Pakistan’s tax system has long been a subject of intense debate and scrutiny. The recent call for tax reform by the newly formed Tax Reforms Commission, a collaboration between state-run and private think tanks, underscores the urgency and complexity of the issue. This article explores the necessity of tax reform in Pakistan, highlighting the key findings and recommendations from the commission’s joint report.
The Current Tax System: Flaws and Challenges
The commission, comprising economists from the Pakistan Institute of Development Economics (PIDE) and the Policy Research Institute of Market Economy (PRIME), has identified several critical flaws in Pakistan’s existing tax system. The report criticizes the system for being neither citizen-friendly, transparent, stable, nor predictable. Instead, it relies heavily on arbitrary budgetary measures aimed at short-term revenue enhancement.
- Pakistan Elected to UNSC: What’s Next?
- Pakistan’s Bold Move Toward Economic Growth with India
- Climate Resilience and Jobs: Afghanistan’s New Priorities
Key Issues Identified:
Arbitrary Tax Measures: The reliance on ad-hoc measures has led to excessive use of withholding and minimum tax regimes. Approximately 68% of revenue is collected through these means, causing significant burden and complexity for taxpayers.
Fragmented Tax System: Multiple exemptions and varying tax rates create confusion and increase compliance costs.
Predatory Tax Authority: High compliance costs and a dysfunctional refund system exacerbate taxpayer difficulties, leading to numerous court cases and reversals of tax initiatives.
Revenue vs. Growth: The current system prioritizes revenue collection over economic growth and employment, hampering long-term economic stability.
Recommendations for Reform
The commission’s report advocates for a stable and predictable tax regime through simplification and harmonization of the tax system. The key recommendations include:
Simplification and Harmonization:
Unified Tax Categories: Eliminate distinctions such as filer/non-filer and registered/unregistered for sales tax to simplify tax compliance.
Reduce Reliance on Tariffs: Decrease dependence on revenue collection through tariffs and additional customs duties to boost investor confidence and economic openness.
Automation and Digitization:
Enhance Transparency: Prioritize automation and digitization to minimize direct interactions between taxpayers and tax authorities, reducing opportunities for corruption and increasing efficiency.
FBR Reforms: Improve the Federal Board of Revenue (FBR) administration with necessary changes in human capital and service organization.
Structural Changes:
GST/VAT Implementation: Firmly implement the GST/VAT agenda, resolving issues related to sales tax registration, harmonization, digitization, and the refund system. Consider lowering the GST rate once a fully functional system is in place.
Equal Taxation of Incomes: Tax all incomes uniformly, with no new exemptions for income tax. Incentivize corporatization by setting lower effective tax rates for individuals and associations of persons (AOPs) compared to corporate tax rates.
Expected Outcomes
The commission believes that these reforms will not only simplify the tax system but also lead to significant revenue growth. Conservative estimates suggest direct revenue gains of at least Rs4 trillion in the first three years. Additionally, these reforms are expected to have positive impacts on investment, economic growth, and job creation.
Comparative Insights
The report draws parallels with other countries that have successfully reformed their tax systems. For instance, countries like India, Georgia, and Mexico shifted from high GST rates (17-19%) to VAT with lower rates (7-10%), resulting in a substantial increase in the tax-to-GDP ratio by 3-4%. Pakistan can learn from these examples to enhance its tax system’s efficiency and effectiveness.
Significant challenges
The need for tax reform in Pakistan is undeniable. The current system’s complexity, unpredictability, and arbitrary nature have created significant challenges for taxpayers and hindered economic growth. The recommendations by the Tax Reforms Commission provide a comprehensive roadmap for achieving a more stable, transparent, and efficient tax regime. By implementing these reforms, Pakistan can foster a more conducive environment for investment and economic development, ultimately benefiting its citizens and the broader economy.
