ISLAMABAD: At a time when the economy is grappling with second wave of Covid-19, the International Monetary Fund has recommended a string of policy proposals from the rationalisation of tax rates to withdrawal of tax exemption and removal of all distortions in the country’s tax system.

A technical mission of the fund has conducted a detailed study of Pakistan’s existing tax system and come up with robust and bold recommendations, a well-placed source in the Federal Board of Revenue (FBR) told Dawn on Saturday

The report, according to the source, is confidential and cannot be divulged, but it covers all most all areas of the tax system with policy recommendations. “These recommendations will be considered and implemented in the next budget,” the source said.

Pakistan has held out an assurance to the IMF soon after the release of the first tranche in December last year that a technical team will study the tax structure and recommend measures to the government for implementation. “We have received the report from the technical team,” the source added.

The government has made a commitment with the IMF to work out a plan to expand revenue and find sources of revenue.

The source familiar with the content of the report said it covers the whole tax structure and recommended to the government to implement a few things immediately. The stress of the report is in three areas — to rationalise tax rates where these are very high, review tax exemptions and concessions.

According to the source, the report flagged so many areas which the mission believes is not in conformity with the international best practices.

The report also recommends a few things related to sales tax, but the government believed it will have an inflationary impact. At the moment, the focus will be to review corporate income tax exemptions and concessions. The FBR admitted that exemptions in the income tax areas are very high.

“We have already done some work on it and more will be done in coming days”, the source said, adding anything to implement in these areas will be done in the next budget for implementation from the next fiscal year.

The report also very candidly highlighted the distortions in the tax system from multiple tax rates to concessions to one class while burdening others with high tax rates. The report recommended the elimination of all kinds of distortions.

In the next budget, the source said the sales tax rate will be discussed along with the broadening of the narrow tax base.

According to the source, the revenue collection of the FBR is on track despite the fact that the economy is not on track.

According to the Economic Survey 2018-19 the FBR tax exemptions widened by nearly 80 per cent to Rs972.4 billion in the 2018-19 from Rs540.98bn the preceding year. The income tax exemptions jumped to Rs141.645bn in 2018-19 from Rs61.77bn a year ago, a whooping increase of 129.3pc year-on-year. This was primarily driven by a benefit of Rs90.95bn extended for balancing, modernisation and replacement of plant and machinery.

Tax exemptions are the revenue foregone by the state by granting exemptions under different categories to various industries and other groups.

Published in Dawn, November 22nd, 2020