan to achieve Rs1,952 billion target

The FBR official admits that still there is large hidden money that can be collected while remaining within the existing tax framework. He said FBR has been preparing an action plan to recover evaded taxes from the next fiscal year. The plan focuses on cracking down on 700,600 tax dodgers and getting the court cases settled.

The Revenue Advisory Council has already termed the Rs1,952 billion target over-ambitious and instead asked the government to take a rational course by fixing Rs1,850 billion tax target. It has worked out the Rs1,850 billion figure by assuming that FBR may not collect more than Rs1,530 billion by June this year. On a base of Rs1,530 billion, another amount of Rs236 billion would be added as automatic revenue on account of 16 per cent nominal GDP. The March 15 measures would bring Rs75 billion.



Published in The Express Tribune, May 3^rd, 2011.