ISLAMABAD: The government has failed to convince the IMF about its enforcement capabilities for increasing revenues due to a poor track record and trust deficit, leading to enhanced taxation on the already overburdened salaried class and new taxes, including on milk.

This was disclosed by FBR Chairman Amjed Zubair Tiwana during a testimony before the National Assembly’s Stand­ing Committee on Finance, chaired by PPP MNA Syed Naveed Qamar. Mr Tiwana said the tax authority’s systems and technologies were obsolete and that its digitisation would take years to remove tax gaps.

“We opposed some new tax measures and managed to protect agriculture-related things but couldn’t convince them about many others. We tried to explain many challenges but couldn’t protect the salaried class,” Mr Tiwana said while responding to a question from PPP’s Nafisa Shah regarding the impact of a 40pc tax increase.

Likewise, the government did not want to impose sales tax on milk, “but we had to” due to the IMF, he said.

FBR chairman says authority’s systems obsolete, digitisation will take years

Mr Tiwana said the IMF did not accept their argument about higher revenue collection through enforcement due to a lack of trust in the government’s past 75 years of performance.

The FBR chief, however, linked the tax collection target of Rs12.97 trillion to the government’s commitment to widening the tax net through effective taxation on retailers, exchange rate, SBP’s monetary policy and other government policies. He said the retail sector had also given a tough time to tax measures in the past, and successive governments had to withdraw those taxes.

“We would like that no tax measure is withdrawn this time because if imports suffer due to the central bank’s exchange rate policy and government’s import restrictions, the FBR would have to ensure 50pc growth in taxes to achieve the 40pc growth target,” he said.

He assured the panel that new revenue measures introduced in the new budget would not be withdrawn and enforcement would be the top priority to achieve the revenue collection target assigned to the FBR. The enforcement would be intensified to sectors that are out of the tax net or underpaying taxes.

He acknowledged that withholding taxes were imposed to compensate for the FBR’s weak enforcement. In Pakistan, there are more withholding taxes compared to the rest of the world, though the number has been reduced from 58 to 31, he said.

Responding to a query about the real estate sector, he said the economic slowdown had affected almost all sectors, including real estate, automobiles, and tobacco. He said the biggest initiative in reforms is to shift the tax policy wings away from the FBR. This reform initiative would be achieved by March 31, 2025.

Mr Tiwana told the panel that out of Rs4.58tr direct taxes collection during 2023-24, withholding tax collection stood at Rs2.680tr, reflecting an increase of 58pc. Major withholding taxes included salary, dividends, interest and exports, which contributed Rs1.538tr.

Committee members, including Mr Qamar, expressed serious concern over FBR’s heavy reliance on withholding taxes.

The FBR chief responded that the share of withholding taxes has been decreased from 70pc to 58pc. Direct taxes contribution was around 50pc which was traditionally less than 40pc. The import taxes now stand at 34pc which used to be more than 50pc total taxes in 2021.

Regarding technological efforts, Mr Tiwana said the FBR’s systems were outdated, with obsolete IT equipment and data centres. The scanners at ports are also becoming obsolete, but upgrades to data centres are expected by January 2025.

He informed the committee that the prime minister had approved an end-to-end digitisation plan, hiring McKinsey and Company, a global consulting firm, for the FBR digitalisation project. The firm is expected to submit its report within 18 months, which will guide the future steps of the project, including whether to preserve, continue or discard existing projects and data.

Published in Dawn, July 13th, 2024