Narrow tax base has often been cited as the most obvious reason for low tax collection in Pakistan. However, the very term “tax base” is largely misinterpreted and is unknown to many people despite the fact that their incomes or activities, annually or periodically, are subject to tax.
In Pakistan, Rs 400,000 of non-agricultural income per annum is normally a base for imposing income tax. Nonetheless, many other bases are also used for collection of income tax. For example, advance income tax is levied on amounts of bills of all landline and cellphone users irrespective of that whether the amount of bill is paid out of the agricultural income or the exempt income. Although the tax so deducted is adjustable but most people do not claim adjustment mainly due to lack of awareness and complex administrative procedures.
There are several other bases as well such as value of goods, gross amount of air ticket, cash withdrawn from a bank account, etc. that are used for collection or deduction of advance income tax. It is worth mentioning that about 40pc of these bases are presumptive in nature wherein tax collected or deducted is not allowed to adjust for determination of net tax liability or for claiming refunds.
It becomes clear from the structure of income tax system in place in Pakistan that the authorities are using supplementary measures such as adjustable and non-adjustable withholding taxes and minimum taxes to collect income tax on various bases to meet revenue targets. Such tax structure cannot ensure vertical and horizontal equity, fairness and neutrality.
It is a dire need of the time that potential taxpayers are brought in the tax net purely on the basis of annual taxable income exceeding the threshold fixed by the government instead of collecting tax in an indirect way from those who are not obliged to pay taxes.
There are several impediments to bringing potential taxpayers into the tax net. For instance, overall tax system is complex as indicated by time to comply and number of payments — higher than the world average. Small and medium enterprises shy away from entering into the tax net mainly due to lengthy, complex and time-consuming procedures.
Excessive tax exemptions and concessions promote unfair competition between informal and formal sectors of business enterprises and thus it encourages the growth of informal sector. These measures are causing 2-3pc loss of tax revenue as a percentage to GDP each year.
At enforcement level, a culture of favouritism, nepotism and corruption has impeded the process of taxing individuals with high net worth, in accordance with their capacity to pay. At present, the government is under immense pressure to raise tax revenue by broadening the tax base. It is because for the last many years, tax collection has been on the decline not only at federal level but also at provincial level, which is a sign of an increase in the size of informal or undocumented economy.
In the last year’s Finance Bill, several changes were introduced to increase the cost of non-compliance. For example, the airlines were obligated to collect advance tax at the rate of 3pc on the sale of first class and executive class air tickets in case of compliant taxpayer and at 5% if the passenger is a non-compliant.
Similarly, adjustable advance tax is required to be collected on purchase of immovable property of worth more than Rs3 million at the rate of 1pc for compliant taxpayers and 2% for the non-compliant ones.
Furthermore, obtaining NTN has been made mandatory for installation of commercial and industrial electricity and gas connections.
Nevertheless, these and many other attempts aimed at broadening the tax base have failed to yield the desired results due to inadequate and insufficiently skilled supporting staff. Additionally, survey information is not being used effectively. Adequate tax facilitation to the enterprises is also not available at enforcement level.
Lack of trust and confidence among the people regarding fair and neutral taxation and also the correct spending of public funds is another source that contributes to lower tax compliance. Important determinants of trust deficit include corruption, lack of trust regarding tax utilization and cumbersome filing procedures. Tax compliance is also low due to prevalence of high rate of illiteracy in the country.
To broaden the tax base, the field formations need to explore opportunities for conducting public education programmes on tax laws, tax procedures and accounting requirements, particularly for small enterprises. Working with industry and community groups for promoting benefits of filing tax returns such as lower tax rates, adjustments of tax withheld and refund claims is also crucial.
Similarly, penalty or other enforcement measures must also be taken into consideration keeping in view the past compliance behaviour of the taxpayer.
Last but not least, targeted amnesties may be employed to promote tax compliance in informal economy. It also requires continued working with industry groups for reducing cost of compliance in terms of hours for making payments, number of payments, return filing, etc.