There is a consensus on the issue of broadening of the tax base


Sep 20 - 26, 2004

On the advice of the International Monetary Fund (IMF), the Ministry of Finance and the Central Board of Revenue (CBR) have agreed to revise upward the revenue target set for the current (2004-05) fiscal year by Rs. 10 billion. The ministry has conveyed to the IMF that its revenue collection agency (the CBR) has the required capability to collect Rs 590 billion as against the original estimates of Rs. 580 billion.

This assurance was given to the IMF team, which was in Pakistan last month to conduct its last and 9th review of Pakistan's economy before the release of 10th and the last tranche of loan under the poverty reduction and growth facility (PRGF) programme. Pakistan has already declined to get PRGF programme extended but has indicated that it would follow the reform programme recommended by the donor agency. At the concluding meeting, which took place on September 1 in Islamabad between IMF team and officials of Ministry of Finance and the CBR, Pakistan gave an undertaking to collect Rs. 10 billion over and above the laid down target of Rs. 580 billion during the current fiscal ending on June 30 2005. They also undertook that it will be done without any fresh levy but through broadening of tax base and improving the tax collecting machinery.

There is a consensus on the issue of broadening of the tax base, and the current economic reforms primarily designed to achieve the same. A country with 11.5 percent tax to GDP ratio can hardly expect any social change for the better and hence there can hardly be two opinions with regard to raising this ratio so that the financial position of the state is improved. But this should not be pursued with the conventional policy of taxing the captive tax payers, which will not only be ineffective but might be counter productive in the ultimate analysis. So, it is believed that in spite of low tax to GDP ratio, it will be prudent to allow the reforms to take roots so that the tax base is broadened, which will improve the revenue besides making the whole system more equitable and therefore acceptable.

The fact that the reforms have started paying dividend is amply manifest that the CBR collected over Rs. 460 billion against the set out target of Rs. 450 billion during the financial year 2003-04. The high potential of increase in revenue is proved by the fact that there has been an increase of over Rs. 100 billion in revenue generation during the last three years while previously the same amount was increased in 10 years. This increase is more significant in view of the decrease in the rate of taxes from 45% to 35 percent and bringing down the number of taxes. During the current financial year it is envisaged to increase revenues by Rs. 13 billion (from Rs. 460 to Rs. 590 billion) without any fresh levy by reforming tax collection organization, close monitoring and process of accountability through a policy of reward and punishment on the basis of performance the desired results can be achieved. The present team in the CBR seems determined to deliver by improving performance, curbing corruption and plugging loopholes.

The chairman, Central Board of Revenue, Mr. Abdullah Yousuf, talking to journalists in Islamabad recently expressed his concern over the abysmally low contribution of the services sector in Pakistan to the exchequer. He also cited other potential sources, which were contributing very little in the form of taxes although they were operating in full glare with ever-rising transactions. He referred to the stock exchanges, which he felt, were not contributing adequately in their payment of taxes to the government. The last budget's imposition of capital value tax (CVT), in his view, was the first attempt by the government to tap this source for taxes. Another important source of taxation having so far escaped from making a desired level of contribution to government revenue, according to him, was the group of estate dealers and developers. He appeared to be right in his observation about the two important sources for contribution of taxes. It is for the CBR to take necessary measures to include these sources within the tax net and thereby ensure their tax contribution to a significant extent.

The CBR chairman seemingly opened an old chapter of agriculture sector's conspicuous absence from the tax net and admitted that this was a constitutional issue that needs to be looked into by the government. He however repeated the theory of taxation that all income generation irrespective of its source must be subjected to taxation. This is true but Pakistan's constitution made by a legislature dominated by feudal lords precludes imposition of federal income tax on this sector. The provincial governments, however, have no such bar and can tax income from this sector, which they too are reluctant to impose. He appeared to be right in his views that since the share of agriculture in the GDP was in the region of 25 percent, its contribution to taxes must be commensurate with its size in the economy. His concern about the low level of tax generation from the services sector also appeared to be correct. However, the exact estimates of tax recovery from the services sector and its share in the total tax collection needs to be compiled by the CBR and then alone the expected potential of numerous segments of the services sector could be brought into focus.

As to how this sector continues to lag far behind in its contribution to the government's tax revenues is a question which deserves serious attention from the income tax department. The services sector, as observed by the CBR chairman, has a share of as much as 50 percent in the GDP but it continues to generate a very small portion of tax, which may be seen as an intriguing aspect of the taxation efforts of the CBR. As opposed to the retail shops in the overall business activity, which are largely unregistered with the tax department, the various segments of the services sector are supposed to be duly registered but seemingly remain out of the tax net. There is reason to emphasize here that effective efforts must be directed by the CBR departments to enroll the various players in the services sector as taxpayers, rather than taking the extra pains to discover new taxpayers in the informal sectors of the economy. The CBR would do well to launch a deeper study to unfold as to why the services sector is not contributing adequately to the exchequer. It is due to lack of proper approach to the objective of increasing the tax revenue that seems to be responsible for continued low level of Pakistan's total tax revenue that constitutes a ratio of 11.5 percent to the GDP. Comparatively speaking, this ratio in other developing countries in the region averaged between 17 to 18 percent as the chairman himself pointed out in his observations.