Luxury Tax law

Restructuring of the tax system – III – Opinion

January 24, 2021

While the FBR has performed excellently under the current economic team in the adverse conditions and despite the heavy financial burden of Covid-19, especially amid the deadly second wave, it is a fact that PTI's coalition government failed in the 2020 Finance Act on tax breaks for the salary grade, especially without increasing the pay and pensions of government employees, significantly lowering income tax and sales tax rates for businesses, eliminating and / or deferring withholding and input taxes so that they can survive and revive in troubled times.

FBR in Finance Bill 2020 proposed a luxury tax for the wealthy owners of farmhouses and palace bungalows in the Islamabad Capital Territory (ICT), but it was withdrawn in the 2020 Finance Bill after wealthy lawmakers and their financiers opposed it. By withdrawing the tax on luxury houses in the capital territory of Islamabad proposed in the 2020 Finance Act, the PTI government admitted that it does not want to tax the privileged sections of society. The Senate also recommended the withdrawal without giving a reason.

While the PTI government appeases the rich, it seeks to impose an exorbitant sales tax, the incidence of which takes away a greater proportion of the low-income population, while the rich, mostly the unscrupulous traders and manufacturers, make more money by just not getting past the burden of the end user, but also not honestly into the treasury – this leads to their illegal enrichment. If the PTI had introduced "Taxes on Luxury Homes in the Islamabad Capital Territory" it would have deserved mass recognition, but it did not, as was done by the PML-N in 2014 with the Income Support Levy Act, which was introduced in 2013 in support The economically distressed classes were withdrawn, but it was canceled as early as the next year. For historical reasons, let's reproduce the salient features of the withdrawn "Tax on Luxury Homes in Islamabad Capital Territory":

On residential buildings:

  1. In the case of two to four canals with a covered area greater than 6,000 square feet: Rs. 100,000 per canal

  2. For five canals or more with a covered area greater than 8,000 square feet: Rs. 200,000 per canal.

On farmhouses with four canals including acreage

  1. A farmhouse with a covered area between 5,000 to 7,000 square feet: Rs. 25 per square foot of covered area per year.

  2. A farmhouse with a covered area between 7,001 and 10,000 square feet: Rs. 40 per square foot of covered area per year.

  3. A farmhouse with more than 10,000 square feet of covered area: Rs. 50 per square foot of covered area per year.

    On farmhouses with more than four canals including acreage

  4. A farmhouse with a covered area between 5,000 to 7,000 square feet: Rs. 60 per square foot of covered area per year.

  5. A farmhouse with a covered area between 7,001 and 10,000 square feet: Rs. 70 per square foot of covered area per year.

  6. A farmhouse with more than 10,000 square feet of covered area: Rs. 80 per square foot of covered area per year.

The above tax did not apply to a owner-occupied widow's house. It should be picked up by the Ministry of the Interior via the affiliated departments and deposited in the federal consolidation fund. It could have raised significant funds to help those in need. It must be imposed by a financial addition (amendment) or a presidential ordinance that extends the amnesty for the rich developers and builders. The FBR authorities deserve credit for proposing a progressive tax, but the keen interest in both the Senate and the National Assembly and the rich they fund have proven that the PTI government, like its predecessors, does not tax the rich for the benefit of the poor would! The situation reveals PTI's claim that its goal and agenda to come to power was to ensure socio-economic justice and the establishment of an egalitarian society!

The compliance costs were increased in the Finance Act 2020 by using quarterly sources instead of every six months. Amazingly, the FBR will be empowered to have real-time data access or otherwise under the Income Tax Ordinance of 2001, the Sales Tax Act of 1990, and the Federal Tax Act of 2005 through the Finance Act 2020 in the absence of the Personal Data Protection Act in the country and no hacking safeguards and leaks as well as abuse for self-enlargement.

In the Finance Act of 2020 there would have been a tax margin of Rs if only 40% of the taxes enacted / waived in fiscal year 2019-20 had been reduced. 600 billion for lowering income tax and sales tax rates that harm low-income groups instead of continuing with high taxes and raising / improving existing ones when the economy needs a boost to survive and revive the tsunami in a deep recession Covid-19 absorb outbreak / lockdown. This is the real reality of the PTI government's “no new taxes” budget!

The PTI government could have taken a number of positive resource mobilization measures – tax and non-tax – as well as reducing the cost of doing business proposed above in the 2020-21 budget, but it has decided to significantly increase the price of oil on products on June 26, 2020 with catastrophic consequences (unconstitutional filing, The News, June 30, 2020 and The POL Bomb, Business Recorder, April 5, 2019).

We have a complex tax system with over 70 unique taxes and at least 37 government agencies that administer these taxes. If the Prime Minister is really serious about reforming the tax system, he needs to transform the FBR into a modern national tax authority. The problem of tax fragmentation and multiple collection agencies needs to be resolved as the first priority to simplify business operations and reduce business costs. Otherwise, we will never progress and be endemic to the devastating economic effects of Covid-19.

Pakistan needs a new National Tax Authority (NTA), as detailed in the section “The Case for a Single Tax Service Across Pakistan: PTIs and Innovative Tax Reforms” (Business Recorder, August 31, 2018), and viable solutions have been offered. Oddly enough, the World Bank did not acknowledge this in any of their papers / reports related to the $ 400 Pakistan Raise Revenue Project while introducing the same concept. For example, it can be noted that the idea of ​​the NTA was returned as early as 2013 in Need for National Tax Agency, Business Recorder, November 1, 2013, and then in Revamping Tax System, The News, December 7, 2014, only elaborated in tax proposals – VII : Need for NTA, Business Recorder, May 22, 2015 and argument for "NTA", Business Recorder, November 27, 2015, but its bill was given in the direction of Flat, Low Rate, Broad and Predictable Taxes (PRIME Institute, April 2016) . It was also included in its final report by the Tax Reform Commission, which was submitted to the government in February 2016 (which was classified as confidential by PMLN and has not yet been published by the PTI government, despite repeated requests).

It has been suggested that the NTA should be governed by an independent and competent board and that its members should be selected by the Joint Committee of the Senate and the National Assembly. In addition to collecting taxes at all levels of government, the NTA should also pay out benefits such as social security, grocery stamps, general retirement, health insurance and income support, etc. The linking of the database of various bodies with the NTA (complete digitization) has long been emphasized and again as a big step towards an e-government model for the country that does not currently exist. The Swedish Revenue Service (Skatteverket) and Canadian Revenue Service (CRA) models suggested studying / adopting after debate and suggesting changes to suit our particular needs.

Tax issues and how to deal with them have been extensively discussed in a number of papers and articles including: "Avant-garde Budget Proposals", Business Recorder, May 10, 17, 24 and 31, 2019, Essential Reforms, Business Recorder, May 29, 2019 March 2019, Challenges for Decision Makers, Business Recorder, March 22, 2019, Optimizing Tax Collection, Business Recorder, March 15, 2019, Resolving the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time for Tax Integration, Business Recorder, December 21 and 23, 2018, Tax Policy for Investments, Business Recorder, December 14, 2018, Productive Tax Reforms, Business Recorder, October 27, 2018, Overcoming the fragmented tax system, Business Recorder, October 19, 2018, PTI & Revitalization of the Economy, Business Recorder, October 12, 2018, Bridging the Tax Gap, Business Recorder, 5. and 7. O. October 2018, Case for All- Pakistan Unified Tax Service: PTI and Innovative Tax Reforms, Business Recorder, August 31, 2018, Overcoming the Debt Burden, Business Recorder, August 27, 2018, PTI and Tax Reforms, Business Recorder, August 17, 2018 and Wither Tax Reforms, Business Recorder, August 2, 2019. Unfortunately to this day these are not taken into account by the PTI government and are never discussed or cited by the IMF or the World Bank.

Surprisingly, the World Bank, IMF and FBR ignored the proposals put forward in various articles above for generating Rs revenue. Eight trillion at the federal level alone (Agenda for Flawed Tax Reforms, Business Recorder, November 15 and 21, 2019 and "Raising Rs. 8 Trillion", Daily Times, November 12, 2017) enable Pakistan to overcome its huge budget deficit and get rid of credit achieve rapid economic growth and provide social services to all citizens.

In its first review of December 19, 2019 (Country Report No. 19/380), the IMF admitted that "more than 40 percent of all tax revenues in Pakistan are collected in the import phase". This fact of oppressive and narrow taxation has been stressed repeatedly by us in various articles and viable solutions have been offered to make it fair and broad, but the FBR and IMF have ignored them. The World Bank in 400 Million Pakistan Raises Revenue Project has also given no indication of this, although many proposals have been endorsed without acknowledging published work by local authors.

It is time for the Prime Minister to focus on the principle of reciprocity – in return for taxes, he must put in place a system that will provide citizens with quality education, health, housing, transport, facilities through the implementation of Article 140a of the Act. the constitution provides clean drinking water, sewage, etc.

Our existing tax system offers extraordinary tax-free perks and benefits to powerful sections of society, while mocking allocations are made to health, education and other social services to alleviate the suffering of the poor, which is increasing day by day. Millions are being pushed to become what Frantz Fanon called "The Misery of the Earth". Pro-rich policies mean that prosperity is concentrated in a few hands and there is no delegation of administrative, political and fiscal powers under Article 140A of the Constitution to ensure the provision of social services at the grassroots level.

Successive civil and military governments cannot free themselves from failure on the financial front by shifting blame to the WB / IMF alone. They have never bothered to implement fundamental reforms to improve productivity for higher and sustainable growth, but have continued to raise regressive taxes, as discussed in our book Tax Reforms in Pakistan: Historical and Critical Perspectives. (Available free of charge at: https://www.pide.org.pk/pdf/Books/Tax-Reforms-in-Pakistan-Historic-and-Critical-View.pdf.

The recently launched Tax Payers Alliance Pakistan (TPAP), a voluntary network of Pakistani taxpayers intended to serve as an advocacy group of professionals, business owners and individuals in an initial pre-budget press release, reminded the government that Pakistan needs a dip A broad and equitable tax system and federal and state governments must demonstrate transparency and end inappropriate and wasteful spending – details at https://primeinstitute.org/tax-payers-alliance-pakistan-tpap/.

We need a simple, fair and predictable tax system: 10% tax on natural persons (with an alternative minimum of 2.5% on net assets of more than Rs 10 million), 20% on companies and other businesses, 5% sales tax (for exporters 0%). VAT). Lower tariffs (one chapter, one rate, let's say 2%) on all items and federal excise taxes on luxury items and on hazardous products like cigarettes, beverages, etc. This brings us a tax of Rs. 8 trillion (works available towards a flat, low and foreseeable tax revised and expanded edition (2020).

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(The authors, lawyers and partners in Huzaima, Ikram & Ijaz are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)

Copyright Business Recorder, 2021