‘Well thought out’ tax reforms


ISLAMABAD: Finance Minister, Shaukat Tarin has said that “well thought out” tax reforms would be included in the coming budget which would be progressive and curtail interaction between the taxpayer and the authorities.

He gave this assurance to the federal cabinet during one of the recent meetings presided over by Prime Minister Imran Khan, who has tasked him to promote growth and reduce inflation.

In the past several attempts were made to reform the taxation system and minimize interaction between taxpayers and FBR officials but so far there has been limited success.

FBR installed Weboc system to clear the claims of exporters, but there are allegations that officials dealing with claims in Islamabad or any other part of the country do not clear claims without inducement.   

The sources said country's businessmen and exporters have registered their complaints against certain FBR officials involved in corruption.

The Finance Minister has constituted a sub-group on revenue comprising Chairman FBR, Michael Best and Ehtisham Ahmed. The sub-group will propose domestic revenue mobilization plan in consultation with stakeholders, measures to harmonize taxes as well as to simplify taxes with a view to reducing compliance burden. Review and advice on implementation of automation are also on its agenda.

The sub-group will provide recommendations to improve tax administration, propose measures to reduce cases in litigation and achieve l5% tax to-GDP in 4 years and 20% in 8 years.

In the instant case, Railways Division apprised the Cabinet that it was encouraging private sector participation in railways under the reforms plan approved by the Cabinet. A major initiative of the Ministry of Railways was to engage private sector in all areas including commercial management of trains, outsourcing of freight trains and track rehabilitation.

In accordance with Section 236-A of the Income Tax Ordinance 2001 Pakistan Railways, being withholding tax (WHT) agent, has to recover WHT @10% of the total bid money with first installment. Under the law, it is treated as advance income tax adjustable against final tax liability of the private parties.

Private parties had been agitating that advance payment of WHT @ 10% of total bid money was very high as compared to their actual annual income tax liability and it adversely impacted on the requisite liquidity requirement for successful operation of the outsourced railway services. The private parties had serious concerns about the refund mechanisms at FBR. Resultantly, WHT had become one of the major impeding factors to private sector participation in Railways.

FBR must understand that if Railways carried out these operations itself, FBR would get zero tax on Railways revenue, which was exempted from tax, Railway officials argued. In case of outsourcing its business to private sector, there would be substantial contribution to the national exchequer in the form of taxes. In FY2020-21 in the first 3 quarters, Railways is said to have contributed tens of millions as tax collection from its private partners.

It was further stated that as per law, withholding tax was applicable on the profit and not total revenue. WHT charged on the total bid amount offered by the private party was therefore not justified. It was hindering the process of outsourcing of train operations and other services by Pakistan Railways.

The engagement of private parties through outsourcing of commercial management of trains was imperative for fetching more revenue which, in turn, would reduce losses. The private sector stressed that getting refund of advance tax was an extremely cumbersome process and lacked transparency. It was, therefore, proposed that the collection of WHT @ 10% upfront in case of Railways may be exempted and private companies may be allowed to make tax adjustments at the time of filing of annual tax returns. FBR may be requested to issue SRO to implement this proposal.

The Ministry of Railway sent a draft of this summary to FBR and Finance Division. FBR did not concur with the summary; however, in the forthcoming Budget Exercise for the year 2021-2022, the relevant section would be reviewed based on the recommendations of the Ministry of Railways through the summary.

During a discussion, the Minister for Law & Justice advised that section 236-A of the Income Tax Ordinance 2001 was not applicable in the instant case as it did not entail auction of property or land. The members discussed the need for continuation of withholding tax as some found it to be regressive while others considered it to be necessary in face of prevalent tax evasion.

The Minster for Finance & Revenue stated that well thought out tax reforms would be included in the coming budget which would be progressive and curtail interaction between the taxpayer and the authorities.