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The Tax Laws (Amendment) Ordinance 2025: Concerns Regarding Due Process, Judicial Oversight, and Taxpayer Rights

by PRIME Institute PRIME Institute No Comments

Joint Press Release

The Tax Laws (Amendment) Ordinance, 2025: Concerns Regarding Due Process, Judicial Oversight, and Taxpayer Rights

Islamabad, 7th May 2025—Tax Payers Alliance Pakistan (TPAP) and the Policy Research Institute of Market Economy (PRIME) jointly express serious concerns over the recently issued Tax Laws (Amendment) Ordinance, 2025. Both organizations believe that certain provisions within the Ordinance could potentially affect fundamental legal safeguards and principles that are essential for a fair and transparent tax system.

The Ordinance, which amends Sections 138 and 140 of the Income Tax Ordinance, 2001 (XLIX of 2001), has prompted considerable discussion among legal experts, tax professionals, businesses, and civil society. While its stated goal is to expedite tax collection and improve enforcement, stakeholders are concerned that it may have implications for taxpayer rights and procedural due process.

Key Amendments of the Ordinance:

  • Section 138(3A): Allows for immediate enforcement of tax liability where the issue has been decided by a High Court or the Supreme Court, regardless of contrary rulings, timelines, or procedural norms.
  • Section 140(6A): Enables swift recovery actions under similar conditions, potentially limiting a taxpayer’s opportunity to contest or seek relief.

Raja Amer Iqbal, Chairman TPAP, notes that “these amendments will further marginalize existing taxpayers and discourage potential taxpayers from entering the tax base. Such policies may yield short-term revenue gains but will have negative ramifications on economic growth, exacerbate the parallel economy, and stifle private sector investment, including local and foreign. Ultimately, this could lead to increased unemployment among the youth,” He further mentions that, “a balanced approach is crucial to fostering a conducive business environment and sustainable economic development.”

Legal and Constitutional Considerations:

These provisions grant the Federal Board of Revenue (FBR) expanded authority to enforce recoveries even when a taxpayer may be seeking appellate review or pursuing legal remedies. This raises constitutional and legal concerns, particularly regarding the right to a fair hearing and due process.

In the landmark case of Elahi Cotton Mills Ltd. v. Federation of Pakistan (PLD 1997 SC 582), the Supreme Court emphasized the necessity of due process in tax recovery proceedings, underscoring that taxpayers must be afforded a fair opportunity to contest assessments before enforcement actions are initiated.

Several legal professionals have noted that the Ordinance appears to override established judicial precedents and procedural safeguards. The principle that individuals should have the opportunity to be heard before enforcement action is taken is a cornerstone of administrative justice. Curtailing this right may impact public confidence in tax administration and the authority of the judiciary.

Risk of Disproportionate Enforcement:

Empowering tax authorities to recover liabilities immediately, even in the presence of ongoing legal challenges, may increase the risk of overzealous enforcement. There is concern that such discretion, without adequate checks and balances, could result in unintended consequences, particularly for compliant taxpayers facing disputed assessments.

Over 108,000 tax cases are currently pending in various courts across Pakistan, involving approximately Rs4.457 trillion in revenue. This backlog indicates systemic challenges in tax dispute resolution and underscores the need for balanced enforcement rather than expedited action without recourse.

Impact on Economic Climate:

Predictability and fairness in tax administration are crucial for fostering business confidence. Sudden enforcement actions, especially near fiscal year-end, may be perceived as efforts to meet revenue targets without adequate taxpayer facilitation. Such perceptions could discourage investment and create uncertainty among both domestic and international investors.

The International Monetary Fund (IMF) has highlighted that Pakistan’s narrow tax base and challenges in tax administration contribute to economic vulnerabilities. In its recent assessment, the IMF noted that strengthening governance and ensuring fair tax practices are crucial for fostering a conducive investment climate.

Stakeholder Perspectives:

TPAP and PRIME, along with allied organizations, have emphasized the need for balancing revenue imperatives with constitutional protections and judicial oversight. Legal experts have also raised caution against legislation that could appear to diminish the judiciary’s role in adjudicating tax matters. A well-functioning taxation system should encourage voluntary compliance through transparency and fairness.

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has expressed concerns over abrupt tax enforcement measures, stating that such actions can undermine business confidence and deter investment. The FPCCI advocates for a balanced approach that ensures compliance while safeguarding taxpayer rights.

International Comparisons:

The Organisation for Economic Co-operation and Development (OECD) recommends that tax administrations adopt transparent and fair procedures, ensuring that taxpayers have the right to appeal and that enforcement actions are proportionate. These best practices aim to build trust in the tax system and encourage voluntary compliance.

Call for Reassessment:

Under the many reforms suggested by commissions and donor reports, an element of certainty and transparency was highlighted. Moreover, any change in the tax code, with the exception of Finance bill/budgets, was discouraged. Despite FBR being in the process of formulating budgetary proposals, sudden enforcement of major changes in compliance laws does not only jeopardize the fair and transparent fiscal process but also increases uncertainty about tax laws.

Businesses are already overburdened with predatory tax practices such as business-choking WHT tax regimes, excessive documentation, higher import stage taxes, while refunds and rebates, which should be swift and automated, are stuck and delayed beyond their normal timeframe. Such abrupt measures would only increase distrust on the government and increase informality in the economy and retard growth.

In view of these concerns, TPAP and PRIME jointly urge the government to:

  • Ensure taxpayers retain the right to be heard before enforcement actions.
  • Align enforcement mechanisms with due process and judicial safeguards.
  • Maintain the independence and authority of the judiciary in tax-related matters.
  • Foster a collaborative approach that supports long-term tax compliance.

The government has previously stated its commitment to promoting business and streamlining refund processes, as noted in the Revenue Division Yearbook 2023–24. In this context, the Ordinance’s timing and scope may appear inconsistent with those stated objectives.

Effective tax administration must balance the need for timely revenue collection with the obligation to uphold taxpayer rights and legal safeguards. TPAP and PRIME encourage an inclusive dialogue involving policymakers, legal experts, and civil society to ensure that any future amendments support both fiscal responsibility and constitutional integrity.

About TPAP:

Tax Payers Alliance Pakistan (TPAP) is a citizen-led initiative advocating for a simplified and equitable tax regime. Hosted by PRIME Institute, it aims to foster constructive engagement with public policy and promote responsible taxation practices.

PRIME Unveils New Policy for the Privatisation of Commercial SOEs​

by PRIME Institute PRIME Institute No Comments

PRIME Unveils New Policy for the Privatisation of Commercial SOEs

Islamabad, December 27, 2024 – The Policy Research Institute of Market Economy (PRIME) unveiled its draft privatisation policy for commercial, non-strategic State-Owned Enterprises (SOEs) under the Federal Government. The announcement was made at a press briefing held in Islamabad.

Dr. Ali Salman, Executive Director of PRIME, emphasized that the existing Privatisation Policy of 1994 is outdated and inadequate in addressing the government’s need to reduce its footprint in the for-profit sector. He stated, “Our proposed policy provides a comprehensive framework that aligns with contemporary economic challenges and offers a practical roadmap for effective privatisation.”

The proposed policy introduces a three-pronged strategy to streamline privatisation efforts:

  1. Strategic Disinvestment – Divesting government shares in SOEs through targeted measures.
  2. Asset Stripping – Monetizing movable and immovable assets of SOEs to improve fiscal space.
  3. Direct Sale/Auction – Ensuring transparency and competition in the sale process.

Addressing Fiscal Challenges

The policy highlights the urgent need for divesting the federal government from commercial ventures to improve fiscal management amidst an unsustainable deficit. Dr. Salman noted, “Over 98% of the federal government’s assets and nearly 100% of the losses within the SOEs portfolio are attributed to commercial SOEs. This underscores the critical importance of a robust privatisation policy.”

Mitigating Employment Concerns

Acknowledging the sensitive issue of overstaffing in government-owned entities, Dr. Salman stressed the importance of addressing workforce concerns. “Our policy advocates for equity-sharing options and targeted reskilling programs to support employees affected by privatisation. This ensures a balance between fiscal reforms and social responsibility.”

A Call for Action

Dr. Salman expressed optimism that the government will adopt PRIME’s policy recommendations to reinvigorate privatisation efforts. “The recent failures in privatising loss-making entities have been disheartening for the nation. We are presenting this policy draft to the Privatisation Commission and urge the Federal Government to act swiftly to unlock the potential of the commercial sector through competition, efficiency, and growth.”

TAX PAYERS ALLIANCE PAKISTAN CRITIQUES THE FEDERAL FINANCE BILL 2024: CALLS FOR COMPREHENSIVE TAX REFORMS

by PRIME Institute PRIME Institute No Comments

TAX PAYERS ALLIANCE PAKISTAN CRITIQUES THE FEDERAL FINANCE BILL 2024: CALLS FOR COMPREHENSIVE TAX REFORMS

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 12th 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.

Experts Critique Pakistan’s Fiscal Policy and Budget Allocations in Post-Budget Roundtable

by PRIME Institute PRIME Institute No Comments

Experts Critique Pakistan’s Fiscal Policy and Budget Allocations in Post-Budget Roundtable

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

Stable, Predictable Tax Regime and Not Ad-hoc Budgetary Measures for A Growing Young Economy; PIDE-PRIME Tax Reforms Commission

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Stable, Predictable Tax Regime and Not Ad-hoc Budgetary Measures for A Growing Young Economy; PIDE-PRIME Tax Reforms Commission

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. 

The Prime PIDE Tax Reforms can be accessed by downloading the attached file.

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

 

Economic Policy Think Tank PRIME Signs MOU with Quaid-e-Azam University to Strengthen Policy Linkages

by PRIME Institute PRIME Institute No Comments

Economic Policy Think Tank PRIME Signs MOU with Quaid-e-Azam University to Strengthen Policy Linkages

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

TRACIT warns Pakistan that counterfeiting and illicit trade stifle growth, economic development

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TRACIT warns Pakistan that counterfeiting and illicit trade stifle growth, economic development

  • 6 May 2024, Islamabad – Today, the Transnational Alliance to Combat Illicit Trade (TRACIT) presented policy recommendations to government officials and industry stakeholders participating in a forum hosted by Pakistani think tank, the Policy Research Institute of Market Economy (PRIME). The report highlights the impact of Pakistan’s ongoing economic problems with a staggering 25 percent inflation rate. High levels of inflation have had a disastrous impact on consumer purchasing power and product affordability, which is widely regarded as the primary driver for illicit trade.

“Record high inflation is perhaps the most pressing problem,” said TRACIT Director-General Jeff Hardy. “When prices rise faster than incomes, illicit and black-market products become more tempting to consumers desperately cheaper alternatives.

Speaking on this occasion, Executive Director of PRIME, Dr Ali Salman explained that “the 68 Billion Dollar black and gray markets are fueled by high taxes, tariffs and duties, because in these times of crippling inflation, citizens have nowhere else to go”.

According to Dr Salman, “Unless we minimize barriers to legal trade, the government of Pakistan has no chance of generating enough growth to raise required tax revenues and is set on a clear path towards bankruptcy”.

In Pakistan, the shadow economy is already equal to about 40 percent of GDP and significant levels of illicit trade can be found in many key economic sectors, including food fraud, illicit petroleum pesticides, counterfeiting, and trade in falsified and substandard pharmaceuticals. Discussants at the forum delineated the challenges faced in tackling illicit trade across sectors.

  • It is estimated that 40 percent of the medicines sold in the country are counterfeit or substandard. Illicit trade in pharmaceuticals will need to be addressed from different angles, including amending the existing regulatory framework and undertaking aggressive law enforcement measures.
  • Manufacturers of illicit pesticides have recently been the target of government investigations, with recent seizures of large quantities of illicit pesticides and fertilizers worth millions of rupees. Efforts by the Department of Plant Protection (DPP) to establish a special anti-pesticide adulteration campaign can usefully shut down the production and distribution of illicit pesticides and can also improve agricultural production and economic development.
  • More than half of the cigarettes consumed in Pakistan are sold without the payment of taxes, leading to annual losses of tax revenues of around USD 860 million. Since the recent imposition of federal excise taxes, the share of illicit cigarettes has jumped to about 67 percent of the market. Government efforts to implement track and trace systems have been somewhat effective but have only captured a fraction of the tobacco market. Greater enforcement of the track and trace system can help ensure that tax revenues due to the government will be collected.
  • While historically most of the fast-moving consumer goods purchased in Pakistan were imported from China, there has been a noticeable increase in local manufacturing of counterfeits in Pakistan. This makes counterfeiting far easier and has increased the magnitude of counterfeit products in the market. Pakistan needs to look at counterfeiting and illicit trade as a serious criminal issue. And, unless the circumstances are dealt with, counterfeiting and illicit trade will continue to be the biggest hurdle in the revival of the Pakistan economy.

“These illicit markets have plagued the country for years – perpetuating a vicious circle of associated money laundering, organized crime, corruption, and tax evasion,” said Mr. Hardy.  “We are pleased that the government is stepping up law enforcement against smuggling, money laundering and black marketers.”

Tax evasion is also a major problem in Pakistan, undermining its capacity for fiscal resource mobilization, especially when it amounts to as much as 6 percent of GDP. Tax evasion related to illicit trade in tea, tires and auto lubricants, and pharmaceuticals has grown to about PKR160 billion per year. The unregulated, untaxed illicit trade in cigarettes, which had increased about 10 percent over the last few years, now drains PKR 240 billion from fiscal revenue collections.

“Improving enforcement and tax collections can help mobilize domestic revenues without the need to raise taxes, which could stifle growth and the fragile economic recovery,” said Mr. Hardy. “Additional revenues resulting from tighter compliance with existing taxes and track and trace systems can help preserve economic stability and enhance debt sustainability.”

TRACIT and the Prime Institute also signed a Memorandum of Understanding establishing a framework for cooperation to mitigate illicit trade in Pakistan.  Among the agreed areas for collaboration will be the development of a new, in-depth investigation of the size, scope and associated negative impacts of illicit trade on the Pakistan economy.

“One of the main takeaways from today’s meeting is the urgent need for more information and a better understanding of the drivers of illicit trade in Pakistan,” said Dr Ali Salman, Executive Director of the Prime Institute.

“We look forward to working with the Pakistan government and will leverage on the international expertise of TRACIT to start a research and advocacy agenda to implement comprehensive policies that consider the potential impact on all sectors of the economy and work to reduce the incentives for criminals to engage in illegal activities.”

Dr Ali Salman highlighted that “Smuggling is growing faster than legal trade and presently stands at 20% of GDP, indicating that formal markets are unable to meet the increasing demand of the Pakistani middle class. who are willing to take high risks to avoid the excessive cost of taxes and tariffs.

About TRACIT: The Transnational Alliance to Combat Illicit Trade (TRACIT) is an independent, private sector initiative to mitigate the economic and social damages of illicit trade by strengthening government enforcement mechanisms and mobilizing businesses across industry sectors most impacted by illicit trade.

About PRIME: The Policy Research Institute of Market Economy (PRIME) is an independent economic policy think tank based in Islamabad.

Contact: Cindy Braddon, Head of Communications and Public Policy, TRACIT, Tel: +1 571-365-6885 / cindy.braddon@TRACIT.org / X: @TRACIT_org. The full report and associated content are available at www.TRACIT.org.

SOEs continue to strain public finance; privatization is inevitable

by PRIME Institute PRIME Institute No Comments

SOEs continue to strain public finance; privatization is inevitable

The government provided financial support of Rs. 1.93 trillion to SOEs during FY 2019-22 to keep them operational. The power sector posted a loss of Rs. 321 billion, while the infrastructure, transport, and communication sector posted a loss of Rs. 295 billion.

PRIME has published its quarterly assessment report, Prime Plus April 2024, which analyzes the financial performance of State-Owned Enterprises (SOEs) in Pakistan. The report evaluated the financial performance of SOEs and the private firms operating in the oil and gas marketing sector, banking sector, steel sector, and power generation sector.

The Power Sector and Infrastructure, Transport and Communication (ITC) Sector were the major contributors to the overall loss, incurring losses of Rs. 321 billion and Rs. 295 billion, respectively, during the fiscal year 2022. On the loss-making side, seven out of the ten largest loss-making SOEs are DISCOs, while the remaining three entities belong to the ITC sector. The combined losses of DISCOs amounted to Rs. 375.81 billion in FY 2022 alone. Pakistan Steel Mills incurred a loss of Rs. 206 billion from 2019 to 2022. In contrast, the Oil and Gas sector, a highly regulated sector, stands out as the most profitable segment within the SOE portfolio.

The report highlights vulnerability to external shocks emanating from wars. The continuity of the Russia-Ukraine war and unbated Gaza genocide may promote uncertainty throughout the world. These wars have affected trade in the Mediterranean Sea, which could result in disrupting the supply chain. Externally, the financial obligations due to debt and imports will keep the exchange rate under stress as the foreign exchange reserves are merely sufficient for two months’ imports. It is pertinent to highlight that a market-based exchange rate is the only way to promote economic sustainability.

Domestically, public finance is under pressure due to higher expenditures and lower revenue collection. FBR collected Rs. 2,241 billion in the third quarter of FY 2024. During the first nine months of FY 2024 (July-March), FBR collected Rs. 6.710 trillion, beating the Rs. 6.707 trillion target by Rs. 3 billion. Compared to revenues, the total government expenditure increased by 49 percent to Rs. 7,532 billion against Rs. 5,058 billion in the first seven months of FY 2023.

In the third quarter of FY 2024, total government borrowing increased by Rs. 2,490 billion compared to an increase of Rs. 1,959 billion last year. At the end of the third quarter of FY 2024, total government borrowing was cloaked at Rs. 28.2 trillion. The government borrowing from the scheduled banks increased by Rs. 1,405 billion in the third quarter of FY 2024. The central government’s total debt stood at Rs. 64.8 trillion, out of which domestic debt is Rs. 42.7 trillion and external debt is Rs. 22.1 trillion.

Inflation remains a challenge for the government. People face continuous declines in their purchasing power. In the third quarter of FY 2024, the average CPI inflation stood at 24 percent compared to 31.5 percent in FY 2023. The inflation in the first nine months of FY 2024 stood at 27.06 percent. The underlying cause of inflation is the higher growth in the money supply compared to the growth in the supply of goods.

The government needs to ensure efficient allocation of resources and reevaluate its spending patterns. The government cannot continue to support loss-making SOEs and should prioritize the privatization of the highest loss-making enterprises. An increase in revenue generation has been observed, but the government should refrain from increasing tax rates and focus on broadening the tax base. This could be accomplished through a flat, low-rate, and broad-based taxation system.

 

The report is available on PRIME’s website and can be accessed by clicking here

For further information, contact our communications officer Mr. Farhan Zahid at farhan@primeinstitute.org or call +92 331 522 6825.

PRIME Report: Assessing Pakistan’s Economic Freedom with a Focus on Sound Money

by PRIME Institute PRIME Institute No Comments

Report: Assessing Pakistan's Economic Freedom with a Focus on Sound Money

The Policy Research Institute of Market Economy (PRIME), in collaboration with the Atlas Network, has published a report titled “Pakistan Economic Freedom Audit: Sound Money as a Case Study,” delving into Pakistan’s economic freedom with a focus on monetary stability.

Authored by economist Dr Wasim Shahid Malik, a fellow at PRIME, this study thoroughly explores Pakistan’s financial system, emphasizing the stability of its money. It also evaluates the effectiveness of the Sound Money sub-index in measuring economic freedom, using the Fraser Institute’s Economic Freedom Index. The report finds that Pakistan’s sound money rating has consistently been low and has further decreased due to high inflation in 2023, resulting in its lowest rating to date. Over the past 50 years, the Pakistani currency has lost 68 times its value against a typical consumer’s basket and has depreciated 25 times its value against the US dollar.

“Recent assessments reveal that Pakistan’s sound money rating for 2023 is 4.60, which is the lowest in Pakistan’s history, primarily due to exceptionally high inflation during the year,” says the report.

According to the report, monetary fragility is primarily caused by excessive monetary growth that exceeds GDP growth. This growth in the money supply is due to a lack of fiscal discipline, as the government has been borrowing heavily from the State Bank of Pakistan. Despite the amendment to the SBP Act, the government continues to borrow heavily from commercial banks due to a high fiscal deficit and higher interest rates. This, in turn, crowds out the private sector, limits economic activity and lowers the value of money. Maintaining the money market interest rate close to the SBP policy rate, while the government continues to borrow and spend, SBP provides liquidity to commercial banks who lend it to the government. Additionally, the report identifies exchange rate overvaluation as another contributing factor to monetary fragility. Historically, the exchange rate has been kept overvalued, leading to unsustainable trade deficits and continuous reliance on external borrowing. This has resulted in recent exchange rate depreciation, which has made the country’s currency value unstable against foreign currencies.

The report recommends improvements in the methodology used to measure the Sound Money Sub-index of the Economic Freedom Index. It also proposes a comprehensive reform plan to maintain the stability of the country’s money value. The report suggests a number of measures, including rationalizing the size of the government, implementing an efficient and fair revenue mobilization system, adopting an effective monetary policy to control inflation, ensuring effective coordination between monetary and fiscal policy, demonstrating a strong commitment to the Fiscal Responsibility and Debt Limitation Act, setting up an accountability mechanism for fiscal authorities not adhering to the FRDL Act and for monetary authorities not controlling inflation, and limiting the government’s intention to keep the exchange rate overvalued.    

The report is available on PRIME’s website and can be accessed by clicking here

For further information, contact our communications officer Mr. Farhan Zahid at farhan@primeinstitute.org or call +92 331 522 6825.

HISTORIC SEMINAR ON SECTION 7E OF THE INCOME TAX ORDINANCE, 2001

by PRIME Institute PRIME Institute No Comments

HISTORIC SEMINAR ON SECTION 7E OF THE INCOME TAX ORDINANCE, 2001: TAX PAYERS ALLIANCE PAKISTAN (TPAP) AND LAW & POLICY CHAMBERS CALL FOR ABOLISHMENT OF DEEMED RENTAL INCOME TAX IN PAKISTAN

Tax Payers Alliance Pakistan (TPAP), an initiative of economic think tank PRIME (Policy Research Institute of Market Economy), in collaboration with Law & Policy Chambers organized historic seminar on 9th March 2024 in Islamabad, shedding light on the contentious issue of the Deemed Rental Income Tax levied under section 7E of the Income Tax Ordinance, 2001 vide Finance Act, 2022.

The event brought together a diverse group of experts including economists, lawyers, tax professionals, civil society activists, and academia – attended by huge audience both in person and online - to discuss the detrimental impacts of this tax on the public.

Mr. Umer Ijaz Gilani, Advocate Supreme Court, elucidated the legal intricacies surrounding this tax, while discussing in detail its background and repercussions. He very nicely described the difference between “deemed income” and “non-existent/hypothetical income” to make it easily understandable to even a layman. Mr. Ali Salman, Executive Director PRIME, highlighted the sheer violation of fair taxation principles and the need to protect property rights. Mr. Mahmood Khalid, Senior Research Economist, Pakistan Institute of Development Economics (PIDE) provided insights from a tax policy perspective, and Barrister Junaid Ahmed, joining virtually from Karachi, contributed invaluable insights regarding the implications of this tax for inheritance cases.

The Deemed Rental Income Tax, introduced vide Finance Act 2022, has been under scrutiny for its constitutionality and alignment with public policy. Notably, both the Islamabad High Court (IHC) and Peshawar High Court (PHC) have already declared it unconstitutional, with the matter currently sub judice before the Supreme Court of Pakistan.

The overwhelming consensus among the participants was that the deemed rental income tax, as stipulated under Section 7E of the Income Tax Ordinance, 2001, is not only unconstitutional and ultra vires but also runs contrary to public policy. The arguments put forth during the seminar highlighted the adverse effects of this tax provision on fair taxation principles, property rights protection, and the overall welfare of taxpayers.

Given the compelling evidence presented at the seminar, Tax Payers Alliance Pakistan (TPAP) unequivocally calls for the immediate abolishment of the deemed rental income tax, void ab-initio. TPAP firmly believes that this tax not only violates the fundamental rights of taxpayers but also undermines the principles of fairness and hampers economic growth.

According to Mr. Anas Farhan, Convener Tax Payers Alliance Pakistan (TPAP), this seminar marks a significant step towards advocating for fair and just taxation policies in Pakistan. TPAP has also strongly urged the Government for abolishment of Section 7E, while submitting budgetary proposals to Revenue Division/Federal Board of Revenue (FBR) for the year 2024-25, he said.

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, simplify the taxation regime, and to urge the government to eliminate undue and wasteful expenditures. PRIME Institute (Policy Research Institute of Market Economy) serves as its Secretariat in Islamabad.

TPAP Submitted Sales Tax Proposals 2024-25

by PRIME Institute PRIME Institute No Comments

TPAP Submitted Sales Tax Proposal 2024-25

Tax Payers Alliance Pakistan (TPAP), an initiative of economic think tank PRIME, submitted budgetary sales tax proposals to the Revenue Division/Federal Board of Revenue (FBR) in Pakistan for the upcoming Finance Bill 2024.

The proposal was developed by TPAP Team: Mr. Anas Farhan, Vice President ZTBL & PRIME Research Fellow from Islamabad, Mr. Usman Azmat, Advocate High Court from Lahore and Ms. Sehrish Naz, Economic Analyst FPCCI from Karachi, in consultation with the TPAP’s members comprising of a group of tax experts from across Pakistan, including representatives of Salaried Class Alliance (SCA) Mr. Shameer Muhammad Haroon, Member ICAP and Mr. Amer Sharif, Assistant Manager Treasury KAPCO. Subject proposal is aimed at simplifying tax regulations and reducing the compliance burden on taxpayers. This proposal aims to create a fairer and more efficient tax system in Pakistan that can provide sustainable funding for public expenditures.

According to experts, existing sales tax rate of eighteen percent is too much high and Government must consider to bring it down to single digit. Therefore, they have proposed a rate of nine percent for Budget 2024-25. Adjustment of input tax by some sectors of economy has also become complex and challenging, therefore it should also be simplified. Experts have proposed zero-rate sales tax on medicines. According to them, these life-saving items are out of reach of common man due to extraordinary sales tax thereon. Tax experts also highlighted to implement automated refund processing across the board instead of this facility to only few sectors, giving rise to discriminatory treatment. Existing sales tax withholding regime is also creating nuisance and distortion, therefore experts have proposed revamping it altogether.

Overall, TPAP’s proposal is a crucial contribution to the ongoing debate on sales tax reform in Pakistan. It provides a well-argued and clear case for a simpler, fairer, and more efficient tax system that could benefit both taxpayers and the wider economy initiative.

Tax Payers Alliance Pakistan Sales Tax Proposals for Budget 2024-25

Incredible things happen when taxpayers unite and raise their voice to advocate for positive change in the taxation system.

Revolutionizing Taxation: TPAP submitted Income Tax Proposals 2024-25 for Reduced and Uniform Tax Rates ensuing a Fairer and Simpler Tax System

by PRIME Institute PRIME Institute No Comments

Revolutionizing Taxation: TPAP Submitted Income Tax Proposal 2024-25 for Reduced and Uniform Tax Rates Ensuring a Fairer and Simpler Tax System

Tax Payers Alliance Pakistan (TPAP), an initiative of economic think tank PRIME, submitted budgetary proposal to the Revenue Division/Federal Board of Revenue (FBR) in Pakistan, aimed at reforming the income tax system to promote simplicity, transparency, and compliance. The proposal generated in response to the FBR’s solicitation of ideas for the upcoming Finance Bill 2024.

The proposal was developed by TPAP Team: Mr. Anas Farhan, Vice President ZTBL & PRIME Research Fellow from Islamabad, Mr. Usman Azmat, Advocate High Court from Lahore and Ms. Sehrish Naz, Economic Analyst FPCCI from Karachi, in consultation with the TPAP’s members comprising of a group of tax experts from across Pakistan, including representatives of Salaried Class Alliance (SCA) Mr. Shameer Muhammad Haroon, Member ICAP and Mr. Amer Sharif, Assistant Manager Treasury KAPCO. Subject proposal is aimed at simplifying tax regulations and reducing the compliance burden on taxpayers. The focus of the proposed tax reforms is to eliminate taxes that are unjustified, discriminatory, do not contribute to the national exchequer, and have become redundant. This proposal aims to create a fairer and more efficient tax system in Pakistan that can provide sustainable funding for public expenditures.

The proposed reforms are imperative for the promotion of compliance and broadening of the tax base. The prevalent ambiguities, complexities and distortions from discriminatory application of taxes are the underlying reasons for suboptimal performance of tax administration and low revenue collection. The government needs to move away from regressive and discriminatory tax regime towards flat, low rate and predictable taxes for transparency, compliance and broadening of tax base.

TPAP’s proposal emphasizes the significance of streamlining the tax system and lessening the compliance burden on taxpayers. They argued that a flat and low-rate taxation system would accomplish these objectives while also promoting economic growth and reducing inequality. The proposal would eliminate the current complex system of tax brackets and exemptions, reducing the need for expensive tax planning and compliance.

Overall, TPAP’s proposal is a crucial contribution to the ongoing debate on tax reform in Pakistan. It provides a well-argued and clear case for a simpler, fairer, and more efficient tax system that could benefit both taxpayers and the wider economy initiative.

Tax Payers Alliance Pakistan Income Tax Proposals for Budget 2024-25

Incredible transformations unfold when taxpayers unite and amplify their voice to advocate for positive change in the taxation system.