Tax exemption power may be restored to the parliament

Recommendations include hiking property valuation rates from next month

ISLAMABAD: The government has in principle approved proposals to return the authority of giving tax exemptions, through statutory regulatory orders, to the parliament and increase property valuation rates from next month, as it inches towards rolling over a new set of tax policy reforms.

These proposals are a part of the recommendations that the Tax Policy Subgroup of the Economic Advisory Council (EAC) has submitted to Prime Minister Imran Khan. The premier on Sunday gave a go-ahead to finalise timelines for their implementation. Due to the paucity of time, the premier did not take a presentation on tax reforms.

The report, approved by the prime minister, also includes a recommendation to give the right to collect agriculture income tax to the federal government without amending the constitution. The EAC subgroup also advocated an integrated tax system at federal and provincial levels.

However, similar recommendations had also been made by the Tax Reforms Commission, which remain unimplemented.

The subgroup report is silent on the aspect of revenue implications of the proposals and it also did not suggest drastic measures like abolishing Final Tax Regime, which is necessary to bring true reforms.

In its report, the committee admitted that an extensive review of the entire taxation system and tax policy was a momentous task and was not possible in the short period of time allowed to the subgroup.

In the short-term, the Pakistan Tehreek-e-Insaf (PTI) government has decided to increase the property valuation rates, aimed at bringing them closer to real market value rates. The Federal Board of Revenue (FBR) may notify new rates next month, a senior FBR official told The Express Tribune.

The Pakistan Muslim League-Nawaz (PML-N) government had decided to bring the deputy collector-determined property rates on par with prevailing market rates for enhancing tax collection in three phases. However, after implementing the first phase, it put the matter on the backburner due to the prevailing political situation at that time.

The FBR may now increase the valuation rates by another 30% for federal tax collection purposes. Under the constitution, the immovable property is a provincial subject, but the federal government has the right to collect income tax. It collects income tax through withholding taxes and capital gains tax.

The government has also, in principle, approved the proposal of reviewing the existing withholding tax regime with an aim to reduce the number of withholding taxes, said officials. The subgroup report stated that there are certain withholding taxes that are imposed on people who are otherwise not liable to the payment of income tax and return filing.

The report also noted that provinces do not have incentive to enhance their tax collection, as they get 57.5% of federal taxes under the National Finance Commission (NFC) award without making efforts.

The solution to this might lie in handing over the collection of income tax on agriculture income to the federation, according to the report that the prime minister has approved. FBR officials said the proposal will now be placed before provinces for a decision.

The recommendation states the collected agriculture income tax, in respect of each province, should not form part of the divisible pool and can be directly transferred to the respective province. The provinces can still retain the constitutional right as well as policy decision-making of taxation of the agriculture income, it added.

The government also cleared the proposal of formulating annual medium-term tax policy framework that should indicate the direction of tax policy over the next few years.

SRO regime

The subgroup has made some good proposals on overhaul of the statutory regulatory order (SRO) regime. The power to issue SROs should be withdrawn from the FBR and returned to the parliament. In theory, the FBR has already surrendered these powers, but all the tax laws allow the FBR and the federal government to give exemptions without approval of the parliament.

It has proposed that a law should be enacted to ensure that no tax exemption is allowed though law or notification without an estimate of its cost independently by the tax department as well as the concerned ministry. Such cost shall be made public.

Furthermore, all exemptions, existing or newly proposed, should have a sunset clause. Even where an exemption is desired to be continued indefinitely, it should expire after a period of five years and should be re-enacted after that with redetermination of costs.

A list of all government-owned enterprises availing exemption, along with quantification of the tax expenditure, should be published and a plan for phasing out of these concessions should be prepared to remove this distortion from the market, according to the report.

The subgroup has proposed that the federal and provincial tax systems should be integrated. The subgroup was of the view that an arrangement without any change in the constitution was possible where the centre can collect taxes but they do not form part of the divisible pool.

This will make the administration of sales tax more efficient and consistent and greatly reduce cost of doing business.

Tariff review

The report has recommended a major review of the import tariff structure. According to the report, 50% of imports are cleared against the lowest tariff slab of 3% and another 22% imports at 11% rate, underscoring the need to review the system.

The subgroup has advocated promoting whistleblowing culture as a deterrent to tax evasion. 

Published in The Express Tribune, November 27^th, 2018.

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