Need for Making Tax System Equitable
Income tax is the major levy in almost all the developed countries, which, therefore, have direct tax collection as the largest share in their overall national tax collection. In these countries, income inequalities are minimal and the living standards of the people are high, yet almost similar. A stranger hardly finds poor people in these countries. In view of economic and social development contributed by the high tax-to-GDP ratio in such countries, it is not surprising to conclude that tax revenue is crucial for national development. Nonetheless, economic and social development depends on the type of taxes and the enforcement policy adopted for collection of tax revenue.
In the developing countries like Pakistan, there is an overwhelming reliance of the tax authorities on indirect tax revenue. To balance the budgets, the tax authorities in Pakistan collect over 60 percent of tax revenues through indirect taxes; including sales tax, federal excise duty and customs duty or trade taxes. Even major portion of the direct tax revenue is being collected through withholding taxes. Many withholding tax provisions are presumptive in nature, which directly assume the form of indirect taxes. The importers and manufacturers, whose transactions are subject to presumptive withholding taxes, tend to include the element of taxes in the price of their products. The adjustable withholding taxes are being claimed as refunds by understating or underreporting the taxable income.
Here arises a crucial question: who pays taxes voluntarily and who are forced to pay taxes to achieve tax target that was nearly PKR 4 trillion for the fiscal year 2017-18.
Dr Ikramul Haq and Huzaima Bukhari have reported in their article titled “The Great Tax Robbery” published in Friday Times on 21 October 2016 that at least 60 million people are forced to pay taxes in the form of advance tax. For example, millions of mobile phone users are paying advance tax on prepaid cards. Nonetheless, there are around 1.6 million tax return filers. The low number of the filers of tax returns vis-à-vis taxpaying people is despite the fact that the tax authorities have adopted differential tax rates policy for filers and non-filers. Even then, the number of non-filers as a percentage of the registered income tax payers remained high, at around 70 percent, in 2015-16, of the total 4.2 million persons registered and having valid National Tax Numbers during 2015-16 (actual tax return filers were 1.216 million and 2.98 million were non-filers). Therefore, the compliance level in tax year 2016 was only 29 percent. Furthermore, 30 percent of the tax return filers did not pay any tax in tax year 2016, as they declared income below the taxable threshold of Rs 400,000. The number of corporate income tax filers was 25,551 out of more than 60,000 companies registered. The number of active corporate tax filers is only 0.8 percent of the number of commercial and industrial electricity users, which represent an illustrative pool of potential entities liable for taxation.
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