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High taxes, low yields

Dr Ikramul Haq, Huzaima Bukhari

Unless the government goes for lower taxes with broader tax base, tax collection will remain far below the potential

 The prevailing tax system is unjust, outmoded and unproductive — with high taxes, yielding low revenues and operationally complex, time-consuming and costly. Even after making tall claims of extraordinary improvements, the revenues are falling below the targets. This is the case after blocking refunds of billions of rupees and taking advances of coming tax years.

The government is least pushed to replace the outdated, oppressive and complex system with a simple, certain and low-rate. On the contrary, the worthy finance minister is pressurising the tax collectors to become more and more ruthless in meeting targets, regardless of its disastrous impact on economic growth.

According to a report, in a meeting held on December 3, 2016, high-ups of the Federal Board of Revenue (FBR) “blamed the government’s tax policies for a whopping Rs117 billion shortfall in revenue collection”. Against the assigned target of Rs1201 billion, the FBR collected Rs1084 billion in the first five months of the current fiscal year. They claimed that the government’s decision to keep petroleum prices unchanged for the first five months of 2016-17, the fiasco on property front, weakened exports and low interest rates were key reasons for the shortfall in tax collection. The finance minister, while disagreeing on downward revision in the collection target, issued directions for making up for shortfall.

The target for the FBR for the current fiscal year of Rs3.621 trillion, according to the FBR Chairman, was fixed assuming that petroleum prices would remain constant. Last year, the prices of petroleum products were higher by one-tenth. In addition, sales tax on high-speed diesel was 37 per cent last year compared to 31 per cent this year. Sales tax on motor spirit (petrol) was 21 per cent last year compared with 14.5 per cent from December this year.

The finance minister, refusing to accept the explanation of the FBR, claimed that the impact of lower oil prices was only to the extent of Rs13 billion per month. He lent them support, however, by increasing prices of high-speed diesel and motor spirit from December 1, 2016. It is simply shocking that consumers have been compelled to pay 38 per cent more on oil compared with prices prevailing in the international market to make up for the revenue shortfall. Is this the way to improve economic growth?

In Pakistan, the ultra-rich are avoiding tax obligations but millions having no income or incomes below taxable limit are being forced to pay advance income tax and denied their rightful refunds.

The higher cost of petroleum products vis-à-vis international market is bound to make us further uncompetitive in international markets. Why our worthy finance minister, on the demand of FBR, wants price hike just for the sake of showing “better tax collection”! It is simply thoughtless and imprudent!!

Obviously, the government is least pushed to go for lower taxes with broader tax base. Unless, it is done, collection will remain far below the potential. The entire business climate is destroyed by employing over 70 provisions with respect to advance/withholding taxes, easy collection from petroleum products and big firms. For example, they want more advance tax from an importer when his manufacturing unit is flourishing by denying him waiver from withholding if quantity of raw material exceeds 110 per cent of that consumed during the previous tax year! Such an anti-growth and anti-business provision can only be conceived in Pakistan oblivious to the fact that higher volumes will yield higher taxes in the end!!

One of the major factors behind non-corporatisation of economy is our extremely high corporate income tax rate, the third highest in the world, according to World Bank report, Toward a More Business Friendly Tax Regime: Key Challenges in South Asia. Less than 25,000 companies file tax returns in Pakistan. According to a latest report of State Bank of Pakistan, the active taxpayers increased from 0.76 million as on June 30, 2013 to current 1.01 million, but “the number is still low in comparison with the employed labour force of 57.4 million”. Some 196,000 entities are enrolled in the sales tax system but only 35,000 actually pay any tax.

The World Bank’s report says: “Good taxpayers — like likes of tobacco and telecom, for example — are subject to disproportionate pressure from tax administrations because tax administrations are guided primarily by revenue targets, which are set at the beginning of the year. Top level tax officials then pressurise their subordinates who in turn force good taxpayers to contribute more revenue. Refunds to exporters are often postponed particularly in the last quarter of the financial year. Furthermore, VAT is not always fully refunded.”

The report goes on to say that “administrative burden of tax compliance is hardest in Pakistan where firms have to make 47 payments and spend 594 hours (or 74 man days per year) dealing with tax regulations compared to 12 payments and 175 hours in high income OECD countries. Eighty seven per cent time spent on dealing with taxes (or 514 hours per year) in Pakistan is spent on VAT compliance.”

According to IMF Country Report No. 16/2, Pakistan faces significant challenges in realising its tax revenue potential and thereby providing the much-desired fiscal space for growth-enhancing priority spending on infrastructure, education, healthcare, and targeted social assistance. While the tax revenue-to-GDP ratio has increased by 1.5 per cent over the past three years to 11 per cent in 2015, it remains significantly below comparator emerging market economies and the tax effort expected for the country’s level of development. “The historical development of tax ratios confirms underperformance in revenue mobilisation, with the tax-to-GDP ratio currently 1.4 percentage points below its peak of 12.4 per cent of GDP in 1996. Pakistan has the potential to mobilise additional tax revenues by an amount as much as, if not more than, it currently collects: its tax capacity is estimated to be 22.3 per cent of GDP, which implies a tax revenue gap of more than 11 per cent of GDP. Although its estimated tax effort — the ratio between actual revenue and tax capacity — improved from 0.43 in 2011 to 0.49 in 2015, Pakistan is still significantly below the average of comparator developing countries (0.64) and high-income countries (0.76),” the report observes.

According to Economic Survey of Pakistan 2015-16, by the end of 2015, our population was 195.4 million, out of which 77.93 million constitutes urbanites while 117.48 million live in rural areas. The dependent population of children under the age of 15 years was 35.4 per cent whereas 4.2 per cent people were above 65 years. Out of total population, 30 million were below poverty line earning less than two dollars a day. Our labour force, among the tenth largest in the world, was around 61 million, out of which 57.42 million were employed. Rural labour force of 42.3 per cent was earning below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001.

Reading all these figures together, the total persons liable to income tax could not be more than 10 million whereas the government is extorting income tax in the form of withholding tax from millions of mobile users alone!

Failure to harness the real potential of Rs10 trillion is the main issue — see detail in paper Towards Flat, Low-rate, Broad & Predictable Taxes’, published by Prime Institute, a public policy think tank. For collecting tax of Rs10 trillion, we need to lower taxes and broader tax base.

Pakistan’s real dilemma is that the rich and mighty are not paying taxes according to their ability. In 2014 and 2015, less than 4000 persons paid tax between Rs1,000,000 and Rs10 million. In 2014, just 3,663 declared tax of over Rs10 million and this position worsened in 2015 as per Tax Directory 2015, recently released by the FBR.

In Pakistan, the ultra-rich are avoiding tax obligations but millions having no income or incomes below taxable limit are being forced to pay advance income tax and denied their rightful refunds, in gross violation of Article 4(c) of the Constitution that says “no person shall be compelled to do that which the law does not require him to do”.

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