Tax system efficiency
Pakistan needs to simplify its procedure of filing returns by linking NTN numbers with NADRA
Abid Rehman is a PhD Fellow in Economics and Visiting Faculty Member at the National University of Sciences and Technology in Islamabad
Not talking about the strong East Asian economies like Indonesia, Malaysia, or Vietnam, as far as tax payment and collection is concerned, Pakistan stands even lower than Bangladesh and Sri Lanka in the South Asian region.
According to World Bank reports, the TTCR (Total Tax to Contribution Ratio) is only 33% (lower than the regional average of 36.4%), which includes 18.3% of profit taxes followed by 14.4% of labour taxes and only one per cent of other miscellaneous taxes.
Inefficiency in electronic filing and payment system reflects that Pakistan takes 40 hours each in the collection of profit taxes and labour taxes whereas 232 hours are required to collect the consumption taxes.
Moreover, the regional average time to comply with taxes is 204 hours which is 108 hours lesser/quicker than Pakistan’s 312 hours. Similarly, the value added tax (VAT) compliance time was 84 hours and its waiting time was 79 weeks. For corporate income tax (CIT), the compliance time was 69 hours and its completion time in weeks was 18.6.
On the other hand, in the fiscal year 2017-18, revenue target was Rs4,013 billion that was later revised downwards to Rs3,935 billion. The FBR collected only Rs3,751 billion. It collected income tax of Rs1,441 billion against the target of Rs1,562 (a deficit of Rs121 billion).
Sales tax collection at Rs1,488 billion against the target of Rs1,541 billion showed a shortfall of Rs53 billion. This points towards the need to improve the mechanisms of tax collection for the taxpayers which in turn will improve revenue collection. An efficient IT-based system should be the first priority to be included in the tax collection mechanisms in Pakistan. Lower tax payments and a higher time to comply result in immense tax avoidance.
Firstly, it is suggested that a well-planned federal and provincial policy adjustments and institutional reforms can increase revenue and also improve the supposed fairness of the tax system in Pakistan. The Ministry of Finance is recommended to set up a tax policy research and analysis unit outside the FBR to improve revenue forecasting and thus raise the quality of economic policymaking.
Secondly, the introduction of one-link facility for online collection of taxes and duties by the SBP and the FBR would be helpful in minimising the time involved in tax payments. This would also reduce the chances of inefficiencies in the tax collecting machinery and would, therefore, contribute positively to tax generation. Improvement in Pakistan’s ranking in tax paying is also expected through this move.
Thirdly, Information and Communication Technology (ICT) would be able to organise and handle a huge amount of data in a short time period. A trustworthy digital record is essential for more accurate results. Offering taxpayers a choice of payment will most efficiently lower their compliance costs.
These electronic systems of filing returns when smoothly implemented will benefit both taxpayers and the tax authorities. This will also help tax officers get information to complete faster and accurate transactions. Electronically returned files would have much lower error margin and might be helpful for the payers to avoid extra penalties.
Lastly, the time of filing returns can be reduced through a simple and user-friendly method. The extra lengthy procedure of filing returns may result in less tax generation. Like other regional countries, Pakistan needs to simplify its procedure of filing returns by linking the filer national tax number with NADRA.
Published in The Express Tribune, April 26th, 2019.
According to World Bank reports, the TTCR (Total Tax to Contribution Ratio) is only 33% (lower than the regional average of 36.4%), which includes 18.3% of profit taxes followed by 14.4% of labour taxes and only one per cent of other miscellaneous taxes.
Inefficiency in electronic filing and payment system reflects that Pakistan takes 40 hours each in the collection of profit taxes and labour taxes whereas 232 hours are required to collect the consumption taxes.
Moreover, the regional average time to comply with taxes is 204 hours which is 108 hours lesser/quicker than Pakistan’s 312 hours. Similarly, the value added tax (VAT) compliance time was 84 hours and its waiting time was 79 weeks. For corporate income tax (CIT), the compliance time was 69 hours and its completion time in weeks was 18.6.
On the other hand, in the fiscal year 2017-18, revenue target was Rs4,013 billion that was later revised downwards to Rs3,935 billion. The FBR collected only Rs3,751 billion. It collected income tax of Rs1,441 billion against the target of Rs1,562 (a deficit of Rs121 billion).
Sales tax collection at Rs1,488 billion against the target of Rs1,541 billion showed a shortfall of Rs53 billion. This points towards the need to improve the mechanisms of tax collection for the taxpayers which in turn will improve revenue collection. An efficient IT-based system should be the first priority to be included in the tax collection mechanisms in Pakistan. Lower tax payments and a higher time to comply result in immense tax avoidance.
Firstly, it is suggested that a well-planned federal and provincial policy adjustments and institutional reforms can increase revenue and also improve the supposed fairness of the tax system in Pakistan. The Ministry of Finance is recommended to set up a tax policy research and analysis unit outside the FBR to improve revenue forecasting and thus raise the quality of economic policymaking.
Secondly, the introduction of one-link facility for online collection of taxes and duties by the SBP and the FBR would be helpful in minimising the time involved in tax payments. This would also reduce the chances of inefficiencies in the tax collecting machinery and would, therefore, contribute positively to tax generation. Improvement in Pakistan’s ranking in tax paying is also expected through this move.
Thirdly, Information and Communication Technology (ICT) would be able to organise and handle a huge amount of data in a short time period. A trustworthy digital record is essential for more accurate results. Offering taxpayers a choice of payment will most efficiently lower their compliance costs.
These electronic systems of filing returns when smoothly implemented will benefit both taxpayers and the tax authorities. This will also help tax officers get information to complete faster and accurate transactions. Electronically returned files would have much lower error margin and might be helpful for the payers to avoid extra penalties.
Lastly, the time of filing returns can be reduced through a simple and user-friendly method. The extra lengthy procedure of filing returns may result in less tax generation. Like other regional countries, Pakistan needs to simplify its procedure of filing returns by linking the filer national tax number with NADRA.
Published in The Express Tribune, April 26th, 2019.