Dilemma of taxation policy for developing countries including Pakistan is need to be settled at a point where system is able to raise required amount of revenue with least dependence on government borrowings and with no adverse effect on any sector of the economy of the country concerned. Further system must be based on all canons of taxation propounded by Adam Smith and subsequently added by comprehensive elaborations made by modern economists regarding justice, equity and ability to pay being important ingredients of an effective taxation policy.
Experience with different countries having democratic set up indicates that principles of justice and equity are ignored in all fiscal issues, which is mainly due to poor governance and unfair practices on the part of government to favor rich class who hold reins of economy and are intensively involved in speculative activities relating to property sale and purchase, hoarding of essential items of consumption and money laundering etc.
Existence of voluminous agrarian and informal economy in majority of low and middle income developing countries is another factor responsible for unjust and inefficient tax system, which is due to stronghold of big agriculturists/landlords having larger representation in assemblies.
Similarly lack of rational economic policies on the part of all tiers of government fail to tap businesses in informal economy for bringing them in tax net. This situation warrants for imposing progressive taxation in the sense that taxing the rich heavily rather harshly at highest three slabs to inject justice and equity in the system. However progressive tax system obviously must ensure that it is meant for financing/funding progressive public sector spending such as transfer payments and providing for social safety nets, which are essential for fair play of justice and equity in all segments of population.
In order to bring businesses in informal sector within tax net there is need to rationalize tax system in their favor by levying low rate of income and sales tax and providing tax holiday for new businesses for initial two years of starting business. Similarly low income class although coming within the bracket of taxable income need to be paid wages/salaries through banks instead of cash payments prompted by employers in informal sector who are sabotaging documentation efforts of government not only for evading tax but also for exploiting poor labor by paying wages below minimum wage level prescribed by the government.
Low income families normally do purchases from nearby small shops, which do not maintain proper accounts and evade coming under tax net hence in such cases purchases by this class of people fail to be instrumental in identifying people with taxable income.
It is unfortunate that instead of punishing tax evaders through fines and high rate of tax imposed for concealed income government declares amnesty schemes every now and then for non filers and provides them opportunity to whiten their ill gotten wealth are also the factors for very low tax GDP ratio, which is even less than 10% and only one percent of population having taxable income file income tax returns despite hectic efforts by FBR to bring more and more people under tax net.
Presently hardly one percent of people having taxable income file income tax returns.
Reliance on indirect taxes, which represents almost 70% of total revenue collected through various taxes and tariffs is totally against the principles of justice and equity as burden of indirect taxes is equally felt by poor and those from affluent class. Low and low middle income class is over burdened for paying tax on utilities and high prices of essential consumer items caused by sales tax etc passed on by business class to their customers.
Progressive tax rate system in vogue both for direct and indirect taxes has failed to induce equality and justice in the system with regard to concept of ability to pay. In almost all the low and middle come developing countries it happens that people coming with high tax rate slabs usually evade tax by arbitrarily adjusting tax rate enabling them to evade greater part of income and property tax to be paid by them. Further glaring disparity is noted when tax rates are revised. Increase in high slab rates is made at a lesser rate than percentage of upper revision made in lower tax rate slabs, which negates the very objective lessening the inequality and injustice.
Similarly lowering the corporate tax rate to give boost to economic activity brings monetary advantage to owners/Board of directors whereas lesser or no Benicia is passed on to employees as such inequality persists. It can also be said that political power of richest segment of population is responsible for inequity and injustice. In fact corporate sector would continue to grow despite high rate of tax imposed on them.
Recent exercise undertaken by government to revalue properties (landed properties) according to market price in order to extract sizeable tax from sale and purchase of properties was a good step, but immediate one time relaxation in rate of tax provided to those who had already undertaken sale and purchase during the prescribed period including those who had amassed the properties with ill gotten money goes against the rationale of principles of justice and equity in taxation and resultantly as reported in press (Dawn of 21st December 2016) number real estate deals in DHA Karachi, Lahore and Islamabad in last 15 days have increased to 200% and property prices after providing amnesty have increased by 15% or more.
On the other hand Organization for Economic Cooperation and Development (OECD) decision to ask for tax details of oversea investors big tax evaders in order to conceal their crime are investing in properties in Pakistan thus causing unjust rise in property prices making it impossible for low and middle income class to have their own house.
To facilitate documentation of informal business particularly in katchi abadis and low income areas of all big cities, local bodies of the city should be mobilized to collect data of all small and home based businesses in their areas. As such local bodies officials working honestly and efficiently can succeed in identifying large number of people whose earnings come within the purview of taxable income and need to be brought in tax net. This exercise on the part of local bodies can also help identifying defaulters and people using illegal means to avoid payment of utility bills which comes within the definition of theft of utility services. such cases if properly supervised and monitored by local bodies tier of government can substantially enhance collection of all taxes being part of utility bills.
Apart from income and property tax, policies regarding other components of tax revenues like consumption tax, import tax play an important role in determining the tax GDP ratio. Consumption tax coming within the category of indirect tax is totally regressive for low middle income class. Reducing import tax or liberalization of imports is no doubt beneficial to manufacturing, but competition from foreign suppliers of goods and services is damaging to indigenous industries, hence in the long run ultimate effect is found negative for enhancing tax revenues. Hence rate of import tax should be staggered keeping in view importance of each category of importable goods and services.
It is a rhetoric demand from all quarters of economy that tax system need to be broad based. It should cover all segments of population and all sectors of economy. Agriculture being major contributor to GDP remains out of direct tax net. No doubt taxing the agriculture class will improve tax GDP ratio. But it is to be ensured that tax collection process is simpler and understandable to all.