Increasing tax revenue

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

The News

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.

Mills raise cane rates to ensure supplies

Mills raise cane rates to ensure supplies.

Mills raise cane rates to ensure supplies

By Tahir Ali Khan

THE supply of sugarcane to mills in Khyber Pakhtunkhwa has picked up following fall in gur prices and improved rates being offered by sugar mills.

Gur prices plunged to Rs5,000-5,500 per 80 kg in local markets from Rs6,000-6,500 last month and Rs7,500-8,500 last October. This has prompted farmers to take their crop to millers who are offering better prices these days.

The price offered by mills is Rs338 per 50 kg of cane. But farmers Farmani Gul Khan argue that on the basis of recent gur prices this season, it should be around Rs450 for 50kg.

Since 2007, gur has been costlier than sugar.But it has lost its place of being the first priority of farmers in the province. For example with a crop of 300 maunds, a farmer will earn around Rs83,000 if he opts for gur, and over Rs100,000 if he takes it to mills, says mill owners.

Cane manager at the Premier sugar mills in Mardan Masood Khan says increase price offer has augmented supplies to the mills. “The cane supply situation improved in February and we are crushing around 3,000 tons of cane daily, approaching fast to our peak crushing of 4,000 tons achieved some years ago. We are running the mills non-stop. Gur is our main competitor. If its prices come down, farmers will come to us and vice versa. But for the moment, we are satisfied. Cane supply to mills in Dera Ismail Khan and Charsadda has also improved a lot,” he said.

Why do growers often prefer gur making? “The gur agents make advance agreements to farmers, and payments are made for standing crops. They provide seasonal/crop-based loans to growers which are used for buying inputs and meeting their domestic needs. How could farmers sell their cane crop to mills in this situation?” asks Jehangir Khan, a farmer.

“The millers, conversely, wait for farmers to bring their crop to the mills which they have already pledged to gur agents against return of advance payments or easy loans. Cane crop is also bought by cane-juice-sellers on advance payments. The millers should make agreements with cane farmers as is done in case of tobacco crop. They should purchase cane crop at fixed and better rates. Why can’t they make advance payments or provide loans to farmers like their competitors at the start of the season?” he asks.

Jehangir said farmers at present had to go to mills to get indents for their cane and suggested that it should be the other way round. “They need to reach farmers like their gur competitors. The millers in the past had opened local cane purchase/dumping centres. The farmers would bring their produce to these centres and the millers would pick it from there. This needs to be revived,” he suggests.

“Besides a fixed price for certain fixed sugar-content, farmers should get enhanced payment for produce with better sugar-content. This will be an incentive for them,” he maintains.

“In Punjab a large quantity of gur, named duplicate is being produced by mixing gur with glucose and other ingredients. It has not only a good look but also tastes better and is cheaper.

Around 100kg of duplicate is prepared in an hour. Farmers in Khyber Pakhtunkhwa are also planning to start producing this variety.

This means that more and more cane will be used for making gur in future. Millers will have to be more responsive and competitive to avoid this scenario,” Yousaf Shah, another farmer, adds.

“Farmers opt for gur making for two other reasons as well. One: they have to feed their livestock with cane-grass which necessitates intermittent cutting of crop as allowed by gur manufacturers and not simultaneous harvesting of the entire crop as needed by mills. Two: they use gur in their homes which they make even if they take bulk of their crop to mills. This can be avoided by providing fodder seeds and supplying farmers with sugar on deferred payment,” says Shah.

Khyber Pakhtunkhwa produces about 1.3 million tons of sugarcane. It can produce up to 0.1 million tons of sugar if cane supply to mills is improved.

But the problem is that the area under cane cannot be increased because of its competition with wheat or maize and water shortage. “Investment in research for high-yielding cane varieties and increasing per acre yield with better sugar content is the need of the hour. Millers should also help, ” Jehangir argues.

Missing the point

Missing the point Livestock department needs to be empowered to oversee veterinary drugs and services

By Tahir Ali (The News 27-2-2011)

Strangely enough, livestock and dairy development department in Pakistan has no powers to authorise and monitor veterinary drugs and services, which is obstructing hassle-free delivery of these services and creating complications for the stakeholders, primarily farmers.

Though the livestock department is better equipped, trained and capable of doing the work well, it has been denied these powers and the sector is being supervised by the health department at both federal and provincial levels.

At present, there is no separate veterinary drugs’ registration and regulation authority in the country. The health department issues licenses to animal druggists, monitors veterinary medicines and services and checks the sale of counterfeit veterinary drugs but it obviously cannot do that efficiently not only for being overburdened with responsibilities but also for being not properly trained for the purpose.

There is a dire need to shift the onus of registration and regulation of veterinary drugs and services to its parent and concerned livestock department rather than assigning the task to an already overburdened health department. The move will ensure efficient and effective delivery of veterinary drugs and services and improve their monitoring and reporting systems.

President all Pakistan Veterinary Medical Council Muhammad Arshad, says “Departments that have been formed for a purpose should be dealing with their respective task and not vice versa as is the case here. The health department officials are simply not qualified and lack the required expertise to oversee the veterinary sector properly. These responsibilities should be handed over to the livestock or food and agriculture department,’ he says adding, “There are highly qualified specialists with the livestock department who know the drugs and the nature and requirements of veterinary ailments. They will ensure effective monitoring of the sector.”

But, unfortunately, the health department has taken advantage of its clout to first take and later maintain the sector under its ambit though it is utterly unjustified if considered from the point of merit and farmers’ welfare,” he says.

Dr Ghulam Muhammad, a veterinary expert, says a separate veterinary drugs’ authority under the livestock department was urgently needed and the government should legislate for the purpose. “The posts of veterinary assistants can be upgraded and they can be authorised to ensure the availability of veterinary drugs and services to farmers. They are trained and possess the requisite expertise for working in the sector and will be dealing it better which will help farmers,” he says.

“Health inspectors or officials may be competent persons but only a veterinary expert knows well if a particular animal-specific drug or equipment is permissible or otherwise,” he argues.

“At present, substandard livestock drugs are openly sold in the market. To add to farmers’ woes, there are countless livestock quakes providing unauthorised diagnosis, therapy and prescription services to farmers with the result that the livestock suffers from ailments like low productivity of milk and meat,” Dr Ghulam informs.

Arshad says there are over 100 lawful veterinary manufacturers and about 200 veterinary drug importers in the country. “Illegal manufacturers are in thousands and are supplying animal drugs under the garb of herbal drugs. There are laws to stop the practices but health department officials have done nothing about it,” he says.

Director General Livestock and Dairy Development Khyber Pakhtunkhwa, Dr Sher Muhammad, says his department intended to legislate and request the government to hand over the responsibility of checking and monitoring the veterinary drugs and services to the livestock department. “Devolution of departments to the provinces is underway. When this process completes, we will come to know which components of the department are assigned to the provinces. Then we’ll prepare legislation and request the government to pass it from provincial assembly,” he says.

Haji Naimat Shah, vice president of Anjuman-e-Kashtkaran Khyber Pakhtunkhwa, is unhappy that manufacturing and selling of substandard veterinary drugs and unauthorised services to farmers continue unabated.

“Weak coordination and communication between the livestock and health departments cause delay in taking actions against the culprits selling, for example, fake veterinary drugs and working as animal doctors unlawfully”, he says.

While several veterinary drugs require freezing temperatures to maintain their efficacy, they are kept at normal temperature for lack of refrigerators and air-conditioners at the stores.

The livestock and dairy sector accounts for 52 percent of agriculture, 11 percent of gross domestic product, around 9 percent of exports, and feeds about 50 to 60 million people in the country. It also accounts for 51 percent of provincial GDP in the Khyber Pakhtunkhwa.

More than 90 percent livestock is owned by small farmers and it is their main source of income. By patronising and developing the livestock sector, their financial position can be improved which will push them away from extremist forces in the country.

Even though total veterinary drug sales exceed billions of rupees per year in the country, it covers just about 10 percent of the total livestock industry potential in Pakistan. With a very large livestock population and progressing poultry industry, there is great potential for investment in the veterinary pharmaceuticals.

Officials of the health department agree that there is a need to do more work on the subject to improve the efficiency of the livestock department. Drug Act of 1964 would have to be amended to give the livestock department more powers. “We should think and plan about increasing the capacity of the livestock department as the health department might lack the required expertise,” says a health official who does not want to be identified.

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