Increasing tax revenue
March 25, 2011 Leave a comment
Getting to the point
Expanding the tax base and capping the leakages is the only option to raise the much-needed revenue
By Tahir Ali
No state can operate without a proper and fair tax collection mechanism. But a balanced tax structure has affordable rates, proper load distribution and broad range unlike the present structure which has narrow base, and ever increasing rates.
Pakistan must increase its dismal tax-to-GDP ratio (9 percent) to meet the financial requirements for sustainable development and rehabilitation of the ailing economy. The Federal Board of Revenue (FBR) aims to increase the ratio to 15 percent by 2015 which is a must as high tax to GDP ratio means sustained socio-economic development as more money is there for developing different sectors of economy and for uplifting the living standard of the people.
World powers have been repeatedly urging Pakistan to raise its tax to GDP ratio and that the rich should contribute to the efforts first before asking the international community for money.
US foreign secretary Hillary Clinton has been quoted as saying the most important step Pakistan can take is to pass meaningful reforms to expand its tax base and that the rich and elite support the government and people of Pakistan in their hour of need.
The ratio, unfortunately, has been on the decline due to weak and corrupt tax collection machinery, smuggling, and frail commitment to raise new taxes and bring untapped areas under the tax net. According to an estimate, the government is losing around Rs500 billion annually in tax theft. Governments have always expressed their concerns on the issue but the remedy often resorted to has been defective.
According to a rough estimate, only 2.5 million of the total population of 170 million pays direct taxes which include 1.8 million salaried taxpayers. Most tax payers come in the lowest tax bracket paying meager taxes than they should.
A report jointly released by FBR, Georgia State University, and the World Bank last year said that every man, woman and child in Pakistan is evading taxes worth Rs4,800 per annum and the existing tax gap stood at 67 percent of the actual tax receipts.
The report said narrow tax base, tax evasion, distrust of taxpayers and administrative weaknesses have taken a toll on tax collection and some sectors are more heavily taxed than others. ÒAgriculture contributes about one-fifth of GDP, and amounts to no more than one percent of revenue. Given the shortfall in agriculture and services, industry carries the brunt of the tax burden, and its tax share is three-times as high as its GDP share,Ó it added.
Pakistani leadership has not created good precedents for the people. Hesitant as Pakistani leadership is to cut down on their bourgeoning current expenditure, the shortage of funds in wake of fewer taxes leaves little room with the government other than either to slash development budget or seek expensive foreign debts as has been witnessed in post-flood situation in the country.
Rather than expanding the tax-base by bringing more people into the tax net, the existing tax-payers, mainly the salaried class, have been subjected to increased tax ratio by successive regimes. This has been done this week as well by increasing the ratio of sales tax.
This strategy has been adopted by all the public service departments as well that have increased their tariffs but done little to curtail the theft that has resulted into a loss of an estimated Rs75 billion for Wapda alone. This has resulted in an increased resort to theft in taxes and services by the people and entrepreneurs.
Tax exemptions are making things even worse. The economic survey 2009-10 states that the influential sectors and individuals have managed to secure tax exemptions worth Rs147 billion in major taxes.
The national economy has also received both internal and external shocks during the past more than thirty years. Prolonged load-shedding and law and order situation has dealt severe blows tot the industrial sector in the country.
Direct taxes were Rs520bn as against the initial target of Rs544bn last year. This year it is Rs633bn which also seems impossible given the straight record of the tax collection machinery. This explains why a tax collection target has been lowered recently.
A broadened but rational and balanced tax structure with minimal exemptions is needed but it requires a strong political will to do so on the part of the government.
Shaukat Tarin, former finance minister, had promised to bring agriculture, stock exchanges and real estate business in the tax net for increased revenues, but he was resisted and, instead, shown the door by powerful lobbies.
Last year, former finance minister Hina Rabbani Khar, had said Pakistan had devised a three-year plan for shifting from indirect to direct taxes, expanding the tax base and taxing the untaxed sectors but the idea seems to have been abandoned to the detriment of the people and development.
For industrial growth and to tap the full potential of the industries, the government should overcome energy shortage and build as many big and small hydro-power generation units as possible. More economic activities and development would yield more taxes.
Smuggling to and from Afghanistan and Iran would have to be stopped or controlled and trans-border trade would have to be regulated for raising the tax to GDP ratio. The informal economy is thought to be two times bigger than formal economy of Rs16000 billion. Corruption will have to be brought down.
PakistanÕs tax rules and regulations are complicated, especially for indirect taxes, and some taxpayers have little knowledge on their obligation. This problem needs to be given due attention.
It is strange that the introduction of universal self-assessment scheme, a scheme to allow taxpayers to determine their tax themselves without being questioned by the tax officials and in the absence of income tax audits, has also failed to augment revenue from taxes. What is probably lacking is a commitment on part of the wealthy to support the state. A robust but fair accountability mechanism is the other option to force compliance.
Provincial taxes contribute no more than 0.4 percent of the national GDP, and as a result provincial governments largely depend on fiscal transfers from the central government to meet their expenditures. The inability of provinces to increase their provincial receipts will have to be tackled.