With­hold­ing tax co­nun­drum

The Pak Banker - - 4EDITORIAL - Ma­lik Muham­mad Ashraf

GOV­ERN­MENTS all over the world im­pose taxes to raise rev­enues to be able to in­cur ex­pen­di­tures on de­vel­op­ment and strength­en­ing the econ­omy, through a sus­tain­able process of growth, with the ul­ti­mate ob­jec­tive of pro­mot­ing well be­ing of the peo­ple. Gen­er­a­tion of ad­di­tional re­sources through taxes for the ever in­creas­ing needs to achieve these ob­jec­tives, there­fore, is an in­dis­pen­si­ble and the most de­sir­able pol­icy ini­tia­tive and the only way to im­prove the tax to GDP ra­tio. In Pak­istan, re­gret­tably, the tax GDP ra­tio is dis­mally low. In com­par­i­son to 39% in UK, nearly 27% in USA, Euro­pean coun­tries and Ja­pan and 17% in In­dia it stands at slightly over 9%. En­hanc­ing and di­ver­si­fy­ing of tax gen­er­at­ing av­enues, broad­en­ing the tax base and doc­u­men­ta­tion of the econ­omy are of piv­otal im­por­tance in re­gards to lift­ing the tax GDP ra­tio and the gen­er­a­tion of rev­enues from in­ter­nal sources. There is a na­tional con­sen­sus on broad­en­ing of the tax base by bring­ing more and more seg­ments of the so­ci­ety, busi­ness con­cerns and in­di­vid­u­als into the tax net. But un­for­tu­nately when­ever an ef­fort is made by the gov­ern­ment in that di­rec­tion, the move is re­sisted by the busi­ness com­mu­nity as well as the op­po­nent po­lit­i­cal par­ties in a show of sol­i­dar­ity with the busi­ness com­mu­nity and the peo­ple likely to be tar­geted by the new pro­posal just to ex­tract po­lit­i­cal mileage.

It is be­lieved that the in­for­mal econ­omy of Pak­istan is far big­ger than the for­mal econ­omy which in­di­cates how much tax po­ten­tial ex­ists in the coun­try which needs to be tapped to get rid of the peren­nial prob­lem of bud­get deficit which is the mother of all eco­nomic ills. It goes to the credit of the present gov­ern­ment that in spite of ex­is­tence of myr­iad of de­bil­i­tat­ing fac­tors and dis­mal state of the econ­omy it has re­duced the bud­get deficit from 8.4 % to 3.1% within the span of two and half years through pru­dent man­age­ment and ra­tio­nal struc­tural re­forms. The econ­omy as a whole has shown vis­i­ble signs of re­cov­ery which has not only been cor­rob­o­rated by SBP re­ports but also en­dorsed by the in­ter­na­tional lend­ing in­sti­tu­tions and rat­ing agen­cies.

The bud­get for 2015-16 pre­sented by the PML-N gov­ern­ment en­vis­aged a strat­egy for in­creased re­liance on broad­en­ing of the tax-base and con­sol­i­dat­ing the eco­nomic gains of the last two years. A con­scious ef­fort was made to ex­pand the tax net through the im­po­si­tion of 0.6% with­hold­ing tax on bank­ing trans­ac­tion for the non-fil­ers of the tax re­turns. It is a re­al­ity that in our coun­try there is a well en­trenched cul­ture of tax eva­sion and as such the gov­ern­ment can­not rely on only per­sua­sive and vol­un­tary mech­a­nisms to en­cour­age and en­hance the taxbase. A well-planned and a fool-proof mech­a­nism and steps are re­quired to achieve the de­sired re­sults. The im­po­si­tion of with­hold­ing tax on bank­ing trans­ac­tions made by the non-fil­ers was un­doubt­edly a move in the right di­rec­tion de­signed to force the peo­ple who were earn­ing tax­able in­come and not pay­ing taxes to con­trib­ute to the gov­ern­ment rev­enues to ful­fill their na­tional obli­ga­tions.

But un­for­tu­nately the busi­ness com­mu­nity of the coun­try in­stead of sup­port­ing the gov­ern­ment move re­jected the with­hold­ing tax out rightly which now has be­come a con­tentious is­sue be­tween them and the gov­ern­ment. They threat­ened launch a coun­try wide protest against the pro­posed fis­cal mea­sure notwith­stand­ing the fact that the fi­nance min­is­ter re­peat­edly made it clear that the new tax pro­posal was tar­geted against those who were ca­pa­ble of pay­ing the tax but some­how man­age to stay away from the tax net. This re­ac­tion by the busi­ness com­mu­nity is quin­tes­sen­tial of the cul­ture of re­sis­tance to taxes with­out any jus­ti­fi­ca­tion and the steps to doc­u­ment the econ­omy. The gov­ern­ment with a view to re­solve the is­sue am­i­ca­bly and tak­ing the busi­ness com­mu­nity on board de­cided to hold ne­go­ti­a­tions with the busi­ness com­mu­nity. Ac­cord­ingly the Fi­nance Min­is­ter en­gaged the rep­re­sen­ta­tives of the busi­ness com­mu­nity in a di­a­logue on FBR re­lated is­sues in­clud­ing the im­po­si­tion of 0.6% with­hold­ing tax on 8-9th July and a nine­teen mem­ber com­mit­tee com­pris­ing rep­re­sen­ta­tive of traders, Cham­bers of Com­merce and FBR was tasked to de­lib­er­ate on the is­sue and make rec­om­men­da­tions. The com­mit­tee reached an agree­ment on (i) re­duc­ing the with­hold­ing tax to 0.3% for non-fil­ers up to 30th Septem­ber (ii) fil­ing of tax re­turns by the non-fil­ers for the out­go­ing years by 30th Septem­ber (iii) Ex­ten­sion of sched­ule-III in re­gards to sales tax to be con­sid­ered on case to case ba­sis (iv) de­ter­mi­na­tion of turn over tax ac­cord­ing to var­i­ous trade and sec­tors be­tween FPCCI and FBR (v) FBR and busi­ness com­mu­nity shall hold in depth and mean­ing­ful par­leys to re­solve the is­sues re­lated to fil­ing of taxes. The banks were ac­cord­ingly ad­vised to deduct the with­hold­ing tax at the rate of 0.3 % and make re­fund in cases where it al­ready had made de­duc­tions at the rate of 0.6%.

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