PRIME (Policy Research Institute of Market Economy) organized the 4^th Islamabad Policy Exchange on 1^st of June 2023. The event was attended by private sector, academia, Think tanks and Government representative.

The discussion revolved around ease of tax and macroeconomic issues in the recommendation of RRMC. Withholding tax proposal on simplification of procedures and suggestions put forth by Revenue and Resource Mobilization Commission (RRMC).

The audience was informed about the RRMC recommendations of tax so far in the Federal Budget      2023-24. The Reform and Revenue Mobilization Commission (RRMC) has released a set of recommendations aimed at revitalizing Pakistan’s tax system and promotion of compliance through simple and transparent tax system, compliance facilitation and institutional development. 

Reforms commission have proposed a tax on the sole proprietors and association of persons to promote corporatization The commission recommended penalizing sole proprietors and non-corporate exporters to promote corporatization. They proposed a 10% tax increase for sole business operators and raised the tax on non-corporate exporters from 1% to 8%.

The Reform and Revenue Mobilization Commission (RRMC) recommends imposing an income tax of 5% to 7.5% on the accumulated profits (distributable reserves) of listed and non-listed companies. The Current rate is 20 percent for small company/AOP/Sole proprietors. From 3.5% to 5.5% for commercial importers in the upcoming budget for the fiscal year 2023-2024. The RRMC also proposes increasing tax rates on dividends for companies under the final tax regime. Currently, a 25% tax rate is levied on dividends when the company paying the dividend has not paid any tax for any reason.

The country has been borrowing from abroad since 2007 to finance its current account and trade deficits, which reached $45 billion last year. . It is crucial to prioritize finance over debt and create a proper debt structure, considering the approaching debt payments.

The lack of consistency in revenue policy complicates the tax system for collectors, necessitating a small and stable finance bill for the next five years. Excessive government and Public Sector Development Program (PSDP) spending should be reduced. The PSDP will spend 700 billion rupees this year, with 146.3 billion rupees in foreign aid. It is essential to promote local businesses, improve the ease of doing business, and revitalize the textile industry to increase exports.

To reduce the current account and fiscal deficits, it is necessary to stabilize the dollar rate and limit imports. Overall, the Tola Commission’s interim report needs to establish clear objectives to address these pressing issues.

Rising taxes can have a negative impact on investors, as it can reduce their profits and make it more difficult for them to grow their businesses. This can lead to a decrease in investment, which can slow down economic growth. The hurdles encountered in the overhaul of the taxation system comprise undocumented supply chain, leakages in withholding taxes, mis-invoicing and smuggling.

The participants unanimously agreed that current taxation system is complex and is also lacking to build trust between the government and the citizens, which leads to fall in compliance and more tax evasion. In addition, the high rates of taxes encourage people to stay out of the taxation system as the cost of compliance is high. Therefore, it is recommended to reduce the rates and number of taxes to promote broadening of tax base. It was also considered imperative to promote research and impact analysis within the FBR to evaluate the utility of any tax reform.

PRIME (Policy Research Institute of Market Economy) organized the 3^rd Islamabad Policy Exchange on 4^th of May 2023. The event was attended by policy practitioners from the government and private sector.

The discussion revolved around tax reforms with special focus on Pakistan Raises Revenue Program (PRRP),Withholding tax proposal on simplification of procedures and suggestions put forth by Revenue and Resource Mobilization Commission.

The Islamabad Policy Exchange is a forum for candid discussions for policy stakeholders, held under Chatham House rules.

The audience was informed about the progress government has made so far in the PRRP. The project is of $400 million supported by World Bank with the objective to increase the revenue collection from broadening of tax base and promotion of compliance through simple and transparent tax system, compliance facilitation and institutional development.

The program has 10 disbursement linked indicators where a tranche is released after completion of pre-defined targets. In the program, the scope of withholding tax regime is contracted due to its distortionary impact and the Federal Board of Revenue (FBR) is promoting transparency by publishing tax expenditure and tax gap reports regularly.  Moreover, the effectiveness and transparency of FBR is evaluated with development of key performance indicators and annual reports.

The audience was informed that the Track and Trace system has been implemented in 10 sectors in Pakistan which has contributed to curtailment of smuggling. However, the problem continues to prevail but with lesser impact. Moreover, coordination of FBR with provincial revenue boards is gradually improved for better data sharing aimed at harmonization of taxes.

The hurdles encountered in the overhaul of the taxation system comprise undocumented supply chain, leakages in withholding taxes, mis-invoicing and smuggling.

The experts highlighted the requisite principles for undertaking tax reforms in the country starting with promoting simplicity in legislation and procedures to digitization of processes to evaluate broad based impact of the taxes.

The withholding taxation system has gradually gained momentum where its share in direct taxes has increased from 44 percent in 1985 to 67 percent in 2022. The current withholding tax regime is complex which often contributes to double or even multiple taxation. The regime is distortionary in nature due to multiplicity of rates for filers and non-filers. It is used as a revenue generating tool but falls short to broaden the tax base.

The withholding tax regime needs simplification both at the federal and provincial levels. The multiplicity of rates creates distortion disincentives, which can only be addressed by uniformity of rates. The documentation and reporting should be simplified and minimized.

The reforms proposed by Revenue and Resource Mobilization Commission were also discussed in the event. The proposed reforms by commission are distortionary due the fact that they envisages increase in the rates of advance taxes in different categories. Moreover, different rates are suggested for filers and non-filers thus providing acknowledgement to non-filers as a legal entity.

The participants unanimously agreed that current taxation system is complex and is also lacking to build trust between the government and the citizens, which leads to fall in compliance and more tax evasion. In addition, the high rates of taxes encourages people to stay out of the taxation system as the cost of compliance is high. Therefore, it is recommended to reduce the rates and number of taxes to promote broadening of tax base. It was also considered imperative to promote research and impact analysis within the FBR to evaluate the utility of any tax reform.

PRIME (Policy Research Institute of Market Economy) organized the 2^nd Islamabad Policy Exchange in Islamabad on 20^th of March 2023. The event was attended by policy practitioners from the government and private sector.

The topic of discussions was Public Sector Reforms: Myths and Realities and was organized with the help of German Political foundation Friedrich Naumann Foundation.

The Islamabad Policy Exchange is a forum for candid discussions for policy stakeholders, held under Chatham House rules.

In the session it was explained that Public sector reform consists of deliberate changes to the structures and processes of public sector organizations with the objective of getting them to perform better. Structural change may include merging or splitting public sector organizations while process change may include redesigning systems, setting quality standards, and focusing on capacity-building.

Pakistan’s public sector is generally considered Cumbersome, inefficient, and corrupt. All reform efforts tend to improve its efficiency, effectiveness, transparency, and accessibility. Public Sector Reforms in Pakistan date back to the 1950’s and reflect different models such as NPM (New Public Management), SAP (Structural Adjustment Programme), and PRP (Poverty Reduction Programme).

The weaknesses of the government emerge from its Monopolistic nature of doing business, an unmanageable large size, managerial inefficiencies, public inaccessibility, economic inertia and Self-serving agenda.

It was revealed that in Pakistan’s low ranking on the World Competitiveness Report, inefficient government bureaucracy is the second most significant cause hampering Pakistani goods and services in international markets. The leading cause is corruption.

It was noted that ever since 2016, SOE’s have consistently incurred significant losses. These losses are compensated by recurring subsidies, concessions, taxation exemptions and bank borrowing. The book value of SOE assets is around PKR 21 Trillion, and account for 40% of the country’s GDP. At independence, Pakistan inherited only 12 SOE’s. This number grew in the 1950’s and 60’s but really exploded in the nationalization policy of the 1970’s under Zulfiqar Ali Bhutto. At present, there are 200 SOE’s and most are loss making institutions.

Tax revenues have been increasing every year despite news of most FBR targets being missed. The real problems are on the expenditures side, where no sincere attempt has been made to curb public spending and balance the budget.

While automation in government processes is viewed as critical to improving sectoral performance, most participants express grave concerns and pessimism on the capacity to reform the public sector soon.