ISLAMABAD: The Federal Board of Revenue (FBR) will abolish 30-40 more withholding taxes (WHTs) in a phase-wise manner, FBR disclosed during a webinar titled, “Economics of Tax Expenditure by FBR – A debate for reforms”, held on Wednesday.
So far the FBR has abolished nine withholding taxes in budget (2020-2021), and plans to abolish more withholding taxes in the next fiscal year. However, despite this decision, the board will continue to rely on the WHT regime due to a narrow tax base, distorted tax system and easy mechanism to collect WHTs, said Senior FBR official, Chief Income Tax Policy Reema Masud, during the webinar.
The webinar was organised by the Pakistan Institute of Development Economics (PIDE). Attendees included former Governor State Bank of Pakistan (SBP) Shahid Hafiz Kardar, Dr Nadeemul Haq, and international tax expert Dr Ikramul Haq.
Reema said that there was a long list of withholding taxes as it was the easiest way to collect taxes in a situation when the tax base was narrow. The number and types of WHTs has also been increasing over time.
The FBR Chief Income Tax Policy endorsed the analysis of international tax expert Dr Ikramul Haq that the collection of withholding taxes on imports was not a good tax policy. She pointed out that the FBR’s Tax Gap Analysis showed that Agriculture Income Tax could fetch Rs69 billion revenues on per annum basis if Rs50,000 was collected on per acre basis over certain limit of landholdings.
It was pointed out in the webinar that the agriculture income tax cannot be collected by the FBR under the existing constitutional arrangement because it’s the domain of the provinces. Reema said that the cost of tax exemptions surged over the years as it stood at Rs412 billion in the fiscal year 2014-2015 that now had ballooned to Rs1.149 trillion in the fiscal year 2019-2020.
She said that in last two years, the cost of tax exemptions has increased phenomenally as it stood at Rs540 billion in the fiscal year 2017-2018 but now it surged to Rs972 billion in 2018-2019 and now further increased to Rs1.149 trillion. During budget making process, we do try to take all stakeholders on board to bring growth-oriented tax policy, she added.
The FBR’s powers to grant tax exemptions and tax concessions have been withdrawn. The federal cabinet and the prime minister is the competent authority for granting tax exemptions or providing tax relief. It has to be done through the money bill or an Ordinance. “I can safely say that 100 percent powers of the FBR to grant tax exemptions have been withdrawn,” she said. She said that the FBR was unable to extract data from the database of income tax returns due to simplicity of return.
Former Governor SBP Shahid Hafiz Kardar said that the cost of tax expenditures/exemptions was on a lower side, and argued that the cost of Free Trade Agreements (FTAs) with various countries were estimated at Rs45 billion, while the FTA with China was estimated at revenue loss of Rs34 billion. These revenue losses, he said, were under stated because massive under invoicing was being done. He said that the cost of the CPEC exemptions was not fully accounted by the FBR.
International tax expert Dr Ikramul Haq stated that the Supreme Court had concluded that delegation of powers for granting exemptions and concessions given in tax laws clearly violated the supreme law of the land. Amending tax codes by way of the SROs is unconstitutional in view of Article 77 read with Article 162 of the Constitution of Pakistan. Through these SROs, the government bypasses the Parliament, and commits violation of the Constitution of Pakistan. He said that the Article 162 debarred even the National Assembly to grant exemptions without the prior approval of the president but interestingly, this power had been delegated unconstitutionally to an executive authority by the Parliament.
