Body formed for tax base expansion

ISLAMABAD:

Days before the arrival of a new technical mission from the International Monetary Fund (IMF) to study Pakistan’s tax system, the government has constituted a new committee under the supervision of a three-star military general for data integration to broaden the tax base.

The Federal Board of Revenue (FBR) has notified the technical committee under Lt General Muhammad Munir Afsar, the Chairman of the National Database and Registration Authority (NADRA), to develop a new plan for data integration.

The move is aimed at enhancing the low number of income tax return filers from last year’s level of 4.9 million to 6.5 million in the next eight months. Three senior FBR members will work with the NADRA chairman to plan for data integration for broadening the tax base, showed a notification.

Chairman FBR Malik Amjad Zubair Tiwana notified the committee after a briefing to the Special Investment Facilitation Council (SIFC) a few days ago.

“A high-level Technical Committee for Data Integration for Broadening of Tax Base and Information technology infrastructure transformation plan of FBR is constituted,” reads the notification.

The eight-member committee has been tasked to give its recommendations within one month.

The committee was notified days before the arrival of a technical IMF mission to Pakistan that would study the country’s taxation system. The IMF mission will start next week and holistically review the tax laws and the administrative structure of the FBR. It will finalise recommendations and give a report in two months. Some of its recommendations may become the basis for the next IMF programme.

Pakistan has shared a blueprint of the FBR restructuring plan with the IMF, which talks about the integration of 145 entities with the FBR network for broadening the tax base. However, the PM did not approve the restructuring plan and instead directed to further fine-tune it to address the ambiguities and contradictions in the restructuring plan.

The newly constituted committee, under the chairmanship of an army general, will develop proposals for data integration for broadening the tax base, IT infrastructure transformation plan, showed the notification.

It will review FBR IT infrastructure and devise its transformation and up-gradation plan. The general-led committee will also propose restructuring of PRAL to transform it into a modern IT company. It will also develop data analytics and mathematical modelling with the use of artificial intelligence for broadening the tax base.

The FBR this week also issued a notification to give effect to 40% windfall income tax to be charged from the commercial bank on their previous years’ earnings on account of foreign currency fluctuation. However, Tola Associates – a tax advisory firm – has found faults with the FBR’s notification.

The rate of tax applicable to windfall income will be 40%, and the due date of payment of tax on windfall income is November 30, 2023, which is extendable up to 15 days.

The federal government is required to place the notification of the 40% tax on before the National Assembly latest by February 19, 2024, whereas the National assembly is not expected to be constituted by then even if the general elections are carried out as per schedule, according to Tola Associates.

It added the due date of payment seems to be fixed without any critical thinking and in haste, arguing that the notification would also become invalid if not approved by the National Assembly by February 19, 2024.

The tax advisory firm has termed the new 40% income tax as “confiscatory,” which may meet court challenges.

This 89% still does not include the effect of administrative expenses, which may be 20-25% of the income incurred by the banks, which if accounted for, may make it virtually a confiscatory tax on and it may also lead to litigation by the aggrieved persons, it added.

However, the FBR officials argued that there is no need for National Assembly endorsement of the notification, as the law only requires intimation to the Parliament.

Tola Associates said that another possible issue that may be subject to litigation is the retrospective application of the tax, as it may unlawfully violate past and closed transactions and the aggrieved persons may rely upon the judgment of the High Court of Sindh in 2011.

It added that the normal tax rate for banking companies is 39% for the tax year 2023, whereas the banking companies are also subject to 10% Super tax year for the tax year 2023. This means a banking company will be subjected to 89% tax in case of its foreign exchange income in the tax year 2023.

To calculate the windfall income, only one factor of currency fluctuation has been incorporated, while other factors such as economic growth and inflation which may have an adverse impact on the overall income of the banks have not been incorporated, according to the advisory firm.

The formula for the calculation of the average foreign exchange gain for the tax year 2023 excludes the windfall income of the tax year 2022. This seems counter-logical as on one hand the banks will pay additional tax of 40% on windfall income of the tax year 2022, while on the other, the same windfall income will reduce the average foreign exchange income which will in turn increase the windfall income for the tax year 2023, it added.

Published in The Express Tribune, November 25^th, 2023.

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