Tax sys­tem ills

The Pak Banker - - FRONT PAGE -

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.

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