The IMF and our taxes
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.