Islamabad:
Days before the arrival of a new technical mission from the International Monetary Fund (IMF) to study Pakistan’s tax system, the government has set up a new committee under the supervision of a three-star general to consolidate data to widen the tax base .
The Federal Board of Revenue (FBR) has notified the technical committee under Lt. Gen. Muhammad Munir Afsar, the Chairman of the National Database and Registration Authority (NADRA), to develop a new plan for data integration.
The move aims to boost the low number of tax return applicants from last year’s level of 4.9 million to 6.5 million over the next eight months. Three senior members of the FBR will work with the NADRA chairman to plan for data integration to widen the tax base, a release showed.
FBR Chairman Malik Amjad Zubair Tiwana notified the committee after briefing the Special Investment Facilitation Council (SIFC) a few days ago.
“A high-level Technical Committee on Data Integration for Broadening the Tax Base and Information Infrastructure Transformation Plan of FBR is established,” the statement said.
The eight-member committee has been tasked with giving its recommendations within a month.
The committee was briefed days before the arrival of an IMF technical mission to Pakistan to study the country’s tax system. The IMF mission will begin next week and will holistically review the tax laws and administrative structure of the FBR. It will finalize the recommendations and submit a report in two months. Some of its recommendations may form the basis of the IMF’s next program.
Pakistan has shared a draft of the FBR restructuring plan with the IMF, which talks about consolidating 145 entities into the FBR network to broaden the tax base. However, the Prime Minister did not approve the restructuring plan and instead asked to refine it further to address the ambiguities and contradictions in the restructuring plan.
The newly constituted committee, chaired by an army general, will develop proposals for data integration to widen the tax base, IT infrastructure transformation plan, according to the notification.
It will review the FBR IT infrastructure and plan its transformation and upgradation plan. The general committee will also recommend the restructuring of PRAL to transform it into a modern IT company. It will also develop data analysis and mathematical modeling using artificial intelligence to broaden the tax base.
The FBR this week also issued a notification to implement the 40% income tax to be charged by the commercial bank on previous years’ profits due to foreign currency fluctuations. However, Tola Associates – a tax consultancy – found fault with the FBR’s notice.
The applicable windfall tax rate will be 40%, and the windfall tax due date is 30 November 2023, which can be extended by up to 15 days.
The federal government is required to place the notification of the 40% tax before the National Assembly no later than February 19, 2024, and the National Assembly is not expected to be constituted until then even if the general elections are held on schedule. according to Tola Associates.
He added that the payment due date appears to have been set without any critical thought and hastily, arguing that the notification would also become invalid if not approved by the National Assembly by February 19, 2024.
The tax consultancy called the new 40% income tax “confiscating”, which could face legal challenges.
This 89% still does not include the effect of administrative costs, which can be 20-25% of the revenue that banks make, which if factored in, can effectively make it a confiscatory tax and can also lead to litigation. lawsuits by the affected persons, it is added.
However, FBR officials argued that there is no need for the notification to be approved by the National Assembly as the law only requires notification to Parliament.
Tola Associates said another potential issue that could be litigated is the retrospective application of the tax as it may unlawfully infringe on past and closed transactions and affected persons can rely on the Sindh High Court’s 2011 judgment.
He added that the normal tax rate for banking companies is 39% for tax year 2023, while banking companies are also subject to a 10% Supertax year for tax year 2023. This means that a banking company will be subject to 89% tax. in case of her foreign exchange income in tax year 2023.
To calculate windfall income, only a currency fluctuation factor has been incorporated, while other factors such as economic growth and inflation that may have a negative impact on banks’ overall income have not been incorporated, according to the consultancy.
The formula for calculating the average exchange gain for the tax year 2023 excludes the tax year 2022 windfall. This seems counterintuitive as on the one hand banks will pay an additional 40% tax on the tax year 2022 windfall, while on the other hand the same windfall will reduce average foreign exchange income which in turn will increase windfall for tax year 2023, he added.
Published in The Express Tribune, November 25u2023.
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