Setting the Scene
Setting the Scene
The Economic Advisory Group (EAG) held its second meeting yesterday to deliberate on proposals pertaining to the tax policy. Members were briefed by Dr. Vaqar Ahmad and Dr. Ahmed Jamal Pirzada on the objectives and the outline of the tax policy document currently under works by the EAG. At a broader level, EAG calls for ‘Fair and Just Taxation.’
EAG members mutually agreed on the important role a country’s tax system can play in both stalling or promoting economic growth. The political economy issues which limit the state’s ability to tax the super-rich, and egalitarian concerns behind insulating lower segments of society from direct taxes also came under discussion. Some members pointed to how the aforementioned constraints result in the tax burden falling on the few who cannot escape the tax net. Others pointed to how this has incentivised excessive reliance on indirect taxes thus making the tax system regressive, in contrast to what the policymakers set out to achieve.
When discussing the way forward, EAG emphasised that the tax system should be seen in a holistic manner where linkages between tax policy, tax administration, and tax culture are appreciated. Members pointed to how a complex tax policy can make tax administration ineffective. A complex tax policy not only increases the compliance cost for potential taxpayers but also makes the auditing process less transparent and open to corruption. This further aids in making the dispute resolution process more cumbersome, resulting in lost time and revenue for the exchequer. The lack of appreciation of these interactions between tax policy and tax administration has contributed towards undermining the tax culture in Pakistan.
In light of this discussion, the EAG decided to base its approach towards improving the tax system on five key principles:
- Taxes should be easy to understand
- Tax policy should be easily enforceable
- Taxes should encourage economic activity
- Taxes should correct for structural inequality and market failures
- Taxes should be proportionate to ability to pay
Members of the group propounded to have a tax policy that is fair, easy to comprehend and enforceable, and promotes tax culture. It should be conducive to economic growth, while correcting for structural inequalities and market failures.
The members expressed that in order to change the structure of taxation, it is imperative to set medium- to long-term goals in the proposal.
It was highlighted that the proposal will be formulated keeping in view the trade-offs of political economy of taxation. The proposal is expected to be presented to relevant authorities as one of the pre-budget proposals by the end of March.