Editorial: July 2013
The Captive Taxpayer
Dr. Rasheed Hasan Khan
The Federal Budget 2013-14 has been announced. Drafted miraculously in six days by the financial genius, Mr. Ishaq Dar, it has all the hallmarks of a standard I.M.F. prescription budget ,such as increase in the tariff of public utilities, cut in the subsidies and public expenditure, increase in taxes etc. Yet agricultural sector which constitutes 24% of Pakistan’s economy, remains beyond the tax net, this sector possesses a minimum revenue potential of at least Rs. 250 to 300 billion in line with the current tax to GDP ratio and the tax rate. It is very enlightening to know that in the Year 2009 a total of Rs. 1.8 billion in tax was collected from all four provinces in this sector! The pattern for the successive years would naturally be the same. Tax rates according to the legislation promulgated by the provinces are as follows — on income exceeding Rs300,000, an amount of Rs22,500 is to be paid and when income exceeds Rs300,000, 15 % is to be paid as tax. For income of Rs200,000 to Rs300,000, the fixed amount to be paid is Rs 12,500 and if the income exceeds Rs200,000, 10% is to be paid as tax. When compared to the rates imposed on other sectors, the tax rates for agriculture appear to be ludicrously light.
It is quite evident that if these rates are to be maintained, it will be impossible to achieve any substantial increase in tax revenue and realistic reassessment is called for. Whereas the salaried class, numbering less than a million captive taxpayers will be paying substantially more tax revenue, professional service providers (doctors, lawyers, architects, consultants, tax practitioners, interior designers etc.),restaurant owners, retailers and wholesalers, transporters and many others will continue to escape lightly. It must be noted that service sector contributes 53% of the GDP and wholesale and retail trade constitutes almost 32 % of service sector. Therefore the only way out of the resources deficit, through a widening of the tax base, will largely fail to meet its target unless these sections of the society are also brought in the tax net.
The tax structure in operation currently in Pakistan needs a complete restructuring. Direct taxes (such as income tax) are only about 25 % of the total, while majority of the taxes are indirect taxes (such as sales tax, surcharge, withholding tax etc.). This imposes an inequitable burden on the most deprived section of the society. In effect it means that a salaried person pays his tax once when he pays the income tax and then again when he purchases the items of daily consumption. This is a clear violation of the principle of an equitable distribution of the tax burden. The taxation policy of successive governments in Pakistan has always favored the imposition of indirect taxes, and the present government did not choose to rectify the situation but is following in their footsteps. This situation needs to be remedied at the earliest to provide the people with much needed relief.
In conclusion, by eliminating corruption and inequity from Tax Laws and the tax collecting machinery, positive social and economic benefits will be achieved. Tax laws need to be reviewed and brought in line with current economic imperatives. The Federal Board of Revenue must be purged of corruption and tax collection procedure must be reformed to eliminate avenues for corruption. Only then can we hope to reduce the Fiscal Deficit and reduce the domestic and foreign debt.