Federal Finance Minister Asad Umar while talking to a delegation of the Overseas Investors Chamber of Commerce and Industry (OICCI) led by its President Irfan Wahab stated that the government will introduce necessary changes in the Finance Act 2018 to make it more relevant to the current economic state of the country and reflect his government’s vision. A major component of the Pakistan Tehreek-e-Insaf’s (PTI’s) commitment to the public before, during and after the 2018 elections, has been to formulate a tax structure that is fair, equitable and non-anomalous. This is a very tall order given that the existing tax structure would require massive amendments in the Finance Act 2018, proposed by the Abbasi-led government in the budget for the ongoing fiscal year and approved by parliament more than a month before the end of PML-N tenure on 30 May 2018 – one month before the end of last fiscal year.
It may be recalled that while all the provinces, including Punjab, opted to present an interim budget that would allow the caretakers to take some critical decisions during their tenure, the federal government insisted on formulating a budget for the entire forthcoming fiscal year 2018-19 – a budget that claimed a revenue rise of 17.9 percent in marked contrast to a projected decline of 91 billion rupees due to the tax incentives in the budget according to the Federal Board of Revenue.
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The tax structure today contains three major fundamental distortions that need to be urgently addressed. First and foremost, the heavy reliance on presumptive taxation must end because of its inherent irrationality: it is a tax on turnover, not on profit, which implies that a firm making a profit of 15 percent would pay the same rate as a firm making a profit of less than 5 percent; and therefore it removes the linkage between income, assets created and tax paid. Secondly, the previous government relied heavily on withholding/advance taxes on imports and local sales to increase revenue collections, thus converting it into an indirect tax whose incidence on the poor is greater than on the rich; and then proceeded to deliberately mis-define these taxes by crediting them as direct tax collections. At present, reliance on withholding/advance taxes is more than 70 percent and it is a tax on consumer items/services paid for by those who have already had their income tax cut at source. The non-filers who pay withholding tax at double the rate of the filers have not been lured to begin filing their returns as that would simply increase taxes payable by them; and what is extremely disturbing this has allowed them legitimacy in the eyes of the law to boot.
The word reportedly used by Umar was that the amendments would be announced ‘soon’. One would assume that the federal government is engaged with all the provincial governments in this regard and a Council of Common Interest meeting may be scheduled before these amendments are finalized because the provincial surplus forms a major component of the federal budget since the 18th Amendment and the government would be well advised to remember that the budget for the current year estimates an unrealistic provincial budget surplus of 285.6 billion rupees that may require consultations to agree on a more attainable amount.
Two months of the unrealistic budget announced in April 2018, both in terms of revenue and expenditure allocations based on PML-N priorities, have passed. It is unclear whether the PTI government intends to let another month pass before effecting its amendments. Needless to say that in the event the PML-N budget is allowed to be implemented for the month of September, a quarter of the fiscal year would have passed that would place greater pressure on the government with respect to revenue generation measures on the one hand and on money spent on PTI development priorities on the other.
(This news/article originally appeared in Business Recorder on September 17th, 2018)