ISLAMABAD: Tax revenues, net of refunds, grew 12 percent on year to year while the government has pledged to the International Monetary Fund (IMF) to bring general sales tax (GST) and personal income tax (PIT) reforms in budget 2021-22 including decrease in size of income tax slabs from 11 to 5, reduction in tax credits/allowances by 50 percent, special tax procedures for very small taxpayers and abolition of all sales tax exemptions except on essential items.
This was revealed in the second, third, fourth and fifth reviews under the extended fund facility arrangement and request for re-phasing of access released on Thursday.
Tax collection projections of the Federal Board of Revenue (FBR) have been revised downwards from Rs 4.963 trillion to Rs 4.691 trillion in the current fiscal year, reflecting a decrease of Rs 0.272 trillion; and projected Rs 5.963 trillion as tax collection target for 2021-22.
The government’s GST and PTI reform measures in the budget 2021-22 is projected to yield an estimated 1.1 percent of GDP - crucial for broadening the tax base, a key strategic fiscal objective, reducing informality, and simplifying and modernizing the tax system. The reforms will be underpinned by high-quality tax measures in line with IMF staff recommendations.
Under GST reforms, the government will: (i) eliminate all zero-rated goods (Fifth Schedule of the Sales Tax Act), except on export and capital machinery goods and move them to the standard sales tax rate; (ii) remove reduced rates under the Eight Schedule and bring all those goods to the standard sales tax rate; (iii) eliminate exemptions (Sixth Schedule of the Sales Tax Act) excluding a small subset of goods (i.e. basic food, medicines, live animals for human consumption, education and health-related goods) and bring all others to the standard rate; and (iv) remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate. These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis.
The government is also in the process of harmonizing the service sales tax across provincial jurisdictions, with support from the World Bank, expected to be completed by end-June 2021.
To simplify and increase PIT progressivity, the government will seek to change the existing tax rate structure by reducing the number of rates and income tax brackets from 11 to five and decreasing the size of the income slabs, with a view to simplifying the system and increasing progressivity; reduce tax credits and allowances by 50 percent (except for Zakat and those provided for disabled and senior citizens); introduce a special tax procedures for very small taxpayers, aimed at preventing further tax base erosion and facilitating the formalization of the economy; and adopt a long-term strategy to reduce labor informality and to bring additional taxpayers into the PIT net. This reform is expected to yield 0.4 percent of GDP on an annualized basis.
The staff report projects a revenue increase by 0.5 percent of GDP in the budget 20201-22 from 2020-21 due to the net impact of: (i) revenue measures (especially a hike in the petroleum levy on gasoline and diesel toward PRs 30/litre); (ii) reinforced tax administration efforts; and (iii) automatic stabilizers. The government, the report acknowledges, has made an important step in its multi-year tax policy strategy by committing to parliamentary adoption of a comprehensive corporate income tax (CIT) reform in March 2021. The reform simplifies the CIT system by streamlining numerous tax exemptions and bringing provisions in line with best international practices (including tax credits, accelerated deductions, exempted income, reduced tax rates, and tax liability reductions).
The authorities’ key fiscal objective remains to broaden the tax base, reduce informality, and simplify and modernize the tax system. In this regard, Pakistan plans to introduce a high-quality tax reform package in the budget 2021-22 (of about 0.7 percent of GDP), based on the recommendations of previously provided technical assistance (TA).
GST reform will broaden the GST tax base and harmonize the system between federal and provincial governments. Specifically, it will: (i) eliminate nonstandard preferential rates and tax exemptions, and bring those goods to the standard rate of 17 percent; (ii) harmonize the service sales tax across provinces, in coordination with the World Bank; and (iii) unify the current fragmentation with services subject to provincial taxation and goods under federal government taxation.
Other broad-based reforms will strengthen tax administration. The authorities recognize that tax administration reforms and enforcement efforts need to complement their tax policy measures. The authorities plan to introduce a centralized, risk-based compliance function; update IT and automation; use third-party data, cross-checks and analysis; simplify registration and filing processes; modernize and target audit practices and bolster the large taxpayer office (LTO). Efforts will also be made to establish a single filing taxpayer and return portal, and redress high outstanding tax arrears. To contain smuggling, the authorities will reintroduce the track-and-trace system for tobacco products by July 1, 2021, report added.
The government remains committed to broadening the tax base and gradually increasing the tax-to-GDP ratio by more than three percent of GDP through fiscal year 2023, the report said.
The government acknowledged that it missed the end-June 2020 indicative targets which had been set before the onset of the Covid crisis. These missed targets were due to the necessary fiscal response to the health and humanitarian crisis and also the dramatic deterioration in macroeconomic conditions in fourth quarter of 2020-21. However, despite the budget pressures, the target on the cumulative floor on targeted cash transfers spending due to one-time emergency assistance to 15 million families as part of Covid-19 emergency response were met. At the same time, the government also missed the target on the ceiling on the stock of government guarantees as some previously excluded guarantees needed to be incorporated into the figures.—SOHAIL SARFRAZ