ISLAMABAD: The parliament will be empowered by the end of December 2014 to allow tax concessions and exemptions.
In this regard, a new legislation will be introduced by end of December 2014 in the parliament to stop issuing any tax concessions or exemptions (including customs tariffs) through Statutory Regulatory Orders (SROs).
According to the Tax Administration Reforms understanding reached with International Monetary Fund, it has been agreed with fund authorities that beyond the current fiscal year 2013-14 further revenue and expenditure measures will be implemented to achieve a sustainable deficit of around 3.5 percent of GDP by 2016-17.
This will require further fiscal consolidation of about 1.25 percent of GDP per year in the coming two fiscal years. Roughly half of the adjustment could come from the revenue side, mainly through further widening of the tax base with some contribution from improved tax administration.
Among the initiatives to widen the tax base we will finalise a comprehensive plan to separate existing SROs either by eliminating those granting exemptions or concessions through SROs by end-December 2013.
We will introduce the remaining to fiscal year 2014-15 finance bill by end-June 2014. The government has already stopped issuing any new tax concessions or exemptions (including customs tariffs) through SROs except by an act of Parliament, and will also approve by end-December 2015 legislation to permanently prohibit the practice.
We will also quantify the remaining tax expenditures and publish a detailed list in the budget in future years.
These steps will facilitate gradually moving the GST to a full-fledged integrated modern indirect tax system with few exemptions and to an integrated income tax by 2016-17.
On the expenditure side, further reductions in untargeted subsidies will be undertaken in 2014-15 and 2015-16, along with steps to streamline wage and salary costs via civil service reforms.
The initial consolidation effort relied mainly on the revenue side given the chronically low tax revenue-to-GDP ratio. The government is taking a series of measures aimed at strengthening tax revenues by over 1 percent of GDP on an annualised basis.
The tax measures contained in the 2013 Finance Bill seek to increase revenues by 0.75 percent of GDP, and included (i) an increase in the GST rate, (ii) increase in the corporate minimum tax rate, (iii) higher personal income tax rates for the top income brackets, higher excises on cigarettes, increases in several withholding rates, (vi) introduction of several withholding rates, and (vii) imposition of new levy on movable assets.
Moreover, by end-December 2013 it had been decided to implement a new gas levy, however, due to the challenging of this levy in high court, this has not been materialised so far. Some 0.4 percent of the GDP revenue was projected to come from the proposed gas levy.
Fiscal consolidation is needed to put debt on a declining path and foster sustainable growth. Fiscal consolidation of around 4.0 to 4.5 percent of GDP over the three-year program will lower the fiscal balance to around 3.5 percent of GDP and place the debt-to-GDP ratio on a firmly declining path.
Moreover, a more efficient and equitable tax system would foster competition, while providing the needed resources to finance infrastructure and support the poor through targeted programs.
An upfront adjustment of near 2 percent of GDP aims at restoring policy credibility (prior action). The negative impact on economic activity will be ameliorated by structural reforms to boost growth and a somewhat more commutative monetary policy stance early in the program than would normally be required given the inflation outlook.
Tax administration reforms will gradually deliver further improvements in revenue collections. An initiative to incorporate three hundred thousand new taxpayers into the income tax net was launched in July.
The 2013 Finance Bill granted the FBR access to bank information enhancing the scope and quality of information in its databases. The first step has been taken with the issuance of ten thousand notices based on large potential fiscal liabilities by end-July (prior action), and will be followed by a provisional assessment, collection procedures, and penal and prosecution proceedings.
The income tax initiative will be complemented with initiatives to enhance revenue administration for sales, excises and customs, to be developed and launched by end-December 2013 (structural benchmark). These efforts will be further assisted by increasing the number of risk-based tax audits to 4.2 percent of declarations from 2.2 percent.
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