Indirect taxation is a regressive move affecting the poor - make FBR independent instead

Economic, structural reforms in FBR will set the stage for a progressive, sustainable and equitable taxation system.

Waseem Akram Minhas October 13, 2016
Taxes are what make governments work and allow other functions to operate smoothly. It maintains the country’s infrastructure, funds government operations, facilities and the logistics involved in running a country. All across the world, governments’ levy taxes from its citizens to generate revenue to run their affairs and benefit their subjects in ways untold.

Taxes are the price paid by civilised societies for the opportunity to remain civilised. Being the lifeblood of governments, there is no concept of governance and socio-economic development without taxes. Paying taxes is our civic duty, along with a requirement of the law and its non-payment is backed by sanctions.

Is this really happening in Pakistan?

Out of the estimated budgetary spending of government of Rs4,894,879 million for the fiscal year 2016-17 the revenue collection target was estimated at Rs3,621,000 million. This revenue target seems unrealistic and probably will not be achieved; but we have a long history of revising estimates and not achieving budgetary targets.

Why is this so?

Our total documented GDP of almost $300 billion is about 1/3rd of the total economy – not more. The rest is black or illegitimate economy. Our tax-to-GDP ratio of 11.5% is among the lowest in the world, even worse than our developing world peers.

Of the total population of around 200 million, only 1.1 million (0.5%) pay income tax and file a return – one of the lowest in the world. Revenue authorities maximise their focus on indirect taxes, which contribute towards more than 52% of the total revenue. Of the total direct taxes, around 3/4th of collection is from businesses, the rest from individuals. In terms of major segments of economy, industries contribute around 75% of total tax collection whereas the share of agriculture is less than 2%, whose share in the total GDP is more than 21%.

Lack of accountability and an availability of illegitimate tax havens all across the country and abroad are promoting a culture of tax evasion which is one of the core issues behind our economic troubles. In the past few years, informal and illicit incomes earned through crook practices have multiplied manifold whereas the formal economy was either stagnant or declining. The convenience in hiding assets from the eyes of law on one end, and increasing tax rates on the other, are catalysing capital flight from formal to informal/black economy. The recent ‘Panama Papers’ scandal have highlighted the names of around 600 Pakistanis running offshore companies in different tax havens to avoid the burden of taxes and accountability.

On the reforms end, Federal Board of Revenue (FBR) seems to be lacking and a lot needs to be done. It’s a part of the problem as opposed to being a part of the solution. A well-defined framework is needed to address the core issues of the turmoil.

Publishing the tax directories of all tax filers – Active Tax Payers List (ATL) and especially of parliamentarians – was a major breakthrough and praiseworthy step. Also, creating a distinction between filers and non-filers and an incremental tax hike for non-filers will increase their cost of doing business; eventually compelling them to be a part of the tax system. All these measures are appreciable but they still fall far short of what needs to be done.

Documentation of economy should be the first step in fiscal planning. Banking channels should be promoted for all transactions; from utility bills to payment of raw materials, salaries and wages. This will not only improve the documentation of economy but also reduce the amount going to waste through corruption. Also systematic analysis of data sought from banks and financial institutions can help FBR trace the real/complete trail of income.

Secondly, systematic reforms in FBR need to take place and it should be made an independent and autonomous institution. Following merit and employing properly qualified and trained people will enhance its effectiveness. Whistle blowing should be encouraged; robust audit and transparency will induce confidence in taxpayers. Rewarding honest tax payers will promote a culture of voluntary compliance.

Indirect taxation is a regressive taxation system affecting the poor and deprived segment of society the most – resulting in increased income inequality and wealth disparity. Government should shift its focus from indirect and withholding taxes towards direct taxes and widen the gap between filers and non-filers.

The share of agriculture in total tax collection (being less than 2%) should be increased. Ongoing computerisation of land record in some areas of Punjab should be extended across all of Pakistan to document the entire agricultural area as this will further facilitate collection.

All these steps need a stronger source of commitment from the government and ruling elite to truly meet the objectives. Well documented economic and structural reforms in the FBR will set the stage for a progressive, sustainable and equitable taxation system; resulting in improved revenues. This will reduce the government’s dependence on loans and grants and will boost economic growth and development; paving the path towards real prosperity.
WRITTEN BY:
Waseem Akram Minhas The author is a finance professional and a freelance writer, serving a public sector oil & gas entity. He tweets @WAminhas https://twitter.com/waminhas
The views expressed by the writer and the reader comments do not necassarily reflect the views and policies of the Express Tribune.

COMMENTS (23)

Mehwish Rasheed | 6 years ago | Reply The incompetence and lack of interest on behalf of governments and corrupt political regimes, by far, I think, are the biggest reasons of tax evasion and frauds.
Kashif Khalil | 6 years ago | Reply These political parties will only focus of putting the burden of tax on lay men and common working class. Salaried class in suffering the most. Indirect taxes are damaging the economy and poor.
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