Draft taxation proposals for the 2017-18 budget stipulating an increase of Rs500bn, or 15pc by jacking the IMF’s proposed total revenue target to Rs4,007bn, from the current fiscal year’s revised estimate of Rs3,500bn, have been scaled down. However, the FBR is not ambitious.

The FBR has worked out a final tax target of Rs3,887bn, seen as more realistically achievable —an increase of 11pc from the current fiscal year’s revised target. “We want to set a modest tax collection target”, an FBR official said.

The additional revenue will be collected by raising the rates of indirect and direct taxes coupled with administrative measures to plug loopholes.

The taxation proposals follow consultation meetings with IMF officials last months in Dubai under Article-IV.

The Fund believes the proposed tax collection for the next fiscal year could be achieved, without any extra effort, through tax buoyancy

A senior FBR official said the proposed tax proposals were drawn in line with the IMF’s recommendations, while keeping the impending general elections in mind. While the IMF’s advice is no longer binding, but if Pakistan wants to avail more loans from the World Bank and the Asian Development Bank, it will not be able to do so without winning a Letter of Support from the IMF.

The IMF has asked Pakistan to impose Rs180bn worth of new taxes in the budget. The Fund believes the proposed tax collection for the next fiscal year could be achieved, without any extra effort, through tax buoyancy.

The official said Finance Minister Ishaq Dar will finalise the proposed tax proposals after his return from abroad.

Official data shows additional taxes worth Rs1.2 trillion have been imposed in the last four budgets under the IMF programme. Most of these taxes were regressive in nature and implemented through withholding tax provisions.

A senior tax official, who is a part of the tax exercise, said that the FBR’s draft budgetary proposals were shared with the finance ministry and the IMF. Increasing the rate of 56 withholding taxes (WHTs) for income tax return non-filers by 100pc, in the next fiscal year, has been proposed.

The scope of these taxes will be extended to a maximum number of sectors that were not covered previously. It is expected that the increase in the incidence of taxation will compel people to file tax returns and come under the tax net to avoid higher rates meant for non-filers.

The PML-N government has imposed 20 new WHTs since June 2013, while increasing the rates for non-filers to improve tax compliance. The number of WHT categories has risen to 56 from 36 since June 2013. As a result, the share of WHT shot up to 68pc of the total direct tax collection in the first eight months of the current fiscal year.

The withholding tax, introduced in the 1990s, has become an easy tool for tax collection and is gradually making the income tax department irrelevant.

The government is also considering an increase in the WHT rates on properties. In the next budget, more imports will be brought under this regime. In the banking sector, the tax rate is proposed to be increased to 0.6pc on transactions exceeding Rs50,000 a day. Currently, it is 0.4pc.

The changes in the rate of super tax will be made by the finance minister in order to create difference between filers and non-filers.

Similarly, the government will revise rates on petroleum and other products.

In the next budget, the government will also consider proposals from the Tax Reform Commission for changes in tax laws and procedures. A proposal on the table is to forbid all businesses from using cash to settle any transactions larger than Rs50,000.

Prize bonds may also be bought under the tax net. A new law is being suggested that makes transactions related to property and vehicles be carried out only through cheques.

No doubt all these measures will help the FBR to improve revenue collection, but the tax system will still be facing the twin problems of low tax compliance and greater reliance on indirect taxes, especially withholding taxes.

Published in Dawn, The Business and Finance Weekly, May 8th, 2017