PRIME Institute Proposes Income Tax Reforms

Policy Research Institute of Market Economy (PRIME) has submitted a proposal on income tax reforms to the FBR to promote simplicity, transparency, and compliance, as the narrow pie of only 3.9 million income tax filers should not be burdened to finance public expenditures while others evade taxes.

The proposals were solicited by FBR for Finance Bill 2023. The reforms are proposed in consultation with the taxpayers’ alliance, comprising tax experts all over Pakistan, and Anas Farhan, Vice president ZTBL. The proposed reforms intend to eliminate taxes that are unjustified, discriminatory, do not contribute to the national exchequer, and have become redundant.

In the current taxation system, the withholding income tax is applicable on the amount inclusive of sales tax, Section 153-1c, thus implying that sales tax is a part of the income earned by a supplier as a result of any contract, a manifestation of double incidence of tax.  Therefore, the aforementioned section needs to be corrected by excluding the sales tax for the calculation of withholding income tax.

The government introduced a tax for the rehabilitation of temporarily displaced persons in 2015 under section 4B. After 8 years, the tax is still levied.  Moreover, the tax is currently levied only on banks, which puts a higher burden on the banks and is discriminatory. This tax should be abolished completely as the intended problem has been resolved.

In sections 15-4, the government levies tax on the rental income by calculating fair market rent of properties. The rent of any property, mutually decided by the owner and tenant, may be less than the fair market value due to a number of reasons and the owner should pay tax based on the income earned from rent instead the rent decided by the government. Therefore, the aforementioned subsection 4 should be omitted.

In the income tax laws, there is confusion regarding the components of income. The pension or annuity, or any supplement to a pension or annuity is placed under the head “Salary” under Section 12-2f. The annuity or pension is also placed under the head “income from other sources” in Section 39-1g. This creates confusion at the time of filing returns. Therefore, sub-section 1 clause (g) should be omitted.

The federal government levied income tax on properties as deemed income under Section 7E in Finance Bill 2022. However, the tax on the property is a provincial subject and provincial governments are responsible to administer the such tax. The administration of such tax by the federal government requires amendment in provincial tax laws. Therefore, Section 7E should be omitted.

The contribution of the agriculture sector to GDP is around 20 percent but the share of agriculture income tax in tax revenues is less than one percent. Agricultural income tax is a provincial subject as per the Constitution of Pakistan 1973. There is a lot of potential in agricultural income tax; however, provincial governments are not materializing this potential in the true sense. The Federal legislative list should be revised to bring agricultural income under the Federal Government. FBR is in a better position to collect agricultural income tax and then transfer proceeds to provinces as per the prescribed formula.

The government has put in place the “Whistleblower act” under Section 227B-3b to apprehend tax evaders. However, if the FBR has prior information about the tax evader. Then the FBR may reject the award for the whistleblower. Moreover, if the information regarding the extent of tax evasion provided by the whistleblower does not prove to be true.  Then the whistleblower will be penalized. This makes the utility of the act futile and needs to be omitted.

In Section 227BA-2, there is a provision that FBR can announce incentives or rewards for the people who deduct or deposit taxes on behalf of the board.  According to Revenue Division Year Book 2021-22, around 67 percent of direct tax comes from withholding tax, and withholding agents play a vital role in the collection of taxes. Therefore, withholding agents should also be incorporated into the list of beneficiaries.

The government rescinded the duration of holding property for application of the advance tax on disposal of immovable property in Finance Bill 2022 under Section 236C. This has adversely affected businesses and the real estate sector. Therefore, a time limit should be set. After if a person sells his property, no advance tax should be levied.

In the income tax laws, there are different rates of withholding taxes on supplies and services. (under Division 3 of the First Schedule). Which is discriminatory and distortionary. Therefore, the same rate of withholding tax should be applied across all goods and services.

The government employees, under Clauses 27&56 of the Second Schedule, are entitled to tax exemptions on benefits such as free-of-cost facilities to Judges of the Supreme Court or High Court. There should be no discrimination in the application of taxes on these facilities. And the fair value of these facilities should be ascertained to levy tax. Moreover, the provision of transport facility to for civil servants in BPS-20 to BPS-22. And treating it separately from income hinders the incidence of the appropriate tax rate. Therefore, such a facility should be monetized and included in the salary for the determination of income tax.

The proposed reforms are imperative for the promotion of compliance and the broadening of the tax base.

“The prevalent ambiguities, complexities, and distortions from the discriminatory application of taxes.”
These are the underlying reasons for the suboptimal performance of tax administration and low revenue collection. The government needs to move away from a progressive and discriminatory tax regime. They should move towards flat, low-rate, and broad-based predictable taxes for transparency, compliance, and broadening of the tax base.