An ex­tor­tion­ist state

The Pak Banker - - MARKETS/SPORTS - Faisal Bari

The tax­a­tion sys­tem in the coun­try is ex­tremely un­fair, bi­ased, ex­tor­tion­ist, in­ef­fi­cient and cor­rupt. Those who are in the tax net are fleeced while many who should be in the net are not there (bias and un­fair­ness). The state gets money from wher­ever it can im­pose taxes, a lot of times on a pre­sump­tive and with­hold­ing ba­sis, ir­re­spec­tive of the im­pact that its ac­tions have on the in­cen­tives of the play­ers in ques­tion (ex­tor­tion and in­ef­fi­ciency). One need not say any­thing about cor­rup­tion in the sys­tem: any­one who has dealt with tax of­fi­cials and tax is­sues will know what is meant here.

As a salaried per­son I pay some 20 per cent of my in­come as in­come tax. This is de­ducted be­fore salary is paid to me. For most of the goods I con­sume, I pay a 16pc sales tax on them. In ad­di­tion, there are ex­cise taxes that are charged on a num­ber of goods I con­sume. And I pay a hefty tax amount when I buy petrol: there is lack of trans­parency in how much tax the state is charg­ing on ev­ery litre of petrol, but it is a sig­nif­i­cant amount. So, out of ev­ery hun­dred ru­pees I make, at least Rs40 go to the state through var­i­ous forms of tax­a­tion.

The other side of the equa­tion is about what peo­ple who do pay taxes get in re­turn. Most salaried peo­ple in the tax net do not send their chil­dren to state schools or state-funded health ser­vices, even their wa­ter and se­cu­rity are, in many cases, pri­vately paid for. But, for many, even this would be ac­cept­able if their tax money was reach­ing the poor and de­serv­ing. There are large ques­tions about the ef­fi­ciency of pub­lic ex­pen­di­tures as well as ex­pen­di­ture pri­or­i­ties. The qual­ity of ed­u­ca­tion be­ing given in pub­lic schools is, by and large, very poor. The state-funded health sec­tor is limp­ing. Even tak­ing the Be­nazir In­come Sup­port Pro­gramme into ac­count, there is lit­tle in the way of a ' wel­fare state' that is avail­able to the poor.

The real rub lies in the un­fair­ness of the tax sys­tem. Hardly a mil­lion peo­ple file their tax re­turns. The real rub lies in the un­fair­ness of the tax sys­tem. Hardly one mil­lion or so peo­ple file their tax re­turns. Even among the fil­ers, most of the non-salaried un­der­re­port their in­come sig­nif­i­cantly. The doc­tor I go to does not give any re­ceipts for con­sul­ta­tions un­less one in­sists on it. Even small op­er­a­tive pro­ce­dures are off the books. This ex­tends to most pro­fes­sional ser­vice providers, busi­ness­men and traders.

The state has failed mis­er­ably in both ex­tend­ing the tax net and in be­ing able to re­duce un­der­re­port­ing of those who do file re­turns. And it is not sim­ply due to lack of data that the tax au­thor­i­ties have been un­able to ex­tend the net or catch un­der­re­port­ing. The main rea­sons seem to be em­bed­ded in the po­lit­i­cal econ­omy of the struc­tures we have cre­ated. With most siz­able trans­ac­tions in so­ci­ety now linked to na­tional iden­tity card num­bers, the tax au­thor­i­ties have a lot of data that can be used to find non-fil­ers and get a bet­ter han­dle on un­der­re­port­ing. But the in­for­ma­tion is not be­ing used. All who book and/or buy cars have to sub­mit their iden­tity card num­bers. Why are tax au­thor­i­ties not ask­ing non-fil­ers about their source of in­come for buy­ing cars? As a com­pany we are re­quired to deduct a cer­tain amount on be­half of ev­ery ven­dor who pro­vides us with any good or ser­vice. A lot of bank­ing trans­ac­tions also gen­er­ate sim­i­lar in­for­ma­tion. More­over, one of the rea­sons we started the dis­tinc­tion be­tween fil­ers and non-fil­ers, even though the dis­tinc­tion cre­ates un­wanted in­ef­fi­cient con­se­quences, was to get more in­for­ma­tion on non-fil­ers. Why is that in­for­ma­tion now not be­ing ef­fec­tively har­nessed?

The in­ef­fi­cien­cies in the tax sys­tem are just too many to point out. Ser­vice providers and ven­dors, fil­ers or not, quote their prices to us (we are a small but for­mal sec­tor and doc­u­mented or­gan­i­sa­tion) net of the with­hold­ing tax. It is un­der­stand­able on part of non-fil­ers but even fil­ers of in­come tax force us to pay with­hold­ing tax on their be­half. These fil­ers are not declar­ing their full in­come and so can­not get the with­hold­ing tax ad­just­ment. The re­sult is that where we do not have the op­tion of not buy­ing a ser­vice from such ven­dors we end up pay­ing in­come tax on their be­half. How is that fair? And why are we pe­nal­is­ing those who pay taxes to pay for those who are not pay­ing their share? This is just a small ex­am­ple of the kind of dis­tor­tions we live with. With the ar­rival of pro­vin­cial rev­enue au­thor­i­ties, with the same mind­set as the fed­eral au­thor­i­ties, com­pli­ance costs have bal­looned and un­in­tended con­se­quences have ex­ploded ex­po­nen­tially. But the pres­sure on tax au­thor­i­ties, to gen­er­ate more rev­enue any which way they can, is such that it is un­likely that any ra­tion­al­i­sa­tion will hap­pen. "In line with Mian Nawaz Sharif's vi­sion the prime min­is­ter has in­structed me to try to lower in­di­vid­ual tax rates, widen the tax net, come up with a scheme to re­pay the re­funds owed to our tax­pay­ers, re­form cer­tain cor­po­rate taxes that are ad­versely af­fect­ing cap­i­tal for­ma­tion."

The above is the text of a tweet that Mif­tah Is­mail sent right af­ter the an­nounce­ment that he had been made the ad­viser on fi­nance, rev­enue and eco­nomic af­fairs. We will not ask what has been done about the ' vi­sion' of Nawaz Sharif in the first four and a half years of gov­ern­ment. But we wish Mr Is­mail the best. The way the tax sys­tem stands, it is the sys­tem of a preda­tory and ex­tor­tion­ist state. We hope Mr Is­mail can in­tro­duce el­e­ments of eq­uity, fair­ness, pro­gres­siv­ity, ef­fi­ciency, uni­ver­sal­ity and hon­esty in it. Or soon it will be time for a ci­ti­zen-led tax re­volt.

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