The Institute of Cost and Management Accountants (ICMA) Pakistan has presented a comprehensive set of tax reform proposals to the Federal Board of Revenue (FBR), outlining a strategic roadmap for enhanced revenue generation and sustainable economic development. Submitted by the Research and Publications (R&P) Committee, spearheaded by Vice President Muhammad Yasin, these recommendations address critical areas of Pakistan’s tax system, aiming to broaden the tax base, streamline GST integration, promote progressive taxation, and rectify existing distortions.
Recognizing the urgent need to reduce reliance on external borrowing and bolster domestic revenue, ICMA’s proposals offer a multi-pronged approach. A central theme is the introduction of a Green Tax Reform, designed to incentivize investments in renewable energy and digitalization. This forward-thinking initiative proposes significant tax deductions, including 50% on renewable energy projects, 30% for green operational costs, 40% for digital infrastructure investments like cloud computing, and 25% for digital skills training. This, ICMA argues, will not only stimulate environmentally conscious investments but also modernize the economy.
The proposals also include a carefully phased taxation framework for electric vehicle (EV) manufacturers. Starting with a modest 10%-15% tax on profits, gradually increasing to 20%-25% over five years, this approach aims to nurture the nascent EV industry while ensuring its eventual contribution to national revenue.
Expanding the Tax Net and Ensuring Equity
In line with global best practices, particularly the OECD/G20 BEPS Pillar Two, ICMA advocates for a 15% minimum corporate tax on multinational corporations with substantial annual revenues exceeding PKR 21 billion. This measure seeks to ensure that large multinational entities contribute their fair share to the national exchequer.
To foster greater equity within the system, ICMA proposes targeted adjustments impacting wealthier segments of society. This includes a 10% tax on pension incomes exceeding PKR 200,000 per month, while ensuring exemptions for lower-income retirees. Furthermore, the institute recommends capping tax-free employer-provided health insurance benefits at PKR 500,000 annually, with any amount above this threshold being taxed as ordinary income.
Integrating Businesses into GST and Taxing the Digital Economy
ICMA’s proposals tackle the crucial area of General Sales Tax (GST) integration and the burgeoning digital economy. The institute suggests bringing businesses with annual sales between PKR 6 million and PKR 40 million into the GST regime with a simplified 1% flat tax on sales. A flat-rate credit scheme for non-GST registered sellers is also proposed, ensuring GST collection while acknowledging input costs.
Recognizing the growing significance of e-commerce, particularly cross-border transactions, ICMA recommends mandatory GST registration for foreign sellers with annual sales exceeding PKR 9 million. This measure aims to create a level playing field for domestic businesses competing with international digital marketplaces.
Progressive Taxation and Addressing Wealth Concentration
To address wealth disparities and promote a more progressive tax system, ICMA has put forward several impactful recommendations. These include:
- Integrating exporters into the regular tax system: Moving away from potentially preferential treatment and ensuring all sectors contribute fairly.
- Streamlining Personal Income Tax (PIT) brackets: Simplifying the system into five slabs with a maximum rate of 45% for non-salaried individuals.
- Wealth Tax on the Richest: Introducing a wealth tax ranging from 1.7% to 3.5% on the wealthiest 0.5% of households, mirroring models like Spain.
- Real Estate Wealth Tax: Implementing a property tax on assets exceeding PKR 50 million, with rates between 0.5% and 1.5%.
- Taxing Digital Platforms and Earnings: Levying a 3.5% Public Broadcasting Contribution Tax on social media earnings surpassing PKR 5 million annually, and taxing digital subscriptions for platforms like Netflix and Disney+.
Enhancing Compliance and Modernizing Tax Administration
Beyond revenue-generating measures, ICMA emphasizes the critical need to improve tax compliance and modernize tax administration. Key proposals in this area include:
- Compliance Risk Management (CRM) Framework: Utilizing third-party data analytics in major cities to identify and address tax compliance risks.
- Tax Planning Unit (TPU) within the Ministry of Finance: Establishing a dedicated unit staffed with cost and management accountants to develop data-driven tax strategies.
- Modernizing the Tajir Dost Portal: Automating calculations, pre-filling tax returns, and integrating secure payment gateways for a more user-friendly experience.
- AI-driven Monitoring for TDS/TCS: Leveraging artificial intelligence to enhance the efficiency and effectiveness of Tax Deduction at Source and Tax Collection at Source processes.
- Extending VAT/GST to Cross-Border E-commerce: Addressing tax evasion and ensuring fair competition in the digital marketplace.
ICMA Pakistan believes these comprehensive reforms offer a pathway to a fairer, more transparent, and efficient taxation system. The institute expresses its hope that the FBR will seriously consider these recommendations, paving the way for a more robust economy and sustainable fiscal stability for Pakistan. The implementation of these proposals could mark a significant step towards a more prosperous and equitable future for the nation.
