Time for counter-in­fla­tion­ary di­rect taxes

The Pak Banker - - 4editorial - Aftab Ah­mad

TAX col­lec­tion has been one of the low­est in the re­gion be­cause of a poor tax cul­ture. The coun­try's tax rev­enue stood at just over nine per cent of the GDP in fis­cal year 2009-10 com­pared to 12.9 for In­dia and 14.2 per cent for Sri Lanka.

As a re­sult of lower tax col­lec­tion, the govern­ment spend­ing on ed­u­ca­tion and health stood at around two and 0.5 per cent of the GDP re­spec­tively one of the low­est in the re­gion and the world.

Be­sides, the coun­try has to de­pend heav­ily on in­ter­nal and ex­ter­nal debts and it falls back on IMF sup­port, when­ever there is an in­ter­nal or ex­ter­nal shock to the econ­omy.

If there is a po­lit­i­cal will to boost tax rev­enue in or­der to bring down govern­ment's bud­get deficit, con­tain in­fla­tion and make the econ­omy sel­f­re­liant, it may not be dif­fi­cult to tap po­ten­tial sources that are still ei­ther un­taxed or un­der-taxed.

While agri­cul­ture has a share of nearly 22 per cent in the GDP, its con­tri­bu­tion to tax rev­enue is only one per cent. Sim­i­larly, the ser­vices sec­tor con­trib­utes 26 per cent of the to­tal tax rev­enue, while it ac­counts for the high­est share of 54 per cent in the GDP. The man­u­fac­tur­ing is the only sec­tor that pays taxes much more than its share in the GDP.

Sim­i­larly, govern­ment de­pends heav­ily on in­di­rect taxes such as GST, cus­toms duty and ex­cise duty, which are uni­ver­sally re­garded as re­gres­sive, since these taxes are ul­ti­mately passed on to con­sumers, ma­jor­ity of whom are poor. The in­di­rect taxes still ac­count for 68 per cent of the govern­ment's to­tal tax rev­enue. The share of di­rect taxes con­sid­ered as pro­gres­sive since they are paid by the rich and well-to-do is still con­sid­er­ably lower than its po­ten­tial.

Be­sides, with­hold­ing taxes have been mixed up with di­rect taxes, al­though they do not qual­ify as di­rect taxes. To quote Eco­nomic Sur­vey, 2009-10, 'de­spite the im­pres­sive in­crease, how­ever, the ac­tual in­come tax base is low since di­rect tax col­lec­tion has been boosted since the 1990s by the in­tro­duc­tion of the with­hold­ing tax (WT) regime'.

Then the in­come tax is mostly be­ing col­lected at source from the salaried peo­ple, em­ployed in govern­ment de­part­ments, pub­lic sec­tor en­ter­prises and the pri­vate sec­tor. Other than the afore­said salaried tax­pay­ers and those pay­ing with­hold­ing tax, the num­ber of peo­ple pay­ing di­rect taxes con­sti­tutes a small per­cent­age of po­ten­tial in­come tax pay­ers.

Farm in­comes have so far re­mained ex­empted from tax pay­ment. Sim­i­larly, the self-em­ployed in the ser­vices sec­tor, real es­tate earn­ings, busi­nesses in the in­for­mal econ­omy and those en­joy­ing tax ex­emp­tions, are not pay­ing any in­come tax.

The non-pay­ment of taxes by a sig­nif­i­cant per­cent­age of po­ten­tial tax­pay­ers is de­priv­ing govern­ment of much-needed share of rev­enue po­ten­tial. The un­taxed bil­lions are also cre­at­ing the prob­lem of con­spic­u­ous con­sump­tion, os­ten­ta­tion and waste­ful ex­pen­di­ture that is con­stantly push­ing up the rate of in­fla­tion.

A cer­tain per­cent­age of the tax­e­vaded in­come is find­ing its way into the com­mod­ity mar­kets by way of spec­u­la­tive in­vest­ment, ag­gra­vat­ing in­fla­tion. The un­taxed in­come bo­nanza has also been cre­at­ing de­mand in ex­cess of the lo­cally avail­able sup­ply thereby re­duc­ing ex­portable sur­plus, rais­ing im­port bill and widen­ing the gap be­tween the im­ports and ex­ports.

In or­der to con­tain in­fla­tion, and bring down the trade and cur­rent ac­count deficits to a sus­tain­able level, it has be­come im­per­a­tive for the govern­ment to bring all such un­taxed in­come into the tax net.

There is a mis­con­cep­tion among some peo­ple that all taxes are in­fla­tion­ary. No doubt, in­di­rect taxes such as GST, cus­toms duty and ex­cise duty are of an in­fla­tion­ary na­ture since they are passed on to con­sumer by rais­ing the price of the com­mod­ity on which the tax has been levied.

Sim­i­larly, in­crease in the price of oil, elec­tric­ity and gas has to be borne by the con­sumer di­rectly and, at the same time, it raises the pro­duc­tion costs/prices of lo­cally pro­duced com­modi­ties that he con­sumes.

How­ever, tax levied on big in­comes is not in­fla­tion­ary, since the in­ci­dence and the im­pact of the tax are on the same per­son and it can not be passed on.

On the con­trary, such di­rect taxes have been called 'counter-in­fla­tion­ary', since they re­duce the ca­pa­bil­ity of the tax-payer to squan­der his money or use it for spec­u­la­tive in­vest­ment.

Di­rect taxes col­lected from the rich on their in­comes play a sig­nif­i­cant role in check­ing con­spic­u­ous con­sump­tion. They are an im­por­tant source of govern­ment rev­enue the world over and help in­crease spend­ing on ed­u­ca­tion, health­care and hu­man re­source devel­op­ment. Over the last few years, taxto-GDP ra­tio has gone down to around nine per cent, while the govern­ment ex­pen­di­ture is on the in­crease.

As a re­sult, the bud­get deficit has risen to over six per cent; pub­lic debt has moved up to 63 per cent of the GDP and govern­ment de­pen­dence on the IMF and other donors has in­creased alarm­ingly.

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