Move away from presumptive tax regime


The Dar-led Finance Ministry’s focus on generating revenue from whichever source that is easily taxable has been cited time and again as the reason for low growth rates of specific sectors/sub-sectors that have been brought under a gruelling tax regime and by osmosis the entire economy. It is indeed unfortunate that the International Monetary Fund (IMF) team, responsible for the ongoing 6.64 billion dollar Extended Fund Facility fully supports Dar in this drive.

The press release issued after the successful completion of the 10th review under the 6.64 billion dollar Extended Fund Facility dated 4th February 2016, states that “the mission welcomed the authorities’ strong programme performance in the second quarter of FY2015/16. All end-December 2015 quantitative performance criteria, including the budget deficit target and the floor on the SBP’s net international reserves, have been met… Strong tax revenue collection in the second quarter of FY2015/16 helped recoup much of the previous quarter’s shortfall, with the indicative target missed only by a nominal margin”.

Ishaq Dar’s standard normal response to charges that he is focused on deficit reduction at the cost of growth has been to dismiss it out of hand by claiming that the growth rate subsequent to his getting the portfolio of finance has been higher than during the past eight years. Independent economists, as well as multilaterals, however, challenge the growth statistics released by the Federal Bureau of Statistics (FBS), an entity under the finance ministry’s administrative control, prompting calls for making FBS autonomous that would enable the Finance Ministry to take informed decisions with respect to its macroeconomic policies.

Be that as it may, Dar while chairing the recently-held meeting of the Monetary and Co-ordination Board stated that the 2015 growth rate was 4.24 percent and for the current year the budgeted target is 5.5 percent. The IMF in its post-10th review press release disagrees with Dar’s optimistic claims for growth and notes that “real GDP growth is expected to reach 4.5 percent in FY2015/16, helped by lower oil prices, planned improvements in the energy supply, investment related to the China-Pakistan Economic Corridor (CPEC), buoyant construction activity, and acceleration of credit growth”.

The list of required supporting elements to achieve the lower target is exhaustive, consisting both, internal and external factors that account for many independent economists maintaining that the Fund has been over-optimistic in its assessment. The real GDP growth may be below 3.5 percent for the current year given the considerably lower cotton output and its impact on the textile sector as well as the slowing down of the Chinese economy.

What is further a source of serious concern for independent economists is the lack of harmony between the growth rate and the rate of rise in tax collections. Take the example of India where the growth rate was projected at over 7 percent and the rise in tax collections 11 percent in the budget for 2016-17 – both targets widely regarded as realistic. In contrast, Pakistan’s growth rate for the current year even if taken at 5.5 percent is expected to raise tax revenue by more than 17 percent – a disproportionate increase which explains why the government has to announce mini-budgets.

While the entire tax system needs a major overhaul, yet the decision of the government to levy a presumptive tax on service providers under Section 153 (1)(b) of the Income tax Ordinance 2000 needs an urgent revisit, especially with reference to the IT sector as providing IT services does not require residency in the country where it is provided. It is well known that Dubai is fast emerging as a market of interest for those Pakistanis that provide high-tech services, such as IT, who wish to evade or avoid unfair, inequitable and anomalous taxes. While acknowledging that the service sector does evade taxes be it for reasons attributed to intent to defraud the exchequer or simply because of red-tapism and/or pressure by the tax officials to become complicit in evasion, Business Recorder would urge the government to consider two measures. First, to define the threshold below which the turnover may be subject to tax and it be treated as discharge of their tax liability. And Second, all those that have turnover above the defined threshold shall have the option to either be in the presumptive tax regime or shall have the option to be taxed on their profits.

Treating deduction of tax, at the port level, as final discharge of tax liability must come to an end. No meaningful breakthrough on direct taxation is possible without it. It could be treated as an advance tax but not as final tax. We need to strongly persuade businesses to file tax returns, subject to audit; and filing tax statements will not be sufficient.

Secondly, we need to be more transparent with regard to the China-Pakistan Economic Corridor (CPEC). Thirtyeight billion dollars of power projects are under the Nepra model. However, rest of the amount needs to be spelled out in detail. How much is concessional loan? At what rate? And, how much of this loan is on commercial terms? Thirdly, we need to improve the sentiment of the people. ‘Good feel factor’ is an important element for the investor class which appears to be missing. And, better communication is needed on the private sector credit given thus far. The nation needs to know where it is going.

Source: Business Recorder