The IMF and our taxes

The Pak Banker - - 4EDITORIAL - Dr Ikra­mul Haq

INa re­cent re­port, 'Un­lock­ing Pak­istan's Tax Rev­enue Po­ten­tial', re­leased on De­cem­ber 4, 2015, the In­ter­na­tional Mon­e­tary Fund has en­dorsed es­ti­mates given in one of my ar­ti­cles in th­ese pages ('Hurt­ing the poor', June 14, 2013) that the real tax po­ten­tial of Pak­istan is not less than Rs8 tril­lion at the fed­eral level alone, and that the Fed­eral Board of Rev­enue is un­der per­form­ing by not op­ti­mis­ing tax col­lec­tion for the last many years.

The IMF has ob­served in cat­e­gor­i­cal terms that "de­spite re­cent progress un­der the pro­gramme, Pak­istan's tax rev­enue re­mains very low rel­a­tive to com­para­tor de­vel­op­ing coun­tries and the tax ef­fort ex­pected for the coun­try's level of de­vel­op­ment. This re­flects nar­row tax bases, over­gen­er­ous tax con­ces­sions and ex­emp­tions, weak and frag­mented rev­enue ad­min­is­tra­tions, and struc­tural fea­tures of the econ­omy".

The IMF has not added any­thing new. In de­tailed dis­cus­sion in 'Tax­ing the un­taxed' (The News, Oc­to­ber 25, 2015) this writer had shown that in Pak­istan, mil­lions of mo­bile users paid ad­vance in­come tax of Rs44.7 bil­lion in fis­cal year 2014-15 but only 982,525 filed re­turns. The vast ma­jor­ity of per­sons sub­jected to with­hold­ing taxes, hav­ing in­come below tax­able lim­its, do not file re­turns due to fear of high­hand­ed­ness of tax ma­chin­ery or ex­ploita­tion by un­scrupu­lous tax ad­vis­ers.

It is thus not sur­pris­ing that the reg­is­tered per­sons un­der the Gen­eral Sales Tax (GST) are only 178,190 out of about 1.4 mil­lion re­tail­ers and 3.4 mil­lion com­mer­cial and in­dus­trial elec­tric­ity users. The IMF has rightly con­cluded that "th­ese un­der­ly­ing fea­tures of the tax land­scape leave Pak­istan with an un­usu­ally heavy re­liance on in­di­rect taxes col­lected from very nar­row tax bases and vul­ner­a­ble to fluc­tu­a­tions in im­port prices".

The real is­sue of tax­a­tion in Pak­istan is lack of a ju­di­cious bal­ance be­tween di­rect and in­di­rect taxes. Ap­peas­ing the rich and lav­ish spend­ing on the elite are the main rea­sons for the huge bud­getary gap. Such poli­cies are con­tin­u­ously in­creas­ing the mis­eries of the peo­ple. Around 12.7 per­cent of Pak­istan's pop­u­la­tion now lives below $1.25 per day, which is cat­e­gorised as 'ex­treme poverty'. Non-col­lec­tion of taxes from the rich and gen­er­ously ex­tend­ing amnesties/ex­emp- tions/con­ces­sions is the hall­mark of our un­just tax sys­tem. It is an ir­refutable fact that the share of di­rect taxes in GDP dur­ing the last 20 years was never more than three per­cent.

Un­for­tu­nately, the IMF in 'Un­lock­ing Pak­istan's Tax Rev­enue Po­ten­tial' and Jorge Martinez-Vazquez & Mushar­raf Ra­sool Cyan in their book, 'The Role of Tax­a­tion in Pak­istan's Re­vival', have failed to un­veil the fal­lacy of the FBR's claim that the share of di­rect taxes is 37 per­cent in to­tal tax col­lec­tion. One won­ders how they have ac­cepted the cooked up fig­ures of the FBR.

In Pak­istan's in­come tax law, most of the col­lec­tion is through in­di­rect taxes that are cam­ou­flaged as di­rect taxes. Th­ese pre­sump­tive and trans­ac­tional taxes have noth­ing to do with the in­come of a per­son - the in­ci­dence of th­ese is passed on to the clients/cus­tomers/users. The share of such taxes dur­ing fis­cal year 2014-15, out of the to­tal in­come tax col­lec­tion of Rs1096 bil­lion, was 30 per­cent. That means that the ra­tio of di­rect tax col­lec­tion in to­tal col­lec­tion is no more than 25 per­cent, not 37 per­cent as men­tioned by the IMF in its re­port and the FBR in 'Bian­nual Re­view', Jan­uary-June, 201415. The main em­pha­sis of the IMF's re­port is im­prov­ing tax-to-GDP ra­tio, but there is no men­tion of how the money col­lected is ruth­lessly wasted in perks for the rul­ing elites.

The higher taxes in the West are jus­ti­fied since the state takes cares of its cit­i­zens. In Pak­istan the govern­ment is obliv­i­ous of its obli­ga­tion to pro­vide se­cu­rity of life and prop­erty, what to speak of ful­fill­ing the fun­da­men­tal needs of cit­i­zens - the de­nial of the fun­da­men­tal right to free education un­der Ar­ti­cle 25A is the most glar­ing ex­am­ple of ap­a­thy. Re­gres­sive tax­a­tion, re­tard­ing growth, has re­sulted in a shrink­ing middle class in Pak­istan.

Few Pak­istani fam­i­lies have per capita in­come of $4,286 - the min­i­mum bench­mark set by the World Bank to qual­ify as a middle-class per­son. A lit­tle more than 90 per­cent of Pak­istani adults had wealth less than $10,000 in 2015 (the av­er­age net worth of Pak­istani par­lia­men­tar­i­ans is $900,000, yet few of them pay in­come tax). The share of Pak­istani adults with wealth be­tween $10,000 and $100,000 in 2015 was 9.8 per­cent while only 0.1 per­cent adults owned wealth in the range of $100,000 and $1 mil­lion, as per a re­port com­piled by Credit Suisse.

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