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Pakistan tax policy should target economic revival: PIDE

SAMAA | - Posted: Jun 24, 2020 | Last Updated: 3 months ago
Posted: Jun 24, 2020 | Last Updated: 3 months ago
Pakistan tax policy should target economic revival: PIDE

Photo: AFP

The authorities must remain careful with tax policies due to future challenges as 4.7 million jobs are at risk, says a report by the Pakistan Institute of Development Economics (PIDE).

The PIDE is an economic policy think tank that has published a report on tax policy reforms highlighting various negative aspects of the tax policy, along with recommendations on how it can be changed for the better.

The PIDE has estimated that the annual GDP growth rate for the financial year 2020 will be between -1.36% and 0.62%. It has projected that the growth rate for 2021 could be in the range of 0.4% to 2.16%, depending on the coronavirus situation. This can result in unemployment of 4.7 million people, along with employers laying off 18 million workers, thereby putting 87 million people into poverty.

According to the report, the situation is serious because the pandemic has severely affected transactions through a decrease in consumer demand and uncertainty for the business sector. Therefore, tax policy should aim to revive growth.

It recommends simplifying taxes, reducing tax payment costs, making tax payment language easy, and building taxpayer trust to increase tax revenues.

It also wants the distinction between a filer and a non-filer to be ended. Everyone should file tax returns, according to the report. Simplification and making a reasonable approach such as having a plot of 10 marlas for filing tax returns will be a step in the right direction, it noted.

It has been recommended that a Value Added Tax-based sales tax system be gradually adopted. VAT is a tax on the amount by which the value of an item has been increased at each stage of its production or distribution. This will improve efficiency and then increase revenue for both the provinces and the federal government.

According to the report, the withholding tax system needs to be reduced and simplified to improve efficiency. Withholding tax is an advance tax deduction at source. It applies to both income and sales but its share in the latter is small. It mainly applies to income and the government’s revenue largely relies on this type of tax.

Withholding tax on salary, imports, exports, commission and brokerage, dividends, contracts, profit on debt, utilities, and vehicles are some examples. These taxes are adjustable and can be claimed in refunds later on.

For the financial year 2019, there were 82 major items (economic activities) that were subjected to the withholding tax system. FBR data shows that 35 of the 82 items contributed only 1% of the total withholding income tax. These taxes act like transaction costs due to the nature of the application and unclaimed refunds. This raises cost of production for businesses and makes products expensive for consumers, thereby making it internationally un-competitive and domestically unaffordable for lower-income groups.

Even then, more economic activities are subject to withholding income taxes at variable rates, which have resulted in a reduced share of voluntary income tax paid.

To simplify the withholding tax system and reduce the cost of the tax payment system, the Finance Bill 2020-21 proposes the deletion of nine items. However, according to the report, this is the beginning and there are another 35 out of 82 items in the income tax withholding system that should be deleted.

There is a need to improve the entire tax system from policy to administration, notes the report.

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