Prime Minister Imran Khan on Monday formed a ministerial committee to review proposals that seek equitable taxation by increasing the burden on upper class, but a strong political will is needed to take these steps.
The tax proposals include a steep reduction in income tax rates for the corporate sector and salaried persons but comprise levy of a new tax on assets to compensate for the revenue loss.
About a dozen tax proposals were presented to the PM and his economic team by former finance minister Dr Hafiz Pasha. He had sought the input of the country’s noted economist a few weeks ago after another human development index report painted a gloomy picture of Pakistan’s socio-economic conditions. The premier instructed Minister for Industries Hammad Azhar, Finance Adviser Dr Abdul Hafeez Shaikh and Commerce Adviser Abdul Razak Dawood to review the proposals in detail so that the recommendations that were implementable could be implemented, said the Prime Minister’s Office.
One of the key proposals was to immediately slash the corporate income tax rate from 29% to 20%, a participant of the meeting informed The Express Tribune.
The previous Pakistan Muslim League-Nawaz (PML-N) government had announced a five-year plan to reduce the corporate tax rate but the PTI government halted the process.
To compensate for the revenue loss due to a drastic reduction in the corporate income tax rate, Pasha proposed to impose the Capital Value Tax (CVT) at the rate of 1.5% on all assets, except for property, according to government officials. The meeting was informed that the country’s constitution permitted the federal government to impose CVT, except on property. However, the PTI government, as a policy, has abandoned CVT and has also withdrawn it from stock market transactions in the FY21 budget.
CVT can also be imposed in cases where the government has given income tax exemptions under the law to certain sectors, according to the proposal. Pasha was said to have apprised the meeting that the tax on assets was more progressive as compared to the income.
According to him, the richest 20% of people earn five times more than the lowest 20%. But this gulf was far wider in case of assets. The richest 20% have 12 times more assets than the poorest 20%, as higher income levels allow them to save money and create assets. It was also proposed to end income slabs for the salaried and business individuals and introduce more progressive rates.
Before coming to power, PM Imran had vowed to double the tax collection from just Rs4 trillion to Rs8 trillion. However, during the first two years, his government could not even touch the Rs4-trillion mark. The uncertainty still prevails in the Federal Board of Revenue (FBR). There is no permanent chairman of the revenue board and no permanent director-general of international taxes - another area where the PM had promised to recover the wealth stashed abroad.
Instead, the government has been sitting on the information about billions of dollars and there have been reports that one field unit of the Automatic Exchange of Information has misused this information, highly placed sources informed The Express Tribune.
Pasha also proposed the end of current fragmented income tax system where different rates are proposed for different businesses and sectors. He sought to implement a uniform rate - a recommendation that needs strong political muscle for implementation.
He also proposed the rationalisation of the current tax system to tax rental income as the existing valuation table-based tax structure was more regressive.
According to another key proposal, Pasha proposed the rationalisation of the current capital gains tax structure, particularly for the real estate sector. However, this proposal may invite opposition from different lobbies as the government recently struck a compromise with the realty sector by reducing the tax-free holding period from eight years to just four years.
At present, there is no capital gains tax, if a property is sold after four years of purchase. Pasha proposed that instead of completely exempting the gains, the rate should be lower if the holding period is longer. It was also proposed that tax credits available to industrialists on business expansion or modernisation but were withdrawn in budget, may be restored.
Published in The Express Tribune, September 15th, 2020.
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