Tax Reforms Revenue With Growth

Table of Contents

• The Narrative and Approach Need to Change
• Issues and Analysis
• What We Propose proposals and Revenue Implications
• Customs and Tariffs The Need For an Open Economy
• General Sales Tax
• Income Tax Simplified and low tax regime
• Corporate Income Tax
• Federal Excise Duty (FED) Sin tax to Discourage Consumption
• Withholding Income Tax
• Perennial Problem of Exemptions
• Encourage Capital Formation
• Agriculture Income Tax
• Digitization is a Must
• Revenue Implications

Vision
Transforming Pakistan’s Tax System for Growth and Ease of Tax payers

This presentation is based on the reports published by the following institutions and individuals.

• Pakistan Institute of Development Economics (PIDE)
• Policy Research Institute of Market Economy (PRIME)
• Pakistan Business Council (PBC)
• Dr. Hafiz Pasha

The Narrative and Approach Need to Change

Stable and Predictable Tax Regime

• Investment requires a stable and predictable tax regime
• Unpredictable tax regime scared away investment due to:
  • Complexities in tax code
  • Random tax measures/minibudgets
  • Annual tax dramas in the form of budgets – revised many times during a fiscal year
  • Predatory annual budget recommendations – finance bill circus is harmful to transactions and
    investment

Current narrative: it is the people, but the actual position is that it is the policy

• Pakistan has been struggling with its tax system since independence because expenditures
  have exploded to meet
  • Predatory state machinery (perks and privileges)
  • Global agendas – many of which should wait for a later stage of development
  • Poor Public Financial Management
• The assumption that Pakistanis are tax thieves needs to change
  • Poor policies, ineptitude and misgovernance are the culprits

Current narrative: look at our stage of development and governance

• International comparisons of the tax/GDP ratio should not set the objective
  • At a similar stage of economic development, the US had a tax GDP ratio of 5-7 % and the UK
    had around 12%
• Across countries issues related to systems/institutions/structures are not similar

Current narrative: international agencies need more local engagement

• International agencies require taxes to meet their foreign agendas rather than deal with the growing
  expenditure issues
  • Have a limited idea of curbing the country’s expenditure needs
• Our tax policy on the advice of international agencies is raising taxes/import duties which stops global
  integration
• Perception of rent-seeking in tax administration, government waste, and corruption are often cited
  as reasons for tax avoidance
• A significant portion of legal economic activity stays informal to avoid intrusive and punitive taxes

Structure of The Report

Objectives and Parameters of A New Tax Policy

1. A citizen-friendly, transparent, stable, and predictable tax regime to stimulate growth and investment
2. Simplified & harmonized taxation to facilitate taxpayers and ease of paying taxes
3. Automated & digitized administration to eliminate the direct interface between the taxpayer and the
   tax authority

Summary & Key Points

Income Tax

1. Uniform tax regime for all sources of personal and non-corporate incomes
2. Decrease corporate tax rate to 25%
3. Withdrawal of deemed rental income tax, CVT, super tax, turnover tax, presumptive/final tax
4. Restore investment credits for plant and machinery

Customs Tariffs

1. Zero-rated import of plant and machinery, industrial raw materials, and intermediate goods
2. Withdraw regulatory and additional customs duties and withholding of income tax on imports

General Sales Tax

1. Harmonised GST/VAT
2. Gradual reduction of VAT to 10%

Withholding Taxes

1. Reduction in the number of Withholding Taxes and complete roll-back of WHT regime except,
   in the long-run, on pay-roll, interest, dividends and payments to non-residents

Tax Administration

1. Mandatory registration in GST starting in the first phase with commercial importers, wholesalers and tier-1 retailers
2. Automation and Digitization to reduce interaction between taxpayers and tax authorities
3. Abolishment of non-filer category
4. Enhancement in capacity of PRAL
5. Formation of a Pakistan Fiscal Policy Institute/Budget Office for Parliamentarians