Tax system ills
Pakistan's taxation system suffers from many ills. It is cumbersome and ridden with corruption. Not the least of its shortcoming is the imbalance between direct and indirect tax. Most of the revenue comes from indirect taxes which are considered regressive and hard on the poor. FBR's recently released yearbook for FY18 shows that despite all hype about broadening the tax net, FBR's direct tax collection remains poor at about 40 percent of the total; the remaining being of course indirect taxes of various kinds such as sales tax, customs and the Federal Excise Duty.What is worse, bout 70 percent of total direct tax collection is in the 'withholding tax' ( WHT) mode. This includes deductions from salaries by employers, deductions on contracts, on cash withdrawals, on dividends and so forth. Here too, it is important to note that top ten WHT spinners contributed 86.7 percent in FY18 from 85.3 percent two years ago.
According to available figures, 'advance tax' collection, which like the WHT is also collected in indirect mode, contributed 22 percent to total direct tax collection. These two indirect heads of direct taxation alone make up for 90 percent of total direct taxation, which begs the question why does the FBR has a huge field staff when in fact it only collects about 96 percent of taxes as indirect taxes or quasi-indirect taxes (WHT and advance), many of which are also regressive in nature.Dr Hafiz Pasha and Shahid Kardar noted in their recent proposal to deal with short term challenges to the economy, "the unbridled expansion of the withholding tax regime is a tacit acceptance by FBR that it is unable to develop a modern tax filing and documentation- based system."They also point out that the distribution of revenue from various WHT is extremely skewed. "The top 23 sources contribute 97.7 percent of the tax collection, while the remaining 41 sources have an extremely small share of just 2.3 percent."
It may be recalled here that of the 21 tax offices FBR had at the time of publishing of Masoud Naqvi's Tax Reform Commission in 2016, only six offices collected enough taxes through assessment to cover those offices' administrative cost and salary. The FBR has not published its tax directory for FY17 this year, data from which could be used to shed some light on the growth in the number of tax filers. The department's yearbook is also silent on the size of the tax net in terms of filers and active tax payers and analysis of their contribution thereof. But on the face of it, FBR's performance has only worsened as far as direct tax collection ' with returns' is concerned. Only 2.7 percent of direct tax was collected ' with returns' in FY18, down from 3 percent in the year before.
Here is a piece of information that should enforce serious rethinking of tax policy and administration: more than 50 percent of total FBR taxes ( 53% to be exact in FY18) are collected through indirect taxes on petroleum products. Little wonder that in his recent media interview former finance minister Miftah Ismail frustratingly said that most of FBR's functions - including analytics, sending of notices, audit and customs - should be privatised. While that is too drastic of a direction and difficult to defend on various grounds, the nation does await a clear- cut reform action plan for both tax policy and administration from the newly elected PTI government.