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THAT Pakistan’s tax system is regressive and skewed in favour of the wealthy is widely acknowledged, though not by policymakers. Indirect taxes made up 61pc of the revenues collected in the first eight months of this fiscal year.
The government finds it easy to tax items of mass consumption and difficult to collect direct taxes. The share of direct taxes is a mere 39pc, which includes witholding tax collected in an indirect mode.
Tax equity is largely premised on the principle that all sectors businesses and individuals should contribute their fair share to the national exchequer by paying due taxes. But the focus of tax policies is on generating revenue, without giving any consideration to economic and social objectives.
The share of direct taxes in overall tax collection has been stagnant at around 39pc in the past few years, which includes the withholding tax collected through indirect mode
Tax equity has two main pillars — ability to pay (vertical equity) and tax benefits,(distributive equity) which are by and large missing in the Pakistani tax system.
To begin with, the share of direct taxes in overall collection has been stagnant at around 39pc in the past few years.. Most economists believe that vertical equity is a justification for wealthy people to pay more taxes than the poor.
As a result, over 64pc of income tax receipts are coming from the easy-to-collect withholding tax, which is essentially an indirect tax. The nature of withholding tax is regressive, and most industrialists pass it on to their end consumers.
The focus of the present government is not only to introduce more withholding taxes, but to also increase the tax rates for non-filers. The Federal Board of Revenue (FBR) believes that this will encourage non-filers to file income tax returns. But statistics show that the withholding tax is an easy tool for extra revenue collection and also discourages strong enforcement of tax laws.
Meanwhile, an FBR report reveals that yearly tax exemptions enjoyed by industrialists, feudal lords and companies now amount to a staggering Rs500bn — nearly 2pc of the country’s GDP. The amount is enough to produce 1,700MW of electricity. The elimination of SROs would ensure 30pc growth in revenue collection.
Within indirect taxes — sales tax, customs and federal excise duty — the major revenue spinners are petroleum products, edible oil and beverages etc. For example, in the first six months of this fiscal, over 40pc of the sales tax was collected from petroleum products.
It is imperative to fairly tax all the economic sectors — agriculture, wholesalers, distributors, retailers, real estate and stock exchanges etc — which are currently contributing nominal revenue in proportion to their share in national income.
The agriculture sector, with a 21pc share in GDP, contributes less than 1pc in taxes. As part of the 7th National Finance Commission Award, which is going to end in June, all the four provinces had agreed to supplement the centre’s efforts to increase the tax-to-GDP ratio to 15pc by end of the award’s period. But the ratio has ended up at 9.6pc.
Nowhere in the world do people happily pay taxes. It is an effective tax department that makes it happen. That the tax burden is unfairly distributed among various segments of the economy makes revenue collection more difficult.
The manufacturing sector, which has a 13pc share in GDP, contributes around 52pc in tax revenue. The services sector, accounting for 58pc of GDP, pays 37pc of all tax collection. This imbalance needs to be addressed.
The most important pillar of tax equity is the benefits principle. Normally, people expect benefits from the government against their tax payments, or at least want prudent spending of their tax money in the society’s larger interest.
As the tax system is unfair and the spending questionable, social acceptance/tax compliance has also dropped significantly over time.
As a result, the ranks of taxpayers are shrinking every year. Statistics show that 1.44m people filed their returns in 2011. But in 2013 and 2014, there were only about 840,000 taxpayers whom the FBR could trace at their homes or workplaces.
In 2010, 1.7m tax returns were filed. Does this mean that the missing numbers are imaginary taxpayers? A comparison shows that only 0.4pc of the population pays taxes in the country, against 4.7pc in India, 58pc in France and 80pc in Canada.
Tax equity means fair distribution of the tax burden among all sectors of the economy. The goal of tax policymaking is premised on distributive equity to shift wealth from the rich to the poor, stabilise prices and accelerate economic growth.
Published in Dawn, Economic & Business, May 4th, 2015
The government finds it easy to tax items of mass consumption and difficult to collect direct taxes. The share of direct taxes is a mere 39pc, which includes witholding tax collected in an indirect mode.
Tax equity is largely premised on the principle that all sectors businesses and individuals should contribute their fair share to the national exchequer by paying due taxes. But the focus of tax policies is on generating revenue, without giving any consideration to economic and social objectives.
The share of direct taxes in overall tax collection has been stagnant at around 39pc in the past few years, which includes the withholding tax collected through indirect mode
Tax equity has two main pillars — ability to pay (vertical equity) and tax benefits,(distributive equity) which are by and large missing in the Pakistani tax system.
To begin with, the share of direct taxes in overall collection has been stagnant at around 39pc in the past few years.. Most economists believe that vertical equity is a justification for wealthy people to pay more taxes than the poor.
As a result, over 64pc of income tax receipts are coming from the easy-to-collect withholding tax, which is essentially an indirect tax. The nature of withholding tax is regressive, and most industrialists pass it on to their end consumers.
The focus of the present government is not only to introduce more withholding taxes, but to also increase the tax rates for non-filers. The Federal Board of Revenue (FBR) believes that this will encourage non-filers to file income tax returns. But statistics show that the withholding tax is an easy tool for extra revenue collection and also discourages strong enforcement of tax laws.
Meanwhile, an FBR report reveals that yearly tax exemptions enjoyed by industrialists, feudal lords and companies now amount to a staggering Rs500bn — nearly 2pc of the country’s GDP. The amount is enough to produce 1,700MW of electricity. The elimination of SROs would ensure 30pc growth in revenue collection.
Within indirect taxes — sales tax, customs and federal excise duty — the major revenue spinners are petroleum products, edible oil and beverages etc. For example, in the first six months of this fiscal, over 40pc of the sales tax was collected from petroleum products.
It is imperative to fairly tax all the economic sectors — agriculture, wholesalers, distributors, retailers, real estate and stock exchanges etc — which are currently contributing nominal revenue in proportion to their share in national income.
The agriculture sector, with a 21pc share in GDP, contributes less than 1pc in taxes. As part of the 7th National Finance Commission Award, which is going to end in June, all the four provinces had agreed to supplement the centre’s efforts to increase the tax-to-GDP ratio to 15pc by end of the award’s period. But the ratio has ended up at 9.6pc.
Nowhere in the world do people happily pay taxes. It is an effective tax department that makes it happen. That the tax burden is unfairly distributed among various segments of the economy makes revenue collection more difficult.
The manufacturing sector, which has a 13pc share in GDP, contributes around 52pc in tax revenue. The services sector, accounting for 58pc of GDP, pays 37pc of all tax collection. This imbalance needs to be addressed.
The most important pillar of tax equity is the benefits principle. Normally, people expect benefits from the government against their tax payments, or at least want prudent spending of their tax money in the society’s larger interest.
As the tax system is unfair and the spending questionable, social acceptance/tax compliance has also dropped significantly over time.
As a result, the ranks of taxpayers are shrinking every year. Statistics show that 1.44m people filed their returns in 2011. But in 2013 and 2014, there were only about 840,000 taxpayers whom the FBR could trace at their homes or workplaces.
In 2010, 1.7m tax returns were filed. Does this mean that the missing numbers are imaginary taxpayers? A comparison shows that only 0.4pc of the population pays taxes in the country, against 4.7pc in India, 58pc in France and 80pc in Canada.
Tax equity means fair distribution of the tax burden among all sectors of the economy. The goal of tax policymaking is premised on distributive equity to shift wealth from the rich to the poor, stabilise prices and accelerate economic growth.
Published in Dawn, Economic & Business, May 4th, 2015
