Pak­istan's tax­a­tion cri­sis

The Pak Banker - - 4EDITORIAL - Sakib Sherani

THE con­tours of Pak­istan's tax­a­tion cri­sis are well known by now. Only 0.3pc of the pop­u­la­tion pays in­come tax and files a tax re­turn - one of the low­est ra­tios in the world. Around 7 mil­lion Pak­ista­nis are es­ti­mated to be el­i­gi­ble to pay in­come tax, but only less than 0.5 mil­lion do. (Of course, mil­lions of Pak­ista­nis pay a small por­tion as in­come tax in­di­rectly via de­duc­tions made on tele­com ser­vices, for ex­am­ple. How­ever, the fo­cus of this anal­y­sis is on those well-off and tax-el­i­gi­ble Pak­ista­nis who should be pay­ing vol­un­tar­ily via the tax-fil­ing regime.)

Those at the top of the in­come food chain are delin­quent in pay­ing their due share of taxes, bar­ring a hand­ful, while the bur­den falls un­equally on those at the bot­tom of the pyra­mid who pay via in­di­rect tax­a­tion. Be­yond the is­sue of ver­ti­cal eq­uity is the is­sue of hor­i­zon­tal eq­uity - ie the same lev­els of in­come, but from dif­fer­ent sources, are taxed dif­fer­ently. This oc­curs both due to favourable tax pol­icy dis­crim­i­nat­ing to the ben­e­fit of cer­tain seg­ments of the econ­omy (such as agri­cul­tural in­come), as well as due to for­bear­ance and un­due re­straint in en­force­ment in the case of pow­er­ful in­ter­ests such as par­lia­men­tar­i­ans.

Around 75pc of the di­rect in­come tax col­lected is from busi­nesses, and the rest from in­di­vid­u­als. How­ever, within busi­nesses, only 21pc of the reg­is­tered com­pa­nies paid in­come tax, with the vast ma­jor­ity be­ing tax non­fil­ers. Tax eva­sion by in­di­vid­u­als is on an even larger scale.

The state has to re­store its moral au­thor­ity to tax by tax­ing its elite con­stituents.

In terms of the ma­jor sec­tors of the econ­omy, in­dus­try car­ries the bur­den of tax­a­tion by con­tribut­ing an es­ti­mated 73pc to to­tal tax rev­enue of the gov­ern­ment. Agri­cul­ture has a share of less than 2pc in to­tal tax col­lected, while the tax con­tri­bu­tion of the ser­vices sec­tor is less than half its share of GDP. Within the ser­vices sec­tor, the bulk of the con­tri­bu­tion comes from fi­nan­cial ser­vices and telecom­mu­ni­ca­tions. Traders, at the fore­front of ag­i­ta­tion against the 0.3pc with­hold­ing tax re­cently in­tro­duced by the gov­ern­ment, ac­count for 18pc of GDP - but only 1pc of tax rev­enue.

While 55pc of gov­ern­ment tax rev­enue comes from in­di­rect taxes, al­most 70pc of the col­lec­tion shown un­der di­rect taxes is in the form of with­hold­ing tax - ie tax col­lected on be­half of the Fed­eral Board of Rev­enue (FBR). Hence, the FBR's own ef­forts yield only around 13.5pc of yearly tax col­lec­tion.

Given this dis­mal state of af­fairs, the gov­ern­ment has made some no­tice­able - and praise­wor­thy - moves on the tax re­form front. It has made a break­through by pub­lish­ing tax di­rec­to­ries of all tax fil­ers and, sep­a­rately, of par­lia­men­tar­i­ans. It has con­sti­tuted an able Tax Re­forms Com­mis­sion, and ap­pointed, re­cently, a rev­enue tsar.

It claims to have sent 185,000 no­tices to po­ten­tial new taxpayers, while be­gin­ning a slow and grad­ual clean-up in the FBR. The au­dit func­tion of the FBR has been re-ac­ti­vated af­ter be­ing dis­as­trously put in cold stor­age for the past 10 years. If it does not re­lent from another break­through move, the gov­ern­ment will have brought the rene­gade whole­sale and re­tail trade into the tax-fil­ing regime with its move of im­pos­ing a 0.3pc with­hold­ing tax on bank­ing trans­ac­tions of non-fil­ers. Fi­nally, un­der IMF pres­sure, tax ex­emp­tions amount­ing to over 1pc of GDP are be­ing dis­man­tled.

These mea­sures are all long over- due and cred­itable. How­ever, they fall far short of what needs to be done. As a re­sult, the pur­suit of delin­quent taxpayers is tak­ing prece­dence over non-fil­ers; an in­crease in rates of tax is be­ing re­lied on, in­clud­ing on petroleum prod­ucts and im­ports of ba­sic food items, in­stead of base-widen­ing; ex­ist­ing taxpayers - es­pe­cially larger busi­nesses - are bear­ing the brunt of new mea­sures as well as un­rea­son­able de­mands via tax au­dits; and, tax re­funds are be­ing with­held il­le­gally to meet rev­enue tar­gets agreed with the IMF.

Per­haps most tellingly, de­spite progress, the FBR has not been re­struc­tured to the point where it in­duces con­fi­dence in taxpayers. In its cur­rent state, it re­mains a part of the prob­lem rather than be­ing a part of the so­lu­tion. As a re­lated aside, the FBR's co­er­cive and heavy-handed tac­tics against ex­ist­ing taxpayers have earned it an un­prece­dented ac­cu­sa­tion by the Pak­istan Tax Bar As­so­ci­a­tion - of mal­ad­min­is­tra­tion.

The ap­par­ent lack of a strate­gic grand de­sign in im­ple­ment­ing tax re­form is be­com­ing painfully ob­vi­ous. Tax re­form in this coun­try will only suc­ceed when it is se­quenced prop­erly. Two things need to hap­pen be­fore the gov­ern­ment or the FBR be­gin cast­ing their tax net wider.

First and fore­most, the state has to re­store its moral au­thor­ity to tax - and tax­ing its elite con­stituents via a di­rect tax on in­come is an im­per­a­tive first step. Tax avoid­ance and eva­sion by the elites in Pak­istan who are shirk­ing from pay­ing their due share is the ele­phant in the room. Hence, go­ing af­ter the non-tax­pay­ing elites is a nec­es­sary pre-req­ui­site to be able to suc­cess­fully roll out wider re­form of the tax­a­tion struc­ture be­cause of its sig­nalling/demon­stra­tion ef­fect.

Sec­ond, wide-rang­ing, cred­i­ble and mean­ing­ful re­form of the FBR needs to take place. The nexus with the po­lit­i­cal sys­tem needs to be sev­ered, and the FBR needs to be­come a truly au­ton­o­mous in­sti­tu­tion. In ad­di­tion, it needs to un­der­take a full-fledged or­gan­i­sa­tional de­vel­op­ment pro­gramme to align it­self with its mis­sion and goals. Fi­nally, the FBR's IT ca­pa­bil­i­ties and plat­forms need to be sig­nif­i­cantly up­graded and bet­ter in­te­grated.

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