Analysis: Challenges to implementing tax amendments

The National Assembly is set to pass the Tax Laws (Amendment) Bill, 2024 in the new year, but implementing it will be a significant challenge for the PMLN-led coalition government. The bill could restrict non-filers from buying, purchasing, and economic transactions, guaranteed under Articles 18, 14, and 23 of the Constitution of Pakistan.

Furthermore, this bill aims to grant tax officials sweeping powers to uncover undisclosed assets and establish connections between property, automobile purchases, and other economic activities with taxable income. The bill is a key initiative of the government’s transformation plan to broaden and deepen the country’s narrow tax base.

Giving tax officers more powers raises a few questions. The Federal Board of Revenue (FBR) seeks approval for the legislation in the National Assembly, while further permission from the federal cabinet will be required for its implementation. This means the bill, even if passed, will remain inactive until the government authorises the FBR to enforce it.

A key question is why the FBR is pushing for legislative approval now while the implementation methodologies will be developed later. In 2020, an amendment allowed purchasing assets at a higher value than previously declared lesser value. However, the FBR has not received permission to enforce this change. It is unclear whether the new powers would experience similar delays, making this a critical test case for the government.

Concerns raised on data confidentiality, more powers and constitutional violations

So far, legislators have shown little interest in discussing the pros and cons of the proposed powers. No government senators attended the Senate Standing Committee on Finance’s first day of hearings on the bill. Five out of eleven senators approved the bill on the second day with minor recommendations.

The proposed bill creates new eligible and ineligible categories, replacing the current filer and non-filer. Ineligible will no longer be able to purchase property, vehicles and economic transactions with few exceptions, which they could do at higher withholding tax rates under the current system.

This eligibility criterion will allow the FBR to decide whether taxpayers can do certain economic activities based on their declared assets and income. Earlier, the tax officials could ask a taxpayer in the post-transaction phase about unexplained assets or expenditures under the Tax Law 1922 before moving to the Universal Self-Assessment Scheme. In the new law, the prior nod is now mandatory.

The key question concerns the confidentiality of taxpayers’ data and its sharing with authorities. FBR Chairman Rashid Mahmood Langrial explained that a new system will be implemented, which can be accessed using a CNIC number to check if the applicant has sufficient declared assets and income to purchase property or automobiles. This system will generate a message indicating whether the applicant is eligible for the purchase of property or automobile, etc., without disclosing their income to the authorities, Langrial added.

Mr Rashid said the system will be operational in one or two months.

Many analysts believe that the FBR will need to consider individuals with inherited or gifted assets who may be affected by the new legislation. These assets or visiting tax officials might not eliminate the risk of corruption or harassment, they warn.

The FBR chairman said that data on sales tax registered and unregistered individuals will be shared with banks only. However, no personal income data will be disclosed to banks. If there is a mismatch between declared sales and banking transactions, banks will alert the FBR.

Chartered Accountant and former Chairman of the Tax Reform Commission, Ashfaq Tola, raises two concerns about the tax amendment bill. He points out that some sections of the bill conflict with Article 18 (freedom of trade, business, or profession) and Article 23 (provisions regarding property) of the Constitution of Pakistan. He argues that restricting property transactions based on sufficient resources and limiting withdrawals contradict these constitutional articles.

Mr Ashfaq also cites Article 25, which ensures the equality of all citizens, stating that the bill’s restrictions on non-residents violate this principle. Additionally, he mentions Article 14, which guarantees taxpayers’ right to privacy. He criticises the requirement to file investment and expenditure statements, which goes against the self-assessment scheme.

Mr Ashfaq suggested that instead of the Chief Commissioner, an independent forum such as an appellate tribunal or high court(s) should handle appeals for a fair trial.

Former FBR chairman Dr Muhammad Irshad emphasises the importance of documentation, calling the move a good effort to expand the tax base and improve documentation. However, he criticises the bill as a reactionary measure by top tax officers, saying this is not a tax policy prescription.

He describes it as a frustrated initiative for tax collection, predicting that such measures will not help the FBR meet its revenue targets and that a shortfall is inevitable in the current fiscal year.

Published in Dawn, December 29th, 2024