A mixed report card

For any government in Pakistan, one of the biggest challenges has been tax collection and reform. Part of the issue is fixing the tax collecting mechanism and the other is to promote a tax paying culture. Pakistanis, in many instances, are willing to bribe their way to stay out of the tax net. It will take more than one committed administration to change that culture.

A report recently released by an independent think tank tells us that with half of its five-year life over, the present government has fared only slightly better than its predecessors. The Policy Research Institute of Market Economy in its review of tax reforms under the PTI government looks at the last two and a half years — from August 2018 when the party came to power. It notes that of the 10 promised tax reform related targets set by the government, only one has been fully achieved. But the good news is that six have partially achieved, one was less than partially achieved and only two remained unattended to, says the report.

It has not been an easy ride. The challenge faced by the government can be gauged by the fact that in this period five chairpersons of the Federal Board of Revenue (FBR) have been replaced and the current one is also going to retire in two months. A change at the top does not instil confidence in the tax collecting machinery on the one hand and takes away expectations from the public of consistency in policies.

When he was standing for elections, Prime Minister Imran Khan promised voters that he would reform the FBR, widen the tax net through a robust tax policy as well as introduce an efficient tax administration structure and an effective enforcement mechanism. Currently, Pakistan’s tax-to-GDP ratio remains low at less than 10% — the lowest in the region — despite massive indirect taxes collected by successive governments.

Senior business reporter Shahbaz Rana tells us that reform can start with autonomy to the FBR. This has unfortunately not happened due to political compulsions which every other government has had to face. Another key goal was to shift towards direct taxes as a primary source of tax revenue. In this we are told that no progress was made over the last two and a half years and the share of direct taxes has remained fixed at 38%. In fact, it has lately come down to 36% of the total tax collection by the FBR.

One of the success stories we have seen in this period was the tax amnesty scheme of 2019 which was launched with the aim of documenting the economy. A total of 137,000 people availed themselves of the scheme by offering Rs70 billion in revenue and legalising Rs3 trillion worth of undisclosed assets. So, it has not all been bad news. Other achievements have been making tax payments easier by introducing online payment modules for value added tax and corporate income tax, and less costly by reducing the corporate income tax rate.

The government has also reduced the number of tax payments from 47 to 34 and the total number of hours required for complying with the tax requirements per year fell from 294 to 283. But at the same time the FBR has missed the target to introduce some much-needed reforms like the single sales tax regime.

What we have seen meanwhile is that tax authorities have intensified their operation against illicit and smuggled goods and the FBR took action against Benami transactions. Smuggled goods worth Rs29 billion have been seized in the current year and assets worth Rs7.4 billion stand to be confiscated after the confirmation of orders from the Federal Appellate Tribunal. This is good news. The government has also promised to publish names of non-compliant debtors and pursue large tax evaders. We look forward to that.

As things stand, the government has made limited progress towards achieving its promises but then again, to expect one government to achieve all this in five years was an unrealistic expectation to begin with. Two and a half years are not enough to roll out tax reforms in any country, let alone a country like Pakistan that faces various socio-economic challenges, says the report, adding that the present government has not lacked in will when it comes to tax reform. Possibly this is the key message coming out of this report.

Published in The Express Tribune, February 8^th, 2021.

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