Tax woes

The Pak Banker - - FRONT PAGE -

Ac­cord­ing to ex­perts, the tax­a­tion sys­tem in the coun­try is ex­tremely un­fair, in­ef­fi­cient and cor­rupt. Those who are in the tax net are fleeced while many who should be in the net are not there. 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. 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.

Salaried per­sons pay some 20 per cent of their in­come as in­come tax. This is de­ducted be­fore salary is paid. For most of the goods they buy they pay a 16pc sales tax on them. In ad­di­tion, there are ex­cise taxes that are charged on a num­ber of goods. And a hefty tax amount is paid when one buys 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 one makes, 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 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 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 in­ef­fi­cien­cies in the tax sys­tem are just too many to point out. Ser­vice providers and ven­dors, fil­ers or not, quote their prices 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.

The over­rid­ing need is to lower in­di­vid­ual tax rates, widen the tax net, come up with a scheme to re­pay the re­funds owed to tax­pay­ers, re­form cer­tain cor­po­rate taxes that are ad­versely af­fect­ing capital for­ma­tion. The way the tax sys­tem stands, it is the sys­tem of a preda­tory and ex­tor­tion­ist state. Let the new PTI government in­tro­duce el­e­ments of eq­uity, fair­ness, pro­gres­siv­ity, ef­fi­ciency, uni­ver­sal­ity and hon­esty in it.

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