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Twelfth Five-Year Plan

Twelfth Five-Year Plan

Tax to GDP ratio projected from 15% to 20%

In the recent past, massive changes have been introduced to the taxation regime. To ensure exchange of information in tax matters so as to prevent evasion and avoidance of tax through cross-border trade and financial transactions, Pakistan signed OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCA) on 14th of September 2016. Pakistan, later, also signed the OECD’s Multilateral Competent Authority Agreement on Automatic Exchange of Financial Accounts Information (MCAA) on 7th of June 2017. Subsequently, Pakistan has made legislative changes in the Income Tax Ordinance, 2001, (ITO, 2001) and the Income Tax Rules, 2002, (ITR, 2002) while it also undertakes administrative measures to implement the Common Reporting Standard (CRS). Effective from September 2018, Pakistan has been collecting and providing information on financial accounts to foreign tax jurisdictions.

As the mechanism of automatic exchange of information exposes hidden offshore assets, investments, income and accounts of the resident Pakistanis to the tax authorities (the Federal Board of Revenue), such resident taxpayers will face potential civil, tax and criminal penalties for non-reporting. To address this situation and to raise additional tax revenue amidst widening fiscal deficits, to promote documentation of economy in time of low tax compliance, to boost foreign exchange reserves when foreign exchange reserves are dwindling and to improve the balance of payments in the wake of large current account deficits, the federal government decided to enact foreign assets and foreign income voluntary disclosure programme.

The Twelfth Five-year Plan (2018-2023) has proposed the following changes in the taxation system to enhance the tax to GDP ratio from 12% to 20%:

  • remove bottlenecks in tax system and tax exemptions;
  • review and simplify tax laws, rules and regulations;
  • create central data bank of businesses, non-taxpayers and taxpayers;
  • bring an end to automation of tax system;
  • establish transit trade management system;
  • segregate functions of tax administration and tax policy; and
  • implement ICT-based National Single Window (NSW) system to provide unified platform for trade regulators.

The Pakistani nationals availing themselves of the voluntary disclosure scheme were required to pay tax at the following rates:

  • 5% of the value of liquid assets not repatriated;
  • 3% of the value of immoveable assets outside Pakistan;
  • 2% of the value of liquid assets repatriated and invested in government securities up to 5 years in US dollar dominated bonds with six-monthly profit payment in equivalent rupees (with 3% rate of return) and payable on maturity in equivalent rupees; and
  • 2% of the value of liquid assets repatriated.

The voluntary disclosure scheme was quite successful in terms of tax collection within such a short period. The total amount of declared foreign assets was around Rs 577 billion that resulted in tax collection of Rs 36 billion by mid July 2018. In addition, an amount of $ 40 million has also been repatriated.

Similarly, to enhance tax to GDP ratio and to improve tax compliance, the voluntary declaration of domestic assets scheme was implemented during the same period as of the voluntary disclosure of foreign assets scheme. Taxpayers wishing to declare concealed assets and income were required to pay tax at the following rates:

  • 2% of the value in respect of foreign currency held in a foreign currency account in Pakistan as on 31 March 2018 and encashed in equivalent rupees;
  • 2% of the value in respect of foreign currency held in a foreign currency account in Pakistan as on 31 March 2018 which is invested in government securities up to 5 years in dollar denominated bonds with 6-monthly profit payment in equivalent rupees (rate of return 3%) and payable on maturity in equivalent rupees; and
  • 5% of the value in respect of other assets.

The declared value of domestic assets was Rs 1,192 million. The FBR collected Rs 61 billion tax on domestic assets by mid July 2018.

The Finance Supplementary (Amendment) Act, 2018, and the Finance Supplementary (Second Amendment) Act, 2019, introduced significant changes to the tax system. The Supplementary Finance (Second Amendment) Bill, 2019, which was presented before the National Assembly on 23rd of January 2019, empowers it to raise demand and affect recovery on provisional basis regarding undeclared offshore assets of any person, if discovered by the Commissioner or any department or agency of the federal or a provincial government. The proposed measure will enable tax authorities to recover tax provisionally before the money moves out of bank accounts and initiation of the regular proceedings under the provisions of the ITO, 2001, which takes a time of a year or two. This measure will also enable the tax authorities to enhance tax collection to bridge the tax gap.

As Pakistan’s tax to GDP ratio is around 15% – as mentioned in the Economic Survey of Pakistan 2017-18 – the tax authorities have to work on improving tax policy and tax enforcement to push this ratio. The Ministry of Planning, Development and Reforms released 12th Five-Year Plan (2018-2023) wherein the ministry has projected tax to GDP ratio from 15% to 20%. To achieve this projected ratio, the ministry has proposed the following measures in the taxation regime:

  • remove bottlenecks in tax system and tax exemptions;
  • review and simplify tax laws, rules and regulations;
  • create central data bank of businesses, non-taxpayers and tax payers;
  • bring an end to automation of tax system;
  • establish transit trade management system;
  • segregate functions of tax administration and tax policy; and
  • implement ICT-based National Single Window (NSW) system to provide unified platform for trade regulators.

The ministry has also proposed the following measures to increase investment essential to boost capital stock and increase employment:

  • improved tax administration by making the system taxpayer-friendly, innovative and modern;
  • encouraging financial institutions to expand the range of savings and revitalizing industry to ensure maximum GDP and job growth;
  • technology upgrade and value addition in export-focused sectors; and
  • improvement in competitiveness and cost of doing business indices, as well as investment instruments they offer.

Given the size of the tax gap estimated equal to current tax collection, enhancing tax to GDP ratio from current 15% to 20% in 2023 will not be an uphill task provided the measures proposed in the 12th Five-Year Plan (2018 to 2023) by the Ministry of Planning, Development and Reforms, are implemented in letter and spirit.



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