Tax Payers Alliance Pakistan (TPAP) – an initiative of economic think tank PRIME (Policy Research Institute of Market Economy), had an insightful discussion, debate and deliberations of its members on the Federal Finance Bill 2024 presented in the Federal Budget 2024-25 on 12^th June 2024.

The general consensus among members of TPAP is that the government has made no significant efforts to broaden the tax base. The latest budget, as is typically the case, remains focused solely on revenue targets rather than implementing meaningful reforms. The government’s approach has been to tighten the withholding tax regime in order to meet its revenue goals, rather than undertaking substantive measures to broaden the tax base.

The existing tax system is riddled with discriminatory exemptions, rebates, credits, concessions and reduced rates that have not been adequately addressed. Many clauses in the Second Schedule of the Income Tax Ordinance 2001 give rise to unfair treatment of certain taxpayers and should have been omitted. Specifically, Clauses 51, 52, 53A, 55, and 56 of Part-I, as well as Clause 27 of Part-II of the Second Schedule, should be abolished on an immediate basis. Moreover, the extension of tax exemptions to the erstwhile FATA/PATA regions is unwarranted and should not have been continued.

Moreover, Section 41 of the Income Tax Ordinance, 2001, which exempts agricultural income from Federal income tax, is proposed to be omitted. Although this exemption allows provinces to independently tax agricultural income, as it falls under their jurisdiction according to the Constitution of Pakistan however, due to insufficient resources and capacity, they are unable to collect agricultural income tax to the potential which Federation can realize. By exempting agricultural income tax vide section 41, a visible discrimination has been created. These discriminatory provisions undermine the principles of equity and fairness in the tax system and must be addressed through comprehensive tax reforms.

The taxation system is already burdened with numerous distortions, and the government has compounded the problem by introducing yet another misguided policy – the “Late Filers” provision. This amendment, which imposes harsh penalties on taxpayers who fail to submit their returns on time, is a flagrant violation of the principles of fairness and equity. Rather than encouraging voluntary tax compliance, it has only succeeded in fueling resentment and triggering a wave of litigation, as evidenced by the growing number of court cases challenging the legality of Section 7E (levied through Finance Act, 2022).

Adding to this list of problematic measures is the imposition of Federal Excise Duty (FED) on transfer of immovable property. This levy represents an overreach by the federal government into a domain that rightfully falls under provincial jurisdiction. Not only does this infringe on the constitutional division of fiscal powers, but it also places an undue burden on real estate transactions, stifling investment and economic activity in a critical sector.

Salaried individuals, the backbone of Pakistan’s professional middle class, have borne the brunt of the country’s economic woes. Currency devaluation, hyperinflation, and previous years’ tax rate hikes have eroded their purchasing power. Yet, the government has compounded their hardship by once again increasing tax rates for the FY2024-25 budget. This move is particularly egregious when one considers that the salaried class pays a staggering 243% more in taxes than the wealthy, subsidized exporters – a glaring disparity that underlies the inherent inequity of Pakistan’s taxation system. (https://www.pakistantoday.com.pk/2024/01/07/salaried-class-pay-243-more-tax-than-wealthy-exporters/). Therefore, Government should revert its decision to increase the tax rates for salaried individuals for FY2024-25.

Evidently, the government’s approach is inherently flawed. While salaried individuals in the private sector and those employed by SOEs/PSEs with their own salary structure & increments policy, have grappled with stagnant salaries or meager increments for years. This decision appears to unfairly link the losses of SOEs/PSEs to the tax burden borne by salaried individuals, treating all employees – public, private, industrial workers, etc. with the same broad brush.

However, this is not the case as a matter of fact. If the government has to reduce its expenditure or has some plan to reduce the losses of SOEs, it is puzzling that it has simultaneously announced increments for government sector employees. Meanwhile, private sector employees have not received meaningful pay increases for several years. In this context, the burden of increased tax rates is being shared equally by both categories of employees, despite their vastly divergent economic circumstances. For government sector employees, excluding those working in loss-making SOEs/PSEs, the increase in tax rates may be justified as part of a broader fiscal consolidation strategy.

However, for employees working in SOEs/PSEs and the private sector, such tax rate hikes are simply unacceptable. Subjecting them to further fiscal tightening, while the government workforce enjoys incremental pay raises, would be a deeply inequitable and short-sighted policy. Therefore, the government should maintain the prevailing tax rates for employees in the SOEs/PSEs and private sector, ensuring that the burden of fiscal adjustment is not disproportionately borne by the very individuals whose contributions are vital to Pakistan’s economic resilience and long-term growth.

Clause (6) of Part I of the Second Schedule of the Income Tax Ordinance, 2001, limits the tax rate to 5% on yield or profit from investments in Bahbood Savings Certificates, Pensioners Benefit Accounts, and Shuhada Family Welfare Accounts. However, due to Clause 36A and Clause 103 of Part IV of the Second Schedule, institutions paying profit on these investments are unable to withhold tax. Ideally, recipients should pay tax at the reduced rate of 5%, but in practice, many treat this income as exempt, leading to a loss of revenue for the government.  To address this issue, it is proposed that a new clause be inserted in Part II of the Second Schedule of the Income Tax Ordinance, 2001. This would make the respective institutions responsible for withholding tax at the reduced 5% rate when paying out the profit on these specified accounts.

The government’s decision to introduce exemptions from sales tax for iron and steel scrap is unjustified and short-sighted. These raw materials should be subject to appropriate taxation, as they are integral inputs for various industries. Providing tax exemptions in this regard amounts to an unfair subsidy that distorts market dynamics and undermines the principles of equitable taxation.

Additionally, the withdrawal of sales tax exemption/zero-rating on stationery items, equipment used for medical treatment/diagnostics is not justifiable. These products are essential for the education and healthcare sectors. Levying sales tax on these fundamental goods can significantly hinder access and affordability, negatively impacting both the education and healthcare systems.

Therefore, comprehensive reforms are urgently needed to create a fairer, more efficient tax system. The current budget’s focus on meeting revenue targets through existing mechanisms and discriminatory practices is inadequate and unsustainable. A shift towards equitable tax policies will not only broaden the tax base but also foster trust and compliance among taxpayers.

Tax Payers Alliance Pakistan (TPAP) is a potent pressure group, comprising citizens of Pakistan from all walks of life to advise, educate and influence the Government and Public Policy in Pakistan to lowering the taxes on businesses and individuals, to simplify the taxation regime, and to urge the government to eliminate undue and wasteful expenditures. PRIME Institute serves as its Secretariat in Islamabad.

Islamabad, June 14, 2024 – The Policy Research Institute of Market Economy, supported by the Friedrich Naumann Foundation (FNF) Pakistan, convened a post-budget roundtable where leading voices from research institutes, academia, and government gathered to analyze Pakistan’s fiscal policies and upcoming budget allocations. The discussion aimed to provide insights into the economic implications of these decisions.

Dr. Ali Salman, Executive Director of PRIME, highlighted the need for a coherent fiscal strategy amidst current economic challenges. “The budgetary measures require scrutiny,” remarked Dr. Salman. “There appears to be a departure from our research-driven approach advocating
streamlined tax policies and sector-neutral budget allocations.”

Key concerns included tax exemptions totaling 3.9 trillion rupees, impacting revenue targets and fiscal sustainability. Experts stressed the urgency of a uniform tax regime to stimulate economic growth and combat the shadow economy, which currently represents approximately 40% of Pakistan’s GDP.

Dr. Manzoor Ahmad, former Ambassador to WTO, noted discrepancies in trade policies and customs tariffs. “The budget’s emphasis on import substitution could hinder Pakistan’s integration into global markets,” he cautioned. “We must align with global economic trends and adopt policies promoting competitiveness and innovation.”

Dr. Nadia Tahir, Economist, expressed concerns about sector-specific impacts, particularly within healthcare and education. “Unbalanced tax measures risk undermining sectors critical to Pakistan’s socio-economic development,” she cautioned.

Dr. Mahmood Khalid emphasized the need for clarity and accountability in fiscal planning. “The budget lacks a coherent long-term perspective,” noted Dr. Khalid. “Targets set in previous years have not been met, reflecting a disconnect between policy objectives and outcomes. The absence of a comprehensive 13th five-year plan exacerbates this issue, leaving us without a clear roadmap for sustainable fiscal management.”

He further highlighted issues such as tax exemptions disproportionately impacting revenue collection, concealment of public sector debts and liabilities, and circular flows of government funds that undermine transparency. “The budget’s reliance on charging expenditures limits
flexibility in fiscal management,” Dr. Khalid added.

The roundtable also addressed transparency in budgetary processes, advocating clearer disclosures on debts and contingent liabilities. Experts called for proactive governance and evidence-based policymaking to effectively navigate Pakistan’s economic challenges. 

The event concluded with a consensus on the need for continued dialogue between policymakers, researchers, and stakeholders to shape inclusive economic strategies. Participants emphasized fostering transparency and accountability in fiscal decisions to strengthen Pakistan’s economic resilience.

For further inquiries or information on the outcomes of the roundtable discussion, please contact Mr. Farhan Zahid at +92 331 522 6825

Islamabad, June 10, 2024 – The Pakistan Institute of Development Economics (PIDE) and the Policy Research Institute of Market Economy (PRIME) have collaborated to form a Tax Reforms Commission, comprising several eminent thinkers. Currently, tax is a crucial issue in the media, and our lenders prioritize revenue collection over growth and employment. The commission highlights several flaws in the existing tax system. It is neither citizen-friendly, transparent, stable, nor predictable. Faced with increasing budgetary difficulties, reliance on ad-hoc measures has grown, leading to arbitrary withholding income taxes, turnover taxes, taxes on deemed incomes, and arbitrary revisions of tax rates. Approximately 68% of revenue is collected through excessive use of withholding and minimum tax regimes. The fragmented system, with numerous exemptions and rates, creates complexity and confusion for taxpayers. Problems include a broken refund system, high compliance costs, and a predatory Tax Authority. The budget period is marked by extreme uncertainty and speculation due to this approach to taxation. This arbitrary approach has resulted in numerous court cases and reversals of initiatives. More taxes are not the solution to deep structural fiscal policy issues where expenditure control is not possible.

According to the press release issued by PIDE, these statements were made during a press conference at the National Press Club in Islamabad, where Dr. Nadeem ul Haque, Vice Chancellor of PIDE, Dr. Ali Salman, Founder of PRIME, and Dr. Mahmood Khalid, Senior Research Economist at PIDE, addressed the audience.

They further stated that our approach emphasizes developing a predictable tax policy to build trust between citizens and the government. Key recommendations include simplification and harmonization of the tax system to facilitate taxpayers and ease tax payments, which is more effective than arbitrary measures imposed annually. Eliminating categories such as filer/non-filer and registered/unregistered for sales tax alone would compensate for many arbitrary tax measures. Reducing reliance on revenue collection through tariffs, additional customs duties, and other arbitrary measures has eroded confidence and closed the economy, leading to declining investment and growth. Long-term goals should include openness with low tariffs, not arbitrarily disturbed by any government. Automation and digitization to eliminate direct interaction between taxpayers and the tax authority are crucial. Transparency and digitization are key for tax administration, along with necessary changes in human capital and FBR service organization.

The Commission has worked tirelessly to ensure that reforms will not result in revenue loss and will lead to revenue growth. The proposed policy relies on simplification, harmonization, and improved FBR administration through digitization. Conservative estimates suggest direct revenue gains of at least Rs 4 trillion in the first three years, with significant benefits to the economy in terms of higher investment, growth, and job creation.

Key problems and recommendations highlighted by the Commission include: reliance on tariffs is outdated. Pakistan has become increasingly isolated due to a closed economy. Strong policy commitment to openness is necessary to benefit from global trade. Decreasing tariffs has shown positive impacts on revenues and substantial reductions in smuggling and mis-invoicing. Zero-rated import of plant and machinery, industrial raw materials, and intermediate goods should be implemented. Withdrawal of regulatory duty (RD), additional custom duties (ACD), and withholding income tax on imports is also recommended. The decades-old GST/VAT agenda needs to be firmly implemented. Problems with sales tax registration, harmonization, digitization, and the refund system should be resolved this year. Key reforms include harmonization of GST/VAT and no new exemptions on GST except in areas such as education and health. A fully functional GST/VAT system must be a performance goal for FBR with consequences. With a good GST in place, we should consider lowering the rate. Existing literature indicates that countries like India, Georgia, and Mexico, which shifted from high GST (17 to 19%) to VAT with a low rate (7 to 10%), have experienced an immediate positive impact on the tax-to-GDP ratio by 3 to 4%. PIDE research shows that in the short run, on average, a 1% increase in GST increases revenues by 2%, while in the long run, FBR revenues tend to decrease by 4% rates. Over the long run, the goal should be a gradual reduction of VAT to 10%.

Taxing all incomes equally and facilitating corporatization is crucial. There should be no new exemptions in the income tax system, and all sources of income need to be taxed. For equity reasons, the marginal income tax should increase. However, the effective income tax of AOPs and individuals should be lower than the corporate income tax to incentivize corporatization. The commission proposes new income tax slabs while suggesting decreased effective tax rates. For example, on an annual income of Rs. 3.6 million, the effective tax rate should be reduced from 12% to 6.38%. Other recommendations include uniformity of the tax regime on all sources of personal and non-corporate incomes, including agricultural income; decreasing the corporate tax rate to 25%; withdrawal of deemed rental income tax, CVT, super tax, turnover tax, and presumptive/final tax; and restoration of investment credits for plant and machinery.

The withholding regime needs to be replaced with an advanced income tax regime. Excessive withholding taxation should be withdrawn, as it operates like an indirect tax and burdens businesses. Withholding should only apply to salaried individuals, while others should pay advanced tax based on 75% of the previous year’s tax. Long-term reforms include reducing the number of withholding taxes and rolling back the WHT regime, except on payroll, interest, dividends, and payments to non-residents. Simplifying and lowering capital gains tax is necessary. Current collection is Rs 10 billion only. Lowering the rate and improving collection can allow capital building. Tax exemptions should be removed, as they create distortions and uncertainty. Removing all exemptions, including those related to income tax, could increase FBR revenues by 37% and raise the tax-to-GDP ratio by 3.36%.

Tax administration reforms are long overdue. These reforms could increase tax revenues by 2-3% of GDP, as seen in countries like Jamaica, Rwanda, and Senegal. The commission recommends mandatory GST registration starting with commercial importers, wholesalers, and tier-1 retailers. Automation and digitization should reduce interaction between taxpayers and tax authorities. The non-filer category should be abolished. Enhancing the capacity of PRAL is also necessary. A Pakistan Fiscal Policy Institute/Budget Office for budgetary and reform with teeth is needed. PIDE, PRIME, and other think tanks should be involved, ensuring that proposals and analyses reach the cabinet and parliament, playing a central role in policy, including international negotiations. The current whimsical approach must end.

The commission has done extensive economic analysis to estimate revenue implications of these reforms. Reforms in customs tariff revenue, including withdrawal of concessions and exemptions, and reduction in under-invoicing and misdeclaration, could bring Rs 314 billion with 36.5% growth over three years. General Sales Tax reforms could yield Rs 2,566 billion in additional revenues with 33% growth in the tax base over three years. Improved compliance in FED could yield Rs 48 billion in additional revenue over three years, assuming a 5% growth rate. Capital gains tax reforms might result in a 20% revenue reduction in the first year but would gradually return to existing levels within three years. Direct tax reforms are expected to result in Rs 1,545 billion over three years, assuming a 27.7% growth rate in the base. Overall revenue gains from tax rationalizations are projected to be approximately Rs 4 trillion, showing a 26% increase in the base over three years.

The PIDE-PRIME Tax Reforms Commission comprises eminent economists and tax experts, including Dr. Nadeem ul Haque, Vice Chancellor of Pakistan Institute of Development Economics (PIDE); Dr. Ali Salman, Executive Director of Policy Research Institute of Market Economy (PRIME); Mr. Shahid H. Kardar, Former Governor of the State Bank of Pakistan; Syed Shabbar Zaidi, Former Chairman of the Federal Board of Revenue; Dr. Ikram ul Haq, Advocate Supreme Court; Dr. Manzoor Ahmad, Senior Fellow at PIDE; Dr. Nasir Iqbal, Head of Macro Lab, PIDE; Dr. Mahmood Khalid, Senior Research Economist, PIDE; and Dr. Khalil Ahmad, Distinguished Research Fellow, PRIME. 

Islamabad, June 5, 2024 – The Policy Research Institute of Market Economy (PRIME), Pakistan’s leading economic think tank, has signed a Memorandum of Understanding (MOU) with the prestigious School of Economics at Quaid-e-Azam University (QAU). This partnership aims to bridge the gap between academia and policy research, enriching the intellectual development of students, particularly in economic policy.

The MOU establishes a collaborative framework where PRIME will facilitate seminars, internships, and mentorship programs to educate and build capacity among QAU students and faculty. Both institutions will contribute resources, with PRIME providing experts and QAU offering logistical support for events. PRIME will also host quarterly policy seminars featuring QAU faculty research.

This partnership represents a significant step forward in advancing policy education and fostering collaboration among future public policy leaders. It signifies a shared commitment between PRIME and QAU to elevate the standards of economic policy discourse and contribute to the socio-economic development of Pakistan.

At the ceremony, the Executive Director of PRIME, Dr. Ali Salman, expressed confidence in its potential positive impact on society. Similarly, Dr. Tariq Majeed, Head of the Economics Department at Quaid-e-Azam University, expressed satisfaction that the collaboration will nurture the next generation of policy leaders.

During the signing ceremony, the Vice Chancellor of Quaid-e-Azam University, Prof. Dr. Niaz Ahmad Akhtar, was also present.

For inquiries, please contact Mr. Farhan Zahid, Communications Officer at PRIME, at farhan@primeinstitute.org